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Big Industries Adjust To Economic Change

IT is by now widely accepted that by 1997 the United States defense budget will be cut by $60 billion to $90 billion and that 1 million to 2 million jobs may be lost. These cuts will reduce the procurement budget of the Department of Defense (DOD) by 29.4 percent - more than any other DOD spending category - and will drastically effect defense contractors, including more than 9,000 primary suppliers and more than 2,000 industry segments.

But these contractors can exploit the new economic agenda and adjust in other profitable ways. They are uniquely positioned to shape the evolving economic policy of the new Clinton administration to their own advantage. They can help define the strategies that the US will take from guns to butter.

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For example, they can call for a large investment in infrastructure and bid on projects to build and upgrade roads, bridges, sewer systems, and so on, or take the following strategic measures to adjust to the declining US defense sector.

1. Downsize to meet demand - i.e., stick to areas of core competence and shed everything else. General Dynamics is a company using this strategy. Its chairman, William A. Andres, strongly believes that, "If we have cash General Dynamics can't invest in good, attractive core defense programs with decent return, rather than add diversified volume just to look bigger, I believe we should return excess cash to shareholders."

2. Diversify into related specialties. An example is that of Science and Engineering Associates, Inc. (SEA), a small defense consulting firm in Albuquerque, N.M. When, in the fall of 1989, SEA realized that the defense business would be shrinking, its management began looking for stable, profitable areas. As Gilbert L. Ziegler, SEA's senior scientific engineer, explains, "We had two choices. We could exhibit the desert spider syndrome, staying in our hole and reacting to muffled changes coming to our hol e, or stick our head out, make sense of the changes we see, and take a beneficial course of action."

Mr. Ziegler's group was successful in specializing in the regulatory aspects of the same design services it previously provided for DOD.

3. Commercialize. Raytheon's decision to continue to produce guns and a lot more butter fits this strategy as described in the five-year plan of Dennis J. Picard, Raytheon's chairman. Other examples include ARO Corporation, which capitalized on its technology to market a product that tests the strength of seals on plastic packages for sterilized medical tools; the defense group of Westinghouse Electric, which adapted its military aircraft sensor for air traffic control and for speed-sorting of mail; and the electronic systems sector of Harris Corporation, which drew on its military high-frequency radio equipment to sell air-traffic control systems to the Federal Aviation Administration. Some other companies using the commercialization strategy are Frisby Airborne Hydraulics, Reidville Tool and Manufacturing, and Fail-Safe Technology Corporation.

4. Export: Use some of the production capacity idled by DOD to produce and sell abroad. Loral is a good example of a company which has increased its export of arms to 22 percent of sales and intends to raise this figure to 28 percent. Recent customers include Sweden and Canada. Sweden is buying a $40 million combat flight simulator to train its pilots, and Canada is buying a $3 million gunnery simulator.

5. Joint Venture. As a fitting end to the cold-war era, Lockheed Corp. recently formed a joint venture with the Russian Aerospace firm Khrunichev Enterprise to market the Russian-built Proton rocket for commercial satellite launches. Because of the relatively low cost of the Proton rocket, the joint venture is expected to have a competitive advantage in the marketplace. Rockwell International Corp. followed a similar strategy and formed a joint venture with Russia's NPO Energia.

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6. Be a leader in a declining market. For example, Martin Marietta's purchase of General Electric's aerospace business for $1.8 billion is a perfect example of the use of this strategy. If it wins federal antitrust clearance, the deal will make Martin Marietta a much stronger competitor in the aerospace industry.

7. Get export assistance from the government. For example, slumping McDonnell Douglas is expecting federal approval to sell 72 F-15s to Saudi Arabia for $8 billion, and Kaman will sell 12 anti-submarine helicopters to Taiwan for $161 million. Such sales can become easier in the future if complex federal export rules are streamlined to help US companies compete in foreign markets.

8. Lobby for smaller, more gradual cuts in the defense budget while implementing the above strategies. If such military contractors as General Dynamics, McDonnell Douglas, Boeing, Northrop, Raytheon, and United Technologies were to cut their labor forces rapidly, unemployment rates in some states, including California, New York, Virginia, and Florida could soar. Such situations call for buying time. For example, McDonnell Douglas was supported by the State of Texas in getting approval from the federal go vernment for sale of F-15s to Saudi Arabia.

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