Defense Industry Innovations for Business

Abstract

Governments spend a substantial amount of its national revenue on the military research and development programs. The expected results for such spending are the development of new technologies that would also be used to foster the growth of the civilian industries. However, the contribution of such technologies on the innovation process has remained debatable. The study tends to examine the contribution of the technologies developed by the defense industries to the business innovations. In particular, the study explores the effect of the government spending and regulations on the production of new technology and how such developments relate to the civilian oriented firms within the industrial sector. The indication is that new changes in the marketplace driven by globalization, the reduced state spending on the military activities as well as other external factors have caused the proliferation of the technologies beyond the national borders and the conventional commerce embodied in the state-to-state trade deals.

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Introduction

Governments spend a substantial amount of its national revenue on the military research and development programs (Mantin & Tishler, 2004). The expected results for such spending are the development of new technologies that would also be used to foster the growth of the civilian industries. However, the contribution of such technologies on the innovation process has remained debatable. While the debate has always been on whether the technologies resulting from the military research and development programs have offered a significant advantage to the civilian technological base and enhanced the growth of the economy in general, the globalisation and the changes associated with marketplace have shifted the center of debate (Hirshleifer, 2000). The thin lines between the military and non-military technologies have always been marred by the increased importance of the information communication technologies. The military industry has been found to be lagging behind the civilian industries in terms of the usage and development of the information communication technologies (Garcia-Alonso, 2000). Besides, the thin lines between the civilian and the military technologies have been blurred by the shift in the government policies that aim to increase the procurements from the civilian sources (Levine & Smith, 2000).

In countries with highly developed defense industry, the consolidation of the industry players have resulted in reduced number of contractors (Becker, 2000). In addition, globalisation has opened new markets for the national defense industries. Essentially, globalisation has enabled the cross-border flow of information as well as new technologies including the weapons development technologies that go beyond the conventional commerce embodied in the state-to-state trade deals (Becker, 2000). The changes observed in the industry co-exist with the secular trends in the complexity and cost of weapons combined with declining defense budgets.

In order to understand the complexities of these issues, it is important to re-examine the contribution of the technologies developed by the defense industries in the business innovations. In broader terms, the defense industries can be re-evaluated in terms of its contribution to the National Systems of Innovation (NSI). In this case, the national system is taken to be the institutions including businesses that interact and diffuse the new technologies (Garcia-Alonso & Hartley, 2000). Even though the NSI approach is broad, it focuses its attention on the network of systems that are involved in the innovative activities.

However, the study will narrow its scope to the contribution of the defense industry technological developments on the business innovations. Specifically, the study will be examining the effect of the government spending and regulations on the production of new technology and how such developments relate to the civilian oriented firms within the industrial sector.

The Research Question

The aim of this study is to bring increased attention on the contributions of the defense industry technological developments on the business innovations. Specifically, the study aims to find the effects of the government spending and regulations on the production of new technology and how such developments relate to the civilian oriented firms within the industrial sector. As such, the main research question has been developed and defined as follows:

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  • What are the effects of the government spending and regulations on the production of new technology and how such developments relate to the civilian oriented firms within the industrial sector?

The Relevance of the Study

The study of the interactions between firms in defense industry and how the developed technologies are diffused remains significant particularly, in the academic literature that lack advanced studies on such interactions. In fact, the technological developments in the defense industry sectors have contributed to the growth of other sectors. However, how such technologies have led to the innovation processes has remained elusive. In other words, the relationships between the defense industries, the technological developments and the innovations in businesses have not been studied. Therefore, the significance of the current study is to determine the following objectives:

  • To examine the effect of the government spending and the regulations on the production of technology
  • To determine how firms in the defense industry relate with none military firms in the industrial sector
  • To determine the nature of the changing links as well as technological flows among the firms within the defense industry and the market
  • To determine how the current changes have challenged the conventional patterns of practices within the industry

The scope of the study does not seem to have been completed anywhere within the academic circles. As such, this study will contribute to the original knowledge not only within the academic field but also to the industry players and policy makers on how to approach the current needs and challenges that affect the industry. The study will integrate the whole spectrum of both academic and seminal literature as well as the theoretical approaches that has been established in order to bridge the existing knowledge gaps as well as in response to the main research question.

Contribution to the Existing Knowledge

The relationship between the defense industry, technological development and innovations in business is yet to be understood. While much of the contributions of the defense industry to the economy and its implications have been debated about for a long time, the manner in which technological advances funded by the government within industry help the other business processes particularly, innovations is still new in the existing knowledge of the defense industry (Goolsbee, 1998). In order to understand these concepts the study will look at the changes taking place in the industry and how the current business trends are affecting the industry. In fact, the seminal reviews provide various national responses to the new changes affecting the defense industry and the technological development programs as well as the ability of the state to retain control over the defense technologies in a globalised world (Bolks & Stoll, 2000).

Further, it is undeniable fact that the state power over the defense industry has been declining over the years (Kirkpatrick, 2005). The study remains critical in tracing the degree in which the state have embraced the market liberalisation and the strategies that are followed by the individual firms in response to the changes taking place in the market. Through the literary review, the study revisits the factors affecting the industry as well as the industry approach to the current needs of innovations as well as the main drivers of innovations in the industry as it relates to the non-military industries.

Literature Review

Introduction

The study theoretical framework will be structured based upon an integrative literature review approach. The selection of this distinctive form of research will assist in generating new knowledge on defense industry innovation and technology in business. Additionally, the method should provide a more holistic approach to the concept of defense industry innovation and technology in business, as the framework will be designed upon the integration of various business concepts. The theoretical literature review will be separated into three categories to allow for analysis and integration of the various writings in order to formulate the essential determinants of the concepts of defense industry innovation and technology in business. The categories include:

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  • Theories of defense industry innovation and technology in business
  • The evolution of the defense industry
  • The current transformations in the defense industry

Theories of Defense Industry Innovation and Technology in Business

The Concept of National System Innovation

The concept of National System Innovation (NSI) has become one of the leading theories that can be applied in analysing the technological innovations in the defense industry (Reppy, 2000). However, the theory has been criticised of being too broad for analysing the innovation process as well as insufficiently being based on the theory (Reppy, 2000). The NSI implies the systems of institutions in both public and private domain whose actions and activities results in the importation, initiation, modification and diffusion of technologies (Reppy, 2000; Radosevic, 1998). The main assumption of the NSI approach is that the systems of institutions are bounded by the national borders (Radosevic, 1998). However, the assumption may or may not be warranted (Radosevic, 1998). In fact the theory applies the system approach, which is defined as a network of institutions whose interaction results in the diffusion of the technologies (Reppy, 2000). The other important feature of the NSI is the emphasis of institutions including the business organisations. The definition of the technology to include the technological transfer and diffusion is also critical consideration in the features of NSI.

However, each of these features is complex in respect to their applications. Moreover, the approach covers important features critical for the analysis of the complex nature of innovations and technological developments in the defense industry (Reppy, 2000; Radosevic, 1998). One of the major advantages of the NSI approach is the emphasis it puts on the institutions. While the traditional economic theories locate innovations on the firm, which is seen as an optimising machine and seeks to generate models of technological diffusion across firms, the NSI approach takes into consideration the roles of the government policy, education and training institutions as well as the regulations and the regimes (Reppy, 2000; Radosevic, 1998). The considerations are consistent with the analysis of the defense industry, which is mainly regulated and controlled by the state policies and funding (Mantin & Tishler, 2004).

The model focuses on the interactive process and feedback loops without providing a chance for the linear modeling process of innovations (Reppy, 2000). The success or failure of the innovation is determined by the constituent elements within the system. The weakness in one part of the system can be compensated by the strength in another part (Reppy, 2000). Increased attention need to be given to the manner in which the system operates. As indicated, the NSI model is best suited to analyse the defense technology policy where it focuses much attention to the elements beyond the government funded research and development in the defense industrial sector (Ham & Mowery, 1998). Moreover, it takes into consideration the diffusion of the technologies developed by the defense industries into the civilian industries, which are beyond the national borders due to globalisation and other factors (Reppy, 2000).

The Current Transformations in the Defense Industry

Industry Forces Driving Changes in the Business Strategy

The global aerospace and defense industry has undergone unprecedented transformation in the last three years (Phillips, Pierce & Gates, 2012). Following the financial decline in 2008 and 2009 in terms of orders and backlogs, the industry is currently experiencing a phenomenal growth. The growth observed in the industry is mainly driven by the global increase in the passenger traffic as well as the overall improvements in the global economy (Phillips et al., 2012). Other factors contributing to the growth include the emergence of the low cost carriers and increased demand for aircrafts from the developing economies. The growth in the industry has increased sharply of from 8% to 10% year-on-year.

Firms within the industry that fails to conform to the new changes in the environment are likely to indicate poor performances albeit their competitors (Phillips et al., 2012). The new challenges in the environment range from decreased domestic military spending to a highly competitive and dynamic international marketplace. As such, firms within the aerospace and defense industries have to adapt and take advantage of these changes in order to continue generating marginal growth that would enable them to take up new challenges (Wolstencroft, 2010). The uncertainties in the defense budget have dogged the industry for several years. Majority of firms within the industry have come up with new strategies that would enable them survive despite continuing decreases in the defense spending (Bowlin, 1999). However, the looming federal spending on defense pressure remains the top issue among the larger US firms in the defense and the aerospace industry.

In addition to the decreased federal spending on the security, competitive pressure, customer pricing pressure and the new market opportunity remain the top challenges driving changes in the defense industry (Phillips et al., 2012). The recent survey on the top issues affecting the firms within the industry currently and in the future indicated that the federal defense and budgetary pressures remains at the top with 49% (Walker, King-Jones, Distasi & Hilbun, 2009). The competitive and the customer pricing pressures followed closely with 48% and 43% respectively. Factors such as the new market opportunities, underperforming business units, increased transfer of risks from government to contractors as well as other economic factors remained below the top three at 34%, 27%, 25% and 12% respectively (Walker et al., 2009). The sequestration action in the defense budget would have a negative impact particularly on the defense jobs and procurements (Phillips et al., 2012). The survey indicated that the sequestration the defense budget over the next ten years would cause a job cut of between 1 and 1.5 million over the next four years starting from 2012 to 2016 and a considerable reduction in the defense procurement within the same period (Phillips et al., 2012).

Given the uncertainties due the factors that affect the defense industry, firms have to respond through the new strategies. The international expansion into the global market is the most important strategy (Phillips et al., 2012). The expansion in the international markets have faired well for the US firms recording an increased growth in the export. However, the contractors have been exposed to the international competition especially from Europe. Besides, the global competition, the US contractors has to face the stringent financial offset agreements required on direct foreign sales. The conditions have enabled the large supply firms in the US to shift large portions of their product designs and manufacturing activities to supply firms in the acquiring countries. The complex nature of the new defense product deals and the difficulties in managing the new supply chain requirements presents a considerable challenge to the industry (Ministry of Defence, 2005).

One of the major questions is whether the supply chain, which has shrunk and consolidated in the last ten years, has the capacity to support the new growth. In fact, large firms within the industry as well as other players are still cautious in making large capital investments required to expand and support the newly needed plants and machinery (Walker et al., 2009). Besides, the large firms are responding to the challenge by acquiring small firms within the supply chain especially companies from the countries that make large deals.

Driven by the rising competitive pressure and changing markets, both defense and the commercial industries within the sector have been forced to optimise their operations (Walker et al., 2009). The defense contractors have found it hard to keep up with the complexities in the industry as the general base of work continues to reduce. As a result, most of the firms have consolidated their operations as well as entities in order to reduce both physical and organisational footprints (Ministry of Defence, 2005). Besides, firms have been involved in reducing the overhead costs, right-size the firm and streamline spending across direct and indirect products. The industry indicators show that further consolidation with be necessary as the industry markets continue to decline (Ministry of Defence, 2005). The competitive and the operational synergy that drive and bringing together of firms within the industry will provide not only the clear cost advantages for the newly formed firms, but also the ability to meet the newly forged growth demand (Phillips et al., 2012).

The scramble for emerging markets has enabled most of the firms in aerospace and defense industries to position their products in line with the new demand found in the emerging markets. Most firms take advantage in doing business in these emerging markets through direct sales or establishing the local supply base (Bouvet, Gill & Nadkarni, 2011). However, the advantages have to be weighed against the challenges of doing business in these new markets. The challenge of direct competition from the foreign firms is one of the main set backs in the new markets. In fact, even in the markets with increased demand, the challenge posed by the foreign competitors with more strategic perspective on these markets remains a major threat (Bouvet et al., 2011).

The expansion strategy into the global market is also dogged by the new regulations not only from these foreign markets but also within the mother countries. For instance, failure to comply with regulations contained within the Foreign Corrupt Practices Act (FCPA) and well as the International Traffic in Arms Regulations (ITAR) has serious financial implications (Mantin & Tishler, 2004). Besides, new regulations in the Conflict Mineral (CM) provisions contained within the Wall Street Reform and Consumer Protection Act (WSRCPA) impose extra burden on the US firms within the industry competing in the global market. The expansion into the international markets is also hampered by the selection of inappropriate partners in the new markets, protection of intellectual property, lack of skills in the local resources as well as the offsets in these foreign markets (Phillips et al., 2012). Most of the major firms in the defense industry have found that the supply firms in the foreign markets lack the required skills and resources to develop and manufacture components that meet the US quality standards and government specifications (Phillips et al., 2012). The qualifications of such suppliers have proven to be costly to the large firms and pose significant risks to myriads of corporate imperatives including product reliability, timely execution, and product delivery time as well as safety issues (Phillips et al., 2012).

Therefore, the corporations with the defense industry need to come up with long-term plans that address the continued shifts in the global markets as well as the supply challenges experienced in high growth emerging economies such as in Asia and South America (Ministry of Defence, 2005). The long-term strategies should allow such firms to adjust to new domestic and foreign market demands through managing growth in a strategic direction as well as devising efficient and cost-effective ways of maintaining production that is backed by the right mix of supply chain (Ministry of Defence, 2005).

Firms with large contracts with the US governments, growth opportunities took the form of product innovation and expansion into new technological areas. For instance most of the firms in the defense industry are investing heavily into new technologies in areas of cyber crime detections through acquisitions and internal developments given the growing complexities in cyber crime (Phillips et al., 2012). Such moves would only result into the development of the security software, devices and services.

Besides effective growth strategies and appropriate risk management, optimisation of the global opportunities also involved reexamination of the firms’ basic organisation structure, management design and the business model (Bouvet et al., 2011). Major operational divisions, product lines, business units and key market areas are supposed to be streamlined and rationalised according to the strategic plans Bouvet et al., 2011). Most of the strategic plans had a lifespan of five to ten years while others had less or more. The basic re-alignment of the business model challenged the traditional assumptions that had dogged the industry for many years. In fact, firms that took the earliest opportunity were able to keep pace with the rapid changes in the global markets and realised earlier returns on investments (Bouvet et al., 2011).

The Global Defense Market

Statistics indicate a reduced military spending due the US defense budget cuts. However, the military spending is expected to remain constant in the next five years. Additional defense-related spending is likely to be affected by the weapons programs cancellations combined with delays in the delivery programs (Bouvet et al., 2011). Generally, the global military spending remained below 2% of the GDP. Nevertheless, the growth in the defense industry is expected to continue. The increased growth will majorly be driven by the increased spending in the military programs in the Middle East with Saudi Arabia, Oman and UAE spending more than expected in the region accelerating the global military expenditure by more than 1.3% (Bouvet et al., 2011). Measured in real terms, the increased percentage amounts to $1.6 trillion albeit the figure being the lowest since 2001. Despite the reduced expenditures, US remained the highest defense spender.

The gradual shift in the global military spending patterns is also observed in the defense contractors. The global defense procurement has shifted from traditional heavy equipments and amours to high-tech intelligence equipment (Bouvet et al., 2011). The shift has shrunken the market triggering the consolidations of firms within the industry as venders make every effort to bridge the gap in their product offerings (Sparaco, 2000). Large firm in the industry are also involved in strengthening their positions by acquiring supply and logistics firm. For instance, Boeing has been active in strengthening its position through acquisitions. Boeing acquired Argon ST, one of the firms involved in developing intelligence equipments as well as Narus, the major supplier of real-time network traffic and analytics software (Bouvet et al., 2011). Boeing also strengthened its position in the logistics command and business areas through the acquisition of CDM technologies, one of the largest firms specialised in real-time transportations and planning systems for the US military.

Similarly, the defense suppliers are entering into partnerships with the competitors in order to strengthen their position and be in a position of winning major contracts (Bouvet et al., 2011). For instance, the Northrop Grumman entered into partnership with Boeing in order to continue winning contracts for the supply of the materials required for the Ground-Based Midcourse Defense (GMD) systems managed by the US Missile Defense Agency (MDA).

Despite the industrial growth of over 8% experienced in the last three years, the international demand for the defense products will continue to experience various challenges ranging from the contract termination to industry backlogs (Phillips et al., 2012). Moreover, the continued US military spending cuts combined with rising instability in the Middle East, piracy and the nuclear arms development would continue to influence the general global spending on defense.

The Current Situation and the Future Opportunities

Looking at the current situation and the future opportunities, firms within the defense industry can position themselves strategically to take advantage of the presented opportunities. As indicated firms had to reexamine their structure and identify divisions that could be consolidated or divested in order to increase effectiveness and efficiencies that would result in decreasing the redundant efforts. In addition, firms had to re-evaluate their market opportunities through the production of the commodities that satisfies the market demand. In other words, the new products have to be re-aligned with the clients needs. In order to align the products with the needs of the market, firms have to take strategic decisions involving acquisitions, retention and divestments. Besides, firms within the industry have to come up with rigorous rationalisation programs that would ensure effectiveness and efficiency in the supply chain. It is undeniable that the emerging markets present new opportunities. In order to take up these opportunities firms need to support developments into these new markets. Firms have to come up with new strategies that ensure their expansion into the emerging markets through new partnerships, niche acquisitions and the establishment of the tier suppliers.

The firms on the supply side have to understand the long-term strategies of their client in order to establish multi-tier supply chain and optimisation. In fact majority of firms in the supply chain re-aligned their products and services with the needs of the clients through investments on the new innovations and advanced technologies. In fact, the firms expanded through internal developments, partnerships and acquisitions. In addition, the supply firms have to increase their production capacity in order to meet the projected market needs in the next fifteen to twenty years.

Methodology

Introduction

The study will mainly be qualitative based on the data collected through online surveys and the application of well-structured questionnaires. Essentially, the study would take the phenomenological approach with design and structure based on the “Grounded Theory” in order to determine the main aspects and influencing factors in the defense and aerospace industry (Gravetter & Wallnau, 2009). The grounded theory approach applies data to determine the phenomenon occurring within the target population. Therefore, this study will utilises the empirical data collected through surveys to explain how technological developments and innovations with the defense industry affects the non-civilian industries as well as other influencing factors in the defense industry. The study methodology would rely mainly on the survey method of data collection.

The Study Design

In order to examine the impact of the defense industry innovation and technology in business, this particular research study will utterly be empirical. The obligatory explorative data will be gathered across the study population selected through randomly selective procedures. A survey research technique will be drawn on while the integrated statistical analysis tools will be applied to help analyse the obtained data. By employing the survey research methods, any ensuing unanticipated research proposition will be suggested as well as formulated. The research method is considered to be amongst the best given that it rarely stands a chance of disqualifying any notable alternative explanations because it surmise to the event causations.

Sample and Sampling Procedure

The survey will target senior managers of the selected firms within the defense industry and other related civilian firms mainly the supplying firms. In this particular study, all the managers as well as senior executives within the defense industry organisations are deemed viable. However, only a small number of participants including 35 CEOs of firms within the defense industry and 30 CEOs of the civilian firms will be selected depending on their deep experience on the firms’ management, the understanding of the industry trends as well as other personal attributes including gender, age, experience and academic qualifications. From the total number of the corporation managers that may be sampled, just 65 CEOs from various organisations will be selected via a technique dubbed as convenience simple random sampling strategy and the research questionnaire will be administered to help in addressing the formulated research questions.

Instrumentation

Data perceived to be containing the relevant research information for this study will be acquired qualitatively through a survey. As an online survey, that involves self-administration of the research questionnaires, the pertinent primary data that include the perceived quality information will be gathered. In essence, a comprehensive exploration instrument will be developed besides being satisfactorily tested prior to embarking on the actual research study. The soundly designed research questionnaire will be used in the data collection process.

Data Collection

As one of the most important studies in the defense industrial sector, the information will be collected through administering properly designed research questionnaires through conducting well-structured in-depth interviews to the unbiased selected participants. The soundly designed research questionnaire will be administered to 65 participants constituting 35CEOs from firms within the defense industry and 30 CEOs from the civilian firms. Each part of the questionnaire will constitute key items that suitably attend to the research questions. For instance, part one will constitute whether the technological development and innovations within the defense industry have proliferated into the civilian industries and helped into the development of such industries while part two will elicit the impact of the role of the government in enhancing the technological development within the defense industry. Other parts will generate insights amidst offering recommendations to the organisations within the civilian and the defense industries on the importance of coordinated technological development and diffusion of innovations to augment success of the organisations. Some items in the questionnaire will throw light on the current changes occurring in the industries and how such changes affect the development and usage of technologies as well as innovations. Conversely, much of the information will be obtained from the review of relevant literature on the concerned topic.

Data Analysis Techniques

In order to obtain the best correlation approximation values, the study quantitative data analysis will be carried out by utilising the Integrated Statistical Analysis Tool (ISAT). Further quantitative data analysis techniques including spearman’s correlation, percentages, frequency distribution and deviations will be used to determine the research respondents’ proportions that chose various responses. The method will be applied for each group of items available in the questionnaire that ideally corresponds to the formulated research question and objectives. Line graphs, tables as well as statistical bar charts will be used to make sure that quantitative data analysis is simply comprehensible.

Ethical Considerations

Like any research study, ethical issues are likely to emerge. Thus, ethical consideration is critical. The ethical issues that is likely to emerge range from the informed consent of the participants to confidentiality. Looking into ways through which these ethical issues can be dealt with is critical for the success of the study.

Before undertaking the study, all the requirements will be completed as a requisite by the research committee as well as the department. In addition, all the participants will be provided with information concerning their freedom of participation using the stated standards. A letter of introduction specifying and explaining the aims of the study and the standard methods will also be provided. The letter will also provide an assurance of the confidentiality of their information. Moreover, information sheet guiding and describing the study will also be provided. The participants will also be made aware that they can remove their participation without any consequence. Lastly, the participants will be provided with letter of consent.

An approval will be sought from the responsible authority particularly the company top management and safeguards will be put in place during and after the research study to help protect the respondents and any other human subjects. In fact, both physical and emotional harm that may accrue will be given due consideration in this section by stating the basic ethical approach along with the power differentials between the researcher and the respondents as well as how the participants will be protected from any eminent abuses. Finally, the information acquired from the study participants will be securely stored and protected whereas study-finding reports will not divulge the participants’ identification.

Research Plan

The study is expected to last for more than ten months and the significant procedure is the data collection process. The data will mainly be collected through online surveys, which are expected to take three days. The survey questionnaire will be sent to the participants’ mails and are expected to send back the feedback within three days. The survey would target the senior managers of firms within the defense industry. Generally, the surveys are expected to take three months. The data compilation would take the following one month while the data analysis will follow taking two months. The compilation of the report will take one month after the data analysis.

References

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Mantin, B. & Tishler, A. (2004). The structure of the defense industry and the security needs of the country: a differentiated products model. JEL classification, 56(57), 1-46.

Ministry of Defence (2005). Defence industrial strategy. London, UK.

Phillips, M., Pierce, J. & Gates, D. (2012). Transformations in the aerospace and defense industry: Forces, implications and actions. Retrieved from kpmg.com

Radosevic, S. (1998). Defining systems of innovation: A methodological discussion. Technology in Society, 20, 75-86.

Reppy, J. (2000). The place of the defense industry in national systems of innovation. Ithaca, NY: Cornell University.

Sparaco, P. (2000). EADS foresees cultural hurdles. Aviation Week & Space Technology, 152, 42-43.

Walker, J., King-Jones, R., Distasi, S. & Hilbun, G. (2009). Defense industries: Business & technology management services. Retrieved from www.navigantconsulting.com

Wolstencroft, L. (2010). Strategies for winning business in the defence industry. Web.

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