Understanding the Defense Conversion Dilemma

Understanding the Defense Conversion Dilemma AARON J. SHENHAR, SADOK Z. HOUGUI, DOV DVIR, ASHER TISHLER, and YAIR SHARAN ABSTRACT Two major sectors of the economy—commercial and defense—are facing extensive change and are undergoing considerable downsizing. The defense sector was forced in recent years to adjust to a post-Cold War era and to find commercial uses for many of its military-related technologies, and the commercial industry is challenged by increased competition, higher productivity goals, and higher demand for quality products and shorter development cycles. Under these circumstances, conversion from defense into commercial activity became inevitable, and joint ventures of defense and commercial companies are common. Yet, many conversion attempts are unsuccessful, with failures attributed to differences in culture, practices, and experience of the two sectors. The purpose of this article is to discuss the defense conversion problem faced by defense contractors for a better understanding of the difficulties associated with conversion efforts. We start by discussing briefly the situation, policy, and environment of the American industrial base—government, defense. We then suggest a specific conceptual framework for analyzing the conversion dilemma. Such a framework may help defense companies during the decision-making process while considering transitions into civilian markets and serve as a basis for additional research on the defense conversion dilemma.  1998 Elsevier Science Inc. Introduction One of the most challenging phenomena in the dynamic world of today is the rapid change from a Cold War, arms race conflict to a less threatening environment and more integration among nations. Together with its positive message, this change has caused substantial problems as well as opportunities, both in the defense and the commercial sectors. There is a need to address several issues simultaneously: The increase of worldwide availability of advanced defense technology, the need to sustain a capability of reconstitution in case of future military threats, and the need to improve competitiveness AARON J. SHENHAR is Institute Professor at Wesley J. Howe School of Technology Management, Stevens Institute of Technology, Hoboken, New Jersey. SADOK Z. HOUGUI is a Senior Systems Engineer at Rafael, Armament Development Authority, Israel. DOV DVIR is the Head of the Management of Technology Department at the Holon Center for Technological Education, Holon, Israel. ASHER TISHLER is a Professor at the Leon Recanati Graduate School of Business Administration at Tel-Aviv University, Israel. YAIR SHARAN is Associate Director of the Interdisciplinary Center for Technology Analysis and Forecasting at Tel-Aviv University, Israel. Address correspondence to Professor Aaron J. Shenhar, Stevens Institute of Technology, Wesley J. Howe School of Technology Management, Hoboken, NJ 07030. Technological Forecasting and Social Change 59, 275–289 (1998)  1998 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010 0040-1625/98/$–see front matter PII S0040-1625(98)00026-2 276 A. J. SHENHAR ET AL. in the commercial sector while achieving faster product development and higher pace of new product introduction. In this environment, the defense industry is trying to find new uses for its militaryrelated technologies while experiencing extensive downsizing, both at home and abroad. At the same time, the commercial sector is facing intensified competition and increased customer demands for higher quality, lower cost, and more differentiated products. Furthermore, increased productivity has also caused a wave of downsizing in the commercial industry, as companies are learning to streamline and re-engineer their processes and make better use of information technology. In search of additional markets, the commercial industry is often finding outlets for its non-defense technologies in the defense sector. This is clearly a reverse from previous experience when advanced technologies were usually introduced first in the defense sector. In contrast, high entrance barriers to the commercial market make the difficulties of defense contractors even more intense. The defense decline era involves in essence a two-fold problem, at two separate levels: (1) At the national level: How to maintain adequate capability which will enable a prompt response to future military threats—both globally and locally (the reconstitution dilemma); and (2) At the company level: How to redirect previous defense related capabilities into commercial activities for increased economic growth (the defense conversion dilemma). The focus of this article is defense conversion. We will discuss the situation of the American industrial base—government, defense, and commercial industries—and suggest a conceptual framework for analyzing and better understanding the conversion problem. We begin by mentioning the current policy of reconstitution and the difficulties involved in current conversion efforts. We then mention some of the few previous studies on conversion attempts. In the main body of this work, we develop a specific defense conversion framework and discuss several cases of conversion efforts to illustrate its validity. Such a framework could help defense companies during the decision-making process while considering transitions into civilian markets. It may also serve as a basis for additional research on the defense conversion dilemma. American Policy of Reconstitution The current defense policy was stated by the White House: “[W]e and our allies must be able to reconstitute [build back] a credible defense faster than any potential opponent can generate an overwhelming offense” [1]. Kanter and Van Atta quantified this statement for non-strategic and non-nuclear forces, as follows [2]. 1. Crisis Response. The response time is 30 or more days. It consists of the sustained deployment of the base force, and the supplier warm base of operating or standby production lines for critical items. Also available will be contingency contracts for items such as air transport. 2. Crisis Recovery. The response time is two to four years. In addition to the crisis response availability, the base force is rebuilt or expanded as required. The supplier’s base will engage in restarts of weapons whose production was shut down recently. It might also include some modernizing. 3. Reconstitution. The response time is six to eight years. This is done via building the required base force to encounter the threat. The supplier base will develop new equipment in addition to the manufacture of the sustained and already DEFENSE CONVERSION DILEMMA 277 TABLE 1 Comparison of Previous and Current Defense Draw-downs Peak Low point Difference Era Year GDP Year GDP Year GDP Average change per year (%) W.W. II Korea Vietnam Current 1944 1953 1968 1986 39.3 14.5 9.6 6.5 1948 1956 1978 1997 3.7 10.2 4.8 3.6 4 3 10 11 35.6 4.3 4.8 2.9 8.90 1.43 0.48 0.26 Source: [6] developed equipment. This will be done by utilizing the U.S. and allied economic base. Several developments took place since this policy was declared. Among them, institution of a Technology Reinvestment Project (TRP), embracement of a dual-use technology policy, putting more emphasis on the use of commercial of-the-shelf technology, and attempts to reduce the use of military specifications (Milspecs) in procurement [3–5]. It seems that the administration is still examining and reshaping its policy of reconstitution and the last word has not been said yet. Perhaps the problem is based on the realization that the wars of the 21st century will not be fought just like past wars, and reconstitution may be senseless when entirely new capabilities are needed (electronic and information warfare). Since the focus of this article is defense conversion at the company level, we shift our discussion to this question. Historical Perspective The defense industry has already experienced downsizing in the past. Table 1 compares previous and current defense draw-downs. It is seen from the table that the current required decrease in defense spending as a percentage of Gross Domestic Product (GDP) is small with respect to previous draw-downs. There is a difference, however, between the environment today and the environment in which these drawdowns took place [6]. After World War II many of the civilian industries, such as the automobile industry, converted from defense-related production back to their pre-war businesses. Many industries did not even need to retool. Also, there was a shortage of basic products. After the war, many people wanted to buy commercial products that were unavailable during the war. There was large demand for products such as automobiles, clothing, appliances, etc. After the war, excess defense industrial capacity converted itself easily to respond to the large civilian demand. In addition, the industrial capacity throughout the world was destroyed or heavily damaged. This left little foreign competition for the U.S. industries. During the 1950s and 1960s, industry was working to meet the growing demand of the civilian market. In addition, demand for defense equipment was building up as a response to the Cold War. Unlike World War II, the Korean and Vietnam wars were far less demanding. Wartime demand was supplied by the expansion of appropriate sectors of the defense industry. The conversion after these wars took place within an economy that was able to absorb additional capacity, since demand was still growing [7]. Furthermore, the Cold War was still in place. Thus, market forces were able to drive the transition without much involvement from the government. 278 A. J. SHENHAR ET AL. Current Environment Today, the supply and demand in the civilian sector is fairly balanced. Intense global competition is making the entrance barriers to civilian markets quite high. The collapse of the East as a global military power made available large amounts of easternmade weapons which are sold to whoever wants to buy and at very low prices. Clearly, the environment in which the current conversion is taking place is quite different from the environments in previous conversions. Wallet [8] argued that the current conversion cannot take place only in the defense organizational levels as was done in the past. Rather, he proposed viewing the conversion issue from a systems approach in which the key players are the civil (non-defense) sector, defense support sector (defense industrial base), and the military sector (DoD and the armed services). The objectives of this system is to preserve the defense capability and to meet projected threats while using fewer resources. The resources, released from defense, are to be redirected to channels that promote long-term economic growth. Such suggestions were almost impossible with the economic downturn of 1990–91 and what was at first an anemic recovery in 1992–93—all of which greatly exacerbated the defense conversion problem. However, robust economic growth since 1994 has greatly assisted the economic transition of defense-dependent industries. Yet, individual defenserelated companies still faced enormous difficulty when coping with the reality of new markets and the need to redirect. We address these difficulties in the coming sections. Conversion Difficulties The firms that comprise the defense industry can be divided into three levels: 1. Large defense contractors that primarily design, develop, and produce weapons, and other defense-related systems. They act as system integrators and assemblers. Examples of such companies are Lockheed-Martin, General Dynamics, Grumman, Rockwell, etc. 2. Medium and small specialized companies that function as subcontractors to main defense firms and sell subsystems and components on an OEM basis. Examples are Sargent Controls in Tucson, Arizona, and Morland Valve Company, Manchester, Connecticut (both produce products for nuclear submarines). 3. Small companies that primarily produce parts and materials or do some skilled work as subcontractors to large defense companies. Examples are precision machine tool houses, electrical wiring companies, etc. How do these companies cope with the current situation? The difficulty in conversion is mainly associated with the company’s culture and its management attitude, and not so much with the technical and engineering practices. Extensive differences exist between defense- and commercial-related organizations. Table 2 summarizes these differences. Defense contractors are built to produce complex systems at low volume and to meet stringent demands of technical performance. In contrast, the commercial sector produces high volumes combined with reliability and affordable cost. Time for designing and developing a complex military system may be as long as 15 years, while a commercial product can take just a few months to three years. Another major obstacle is that defense companies have little experience with commercial marketing and distribution. The prime defense contractors deal with a limited number of buyers and basically do not need a distribution network. Commercial companies invest up to seven times more in marketing than defense companies. DoD imposes rigid constraints on the defense DEFENSE CONVERSION DILEMMA 279 TABLE 2 Fundamental Differences between Defense and Commercial-Based Organizations Defense Products Complex systems, low volume, stringent requirements; systems often require hand-tooling Time frame Long development period (up to 15 years); long product life cycle (15 to 20 years) Product development Investment in product development financed primarily by the customer Based on long-term relationship with an identified specific customer; top managers do the marketing to a few buyers, no distribution capability Marketing Standards and constraints Competition Decision making Organization Strategy Culture and values Standards imposed by customers, high requirements, reporting involves high costs, government contracts set limits on profits (25%) A small number of competitors (mostly domestic) Slow decision making; time to assess decisions. Large functional departments; many programs managed in a matrix organization Pushing state-of-the-art technologies; let the customer have the best and pay for it State-of-the-art scientific and engineering knowledge is extremely important; little or no business oriented culture Commercial Simple products, high volume, low price, reliable products, moderate performance requirements, automated production. Short development time (3 months to 2 or 3 years). Short product life cycle (months to a few years). Product development is financed by the company itself No specific customer. Separate marketing function, market research, advertisement, distribution, etc; high cost of marketing (up to four times development cost) Generally no imposed standards. Reporting to customer not required; some new standards (ISO 9000), FDA regulations on medical products. Many competitors, local and global; strong competition on price and quality Fast and timely decisions are critical Small interdisciplinary teams; strong cross-functional involvement Various strategies: create value for customers through technology, cost, quality, design, image, aesthetics, etc. Business driven, fast development, practical engineering practices, save costs companies that range from operational aspects such as auditing and reporting to technical issues such as military specifications. Such limitations impose extensive overhead on defense companies and those doing business with the government, and it explains why many companies separate their defense and commercial businesses. When a defenserelated organization is seeking conversion, it must address these limitations. Several frameworks may help in addressing the specific problems that are associated with this transition. Conversion Efforts There is little written information, let alone systematic research, as to how the defense industry is dealing with the current situation. Some information can be obtained, however, from government publications and the free press. Although the picture, in 280 A. J. SHENHAR ET AL. general, is diverse, the clear trend among defense prime contractors and subcontractors is one of consolidation or exit. Several companies, particularly some of the largest corporations, set their strategy to deal only with defense items. They make limited diversification efforts and try to secure their niches within military markets. As a result, three different types of adjustment strategies are pursued: downsizing, concentration, and diversification. The largest contractors try to practice a mix of the three, but downsizing is notably the most common. Over the past years several tens of thousands of employees were laid off by main contractors such as Unisys, Rockwell, General Dynamics, and McDonnell Douglas. Several companies, such as General Dynamics or Honeywell, pursue a unique strategy of selling or spinning off parts of their business, while aiming to achieve the largest possible profit for their shareholders. In contrast, companies such as Lockheed, Martin Marietta, and Loral, (all part of Lockheed-Martin now) saw diversification efforts as impractical and argued that they do not want to repeat unsuccessful experiences of Boeing and Grumman during the 1970s. Instead, they are seeking mergers and acquisitions to increase their defense potential, reduce overhead and competition. For example, over the past years Loral has purchased the defense/government business of Ford, LTV, IBM, Goodyear, Xerox, Fairchild, Schlumberger, and Unisys. The IBM purchase alone increased Loral’s size by about one-third in revenue [9]. And Martin Marietta and Lockheed, the United States’ number two and three defense contractors, merged and created America’s largest defense contractor. The reasoning behind these mergers and acquisitions is that the largest producers in the industry will have sufficient market share to survive while the smaller contractors will experience difficulties. Other companies recognize that defense-related products will still be needed. But they also emphasize defense conversion efforts to maintain their level of activity and capability. For example, Grumman’s policy on conversion is based on the recognition that national defense will continue to be of paramount importance. Grumman intends to remain a leader in defense technologies and is pursuing programs that have dualuse potential and can be used both in defense and commercial applications. Some companies are trying to diversify. GM Hughes’ electronic division, for example, has been a highly defense oriented electronics company [10]. It is constantly capitalizing on technologies it already has, and is making efforts to apply them to commercial products. Another way to tackle the conversion problem is to diversify by simply purchasing a pre-existing commercial firm, as Rockwell International did by purchasing AllenBradley, a world leader in factory automation. Other companies have changed a portion of their R&D effort toward civilian applications [11]; among them Westinghouse Electronic Systems, TRW, and Lockheed. Companies such as General Electric and IBM chose to exit the defense market completely. They sold off their defense-related businesses and chose to pursue commercial markets only. Yet these companies had strong commercial products and marketing capabilities, which smoothed their transition out of the defense industry. Many of the small and medium sized businesses tried to diversify, and again, with various degrees of success. Examples are Galileo Electro-Optics, Sturbridge, Massachusetts, and Aura Systems, El Segundo, California. Most, however, have not been able to pursue the mixed strategies utilized by prime contractors. The most severely affected companies are the small firms that had to face two main difficulties. First, budget pressures have forced prime contractors to look down the subcontracting chain and compete for contracts deemed “too small” during the previous buildup years. Second, DEFENSE CONVERSION DILEMMA 281 prime contractors have reduced their vendor bases due to the loss of major contracts and the need to become more competitive. Facing these challenges, small firms having no other viable alternative but to diversify or shrink. Although severely affected by budget cutbacks, some subcontractors appear to have enjoyed more success in diversification [11–15]. First, small firms lack the structural characteristics that have burdened diversification by prime contractors [16, 17], but more importantly, senior management of successful subcontractors have made their firm’s diversification efforts the number one priority. This strong commitment has proven critical to successful diversification [12]. Previous Insights on Successful Conversions Although many conversion attempts have failed, data reports on them are quite limited. Few case description exist, however, of successful conversions. Such cases often constitute similar characteristics. Pages [9, 12] examined small businesses that diversified successfully. He reported that to succeed in the conversion process, a company must have a dual-use technology or some other competence that could be exploited aggressively. If an additional competence is required, then a joint venture is an appropriate mechanism. Extremely important is management commitment and the commitment of all employees from the top down. It is essential to develop the company’s marketing capabilities and ensure sufficient capital resources during the transition phase. A collaborative effort between several national laboratories was aimed at developing a process that will help identify and evaluate the commercial potential of certain Strategic Defense Initiative (SDI) funded technologies [18]. The same process was used to rank the promise of dual-use technologies that were identified. Two types of criteria were developed: one for identifying commercial potential, and one for identifying the transferring potential of an existing technology. The criteria which were chosen for the commercial potential category were [19]: • • • • • Costs of commercial development are reasonable. A family of products or applications is possible. The commercial market is accessible. The competitive advantage in the market is possible. Discussions with industry have been held or are ongoing. The criteria for the transfer potential category were: • • • • • The technology is adequately developed for transfer. A team is available to assist the development or transfer. The technology has a proprietary position. The time anticipated for commercial development is reasonable. A transferee or licensee is identified or identifiable. Developing a Framework for Conversion Analysis Given the currently fragmented evidence from previous conversion attempts and research, we believe there is a need to develop additional understanding of the conversion dilemma and build a comprehensive framework for analyzing situations and future decisions regarding conversion problems. As described, defense conversion can take on several meanings. A company’s strategy can be anywhere between remaining completely dependent on defense and completely commercial. Companies that decide to rely solely 282 A. J. SHENHAR ET AL. on defense, must recognize that business in coming years will be weaker than in the past 50 years. To pursue this strategy they might merge or acquire other defense businesses to form a stronger organization. This will naturally decrease the number of defense companies while maintaining the defense R&D and production capabilities. Unfortunately, this will involve additional layoffs as these companies restructure. The companies that are most likely to pursue this avenue are the large defense contractors that form the first tier of the defense technology base. Other companies may decide to pursue entry into commercial markets. However, most companies that are heavily dependent on defense business do not have many of the needed tools to pursue the commercial option. They must transform and make substantial changes before successful pursuit in these new markets. These companies must address and relearn issues such as development time, product cost levels, marketing, distribution, and service. In addition they must learn how to exploit knowledge and capabilities that can be adapted and used in commercial products (dual-use). Companies may acquire this knowledge by hiring new people in relevant areas or they may form alliances with other companies to complement their shortcomings. Although having the right people is extremely important, it is hardly enough. Several other components are needed to make such a transition successful. The first step in making a defense conversion decision is to determine whether the company will do it alone or needs a partnership with another commercial-based firm. Roberts and associates studied the problems involved in entering new businesses [20, 21]. For example, Roberts and Berry [20] examined the advantages and difficulties associated with several options for such entry decisions—from internal development, through joint ventures, to educational acquisitions (see Table 3). To help make an appropriate decision, Roberts and Berry [20] have suggested a 3 3 3 technology/market familiarity matrix based on the familiarity with the market and with the technology of the new business and thus determines recommended strategies for entrance. Using this framework, clearly, most defense companies will find themselves in areas where they are unfamiliar with the market factors. Meyer and Roberts [21], have argued that firms will experience stronger performance if they generate new products that offer basically the same technology with some enhancement or improvement in the technology dimension than if they targeted new market niches. Nevertheless, they suggest that to make a successful movement while looking at the matrix, a firm ought to make changes in one dimension only, either in the market dimension or technology dimension. In other words, a company seeking new businesses should try to avoid making a two-dimensional change—both in markets and in technology or products. Any attempt to move into new markets and new products at the same time is too risky and has a high failure probability. Unfortunately, however, the defense conversion environment is more complex because companies are often required to make a bold change when dealing with conversion situations. First, keeping existing customers is irrelevant, since companies are trying to determine how to move from their current customer (the government/military) and pursue new markets in the commercial arena. Second, it is very unlikely that commercial customers will be interested in their previous military-related products. A refined framework may therefore be helpful when discussing and analyzing the current case. To develop a framework for defense conversion analysis we suggest a 4 3 4 market/ product matrix dedicated to this dilemma (see Figure 1). Outward movement along each dimension represents a higher distance from existing practices. Along the market dimension, companies can move from the existing military market to the para-military DEFENSE CONVERSION DILEMMA 283 TABLE 3 Entry Mechanisms: Advantage and Disadvantages New business development mechanisms Major advantages Internal developments Use existing resources Acquisitions Rapid market entry Licensing Rapid access to proven technology Internal ventures Venture capital and nurturing Use existing resources. May enable a company to hold a talented entrepreneur Technological/marketing unions can exploit small/large company synergy. Distribution of the risk Can provide window on technology or market Educational acquisitions Provide window and initial staff Joint ventures or alliances Major disadvantages Time lag to break even, tends to be long (on average eight years) New business area may be unfamiliar to parent. Requires large amount of capital Not a substitute for internal technical competence, not proprietary technology, dependent upon licenser Mixed record of success, corporation’s internal climate often unsuitable Potential of conflict between the partners Unlikely alone to be a major stimulus of corporate growth Higher initial financial commitment than venture capital, risk of departure of entrepreneurs Source: [20]. market. This will represent police, security organizations, and other government agencies. The next move is to the industrial market, where customers are other commercial organizations. The most substantial market change defense companies can make, however, is to move into the consumer market where customers are individuals and families buying products for home use. On the product/technology axis defense companies can move from existing to modified products. Such modifications may constitute selling guns for hunting instead of military purposes or commercial communication satellites instead of military satellites. The next step is to use the same technology for different (commercial) products. This option includes the case of dual-use technology where the same technology could be useful both for defense and commercial products. Finally, some defense companies may only be able to apply their people’s skills to develop new technology that can only be used in commercial applications. As this framework illustrates, unlike common business moves, a one-dimensional change is irrelevant. While conversion means moving out of the military market, selling the same product to non-military customers is impossible. Thus, almost all defense conversion involves a two-dimensional change—both in market and in technology. The extent of this change increases as the company is moving away from its present situation (shown in the lower left corner of Figure 1). Probably the lowest risk move involves 284 A. J. SHENHAR ET AL. Fig. 1. Product/market matrix for defense conversion. modified products to the para-military or government market. Although selling special purpose ammunition or explosives to police or government agencies may be an easy move, such cases are quite rare and certainly do not represent the majority of conversion situations. The other cells in the para-military market are similarly rare or almost nonexistent. Of higher interest, of course, are the industrial and commercial markets and the cases of the same (or dual-use) technologies and the shift to a different technology while using existing skills. Here we can clearly see a progression in risk. Selling a modified product in the industrial market will exhibit a moderate risk, since marketing to industry, although different than government, has some similarities (e.g., selling to the purchasing functions in the organization). Marketing to consumers is substantially different than to military, and this move is therefore characterized as high risk. A high level of risk is also involved in the selling of similar technology (in different type products) to the industrial market. Finally, the three cells in the upper right corner of Figure 1 constitute a very high level of risk and should in fact be avoided as much as possible. The framework presented above can be used by defense firms while assessing the need to convert. Companies should assess their move according to the level of change and the risks associated. The higher the risk, the more likely it is that the company will need a partner from the commercial sector. Such partners are probably needed when the level of risk is moderate or higher. However, the higher the risk, the higher the level of adaptation and learning needed by the organization. Adler and Shenhar [22, 23] developed the concept of a company’s technological base as a framework for assessing levels of organizational adaptation. It includes business processes, organizational assets, external assets, complementary assets, and technological assets. DEFENSE CONVERSION DILEMMA 285 Fig. 2. Organizational assets—level of learning. Source: [23]. When a company is seeking a business partner, it is usually looking at expanding its external and complementary assets. However, a great deal of change and adaptation is usually still needed within the company itself. Assessing the level of learning or adaptation will involve an analysis of the company’s existing and needed organizational assets. Organizational assets are usually those that prove to be limiting factors for change. Among the elements of the organizational assets we find in hierarchical order; skills, procedures, structure, strategy, and culture. The greater the magnitude of change in technology or market that the organization seeks to effect, the higher in this hierarchy the organization needs to make adaptations (see Figure 2). In addition, the lower levels are typically amenable to faster change than higher levels [22]. Unfortunately, however, in most cases of conversion, the change that is needed involves significant adaptation in almost all parts of the organizational assets, including culture. Such change is usually very difficult to implement, it may take a long time and it involves a high level of risk. In conclusion, a company in conversion may first look at the two-dimensional framework presented in Figure 1 to assess its options of conversion. It must then decide whether it needs a partner using the Roberts and Berry framework [20], and finally assess its present and future technological base [23]. Analyzing Conversion Cases We now apply the framework to examine four previous conversion efforts. As mentioned, an impressive diversification effort was made by GM Hughes’ electronics division [10]. The company identified several existing technologies that can be applied to commercial products. They were the DirecTV system, cellular telephony, large-screen displays, radar sensors, and systems for electrical vehicles. Examination of the decisions that were made regarding the DirecTV program reveals the following: • • • • Formation of a separate and autonomous business unit. Change of management structure to enable independent decision making. Extensive use of teaming, networking, and total quality techniques. Extensive market research to establish confidence in demand for the product. 286 A. J. SHENHAR ET AL. • Leveraged design capabilities with rapid prototyping through technologies such as CAD/CAM. • Exploited an opportunity window, before the installation of fiber-optic networks throughout the United States. • Formation of alliances with RCA-Thomson, Sony, and other consumer products manufacturers. Examining Hughes’ electronics efforts while using the above frameworks suggests that Hughes planned its diversification by introducing many new commercial oriented products while modifying existing products and technologies and by using its core knowledge to develop new products [10]. By introducing the DirecTV, Hughes moved into the modified-products/consumer-market cell. As the model suggests, this move is involved with high risk. However, to face this risk, Hughes pursued a number of alliances to complement and strengthen its weak areas [20]. Forming the alliances with RCAThomson Consumer Electronics as manufacturer of the system’s satellite receiving dish provided the consumer market experience in building the set’s receiver/decoder home units, provided digital compression technology, and its 11,000 dealer retail network guaranteed distribution. Other alliances were formed with Sony Corporation of America which provides state-of-the-art recording and playback equipment, with Digital Equipment Corporation (DEC) to operate a national billing center, and with Matrixx Marketing to operate the national customer service center. Hughes had clearly recognized the need to build a new business infrastructure and formed a separate DirecTV autonomous business in which managers were empowered to make independent decisions and to quickly move to commercialization in a very short time frame. Looking at the change in its technological base, Hughes has clearly modified its structure, while using its core technological assets. It did not attempt to change quickly, however, its sophisticated culture for producing advanced satellites. It chose instead, to form alliances with consumer manufacturers, gaining from their external and complementary assets (distribution and marketing), and building on their culture of low-cost production capabilities for the consumer market. Similarly, when analyzing the development of cellular telephony, Hughes was using the same technology but moved to a different products/industrial cell [10]. This move also involved high risk. Although Hughes is known for digital radio equipment and for small aperture terminals for transmission of voice, data, and video, it did not possess the telephone switch. To confront the high risk, Hughes formed another alliance with the world’s largest telecommunications equipment supplier, Alcatel SEL of Germany. Alcatel at the same time was interested in entering the U.S. market with a new switching platform. The venture was awarded a multi-year contract by BellSouth Cellular Corporation to deploy the cellular network in the southeastern states. In addition, Hughes hoped to enter the worldwide markets of developing nations that are poorly wired for telephone services. These alliances were also an expression of acquiring new external assets, while slowly trying to change the internal culture. A third example of diversification, this time of a small company, involves Galileo Electro-Optics from Sturbridge, Massachusetts [12]. Galileo is a producer of remote sensors, night vision devices, laser technology, and other electro-optical equipment. The company tried to diversify into non-defense products in the late 1960s and again in the mid-1970s, but was unsuccessful. In the 1980s, it tried again by using its core skills in a new way. Possessing extraordinarily valuable technologies, the company attempted to “leapfrog” into new areas with its current technologies. Such technologies were used DEFENSE CONVERSION DILEMMA 287 to enter the new field of remote sensors to manufacturing applications. In areas where it lacked valuable technologies, it would exploit core skills, looking for new customers, rather than new technologies. With this strategy, it entered into the office products and medical markets. A few of the lacking technologies were developed by applying core skills and using the energy and talent of existing people. Examining Galileo’s moves with our framework, suggests a move to the modifiedproducts/industrial cell for the manufacturing equipment and to the same-technologydifferent-products/industrial cell for the office and medical products. As the model suggests, these moves are characterized by a moderate-to-high level of risk. The key to success in this case was clearly management determination and full commitment. Without this commitment the effort would have failed [12]. But the high-risk transition was not painless: The company had to downsize from 631 to 330 employees before it could declare successful business transition. It also faced substantial stock price losses during the transition period. The technological base of Galileo was strong because of its advanced technologies, and they were essentially retained. The company had to change, however, its strategy, and create a more commercially oriented culture. The major change occurred however, with the loss of so many employees, making the remaining ones more receptive to the new culture. The final example involves Textron Aerostructures from Nashville, Tennessee, which was a subcontractor for military jets [12]. As a result of the defense decline, Textron had suddenly to compete with several prime contractors for the production of aircraft wings. Such contractors eliminated much of their subcontractor base and attempted to do more things in-house. When major customers eliminated their orders, Textron management created a strategic plan to identify new markets. Although the company tried to diversify into new areas, it realized its difficulty to compete outside the aviation market. The company quickly returned to its original core competencies: building aircraft wings. During this process, the company greatly expanded its marketing work force to help search for new customers. The result was a successful entry into foreign markets with new orders for commercial aircraft wing components from Airbus and British Aerospace. According to our model for analysis, Textron shifted to the same and modifiedproducts/industrial cells. As the model suggests, such a move is characterized by moderate risk. Nevertheless, because the severe decline in defense orders and the length of the transition process, the company has suffered extensive downsizing—from a peak of 7200 employees in 1985 to 2400 workers in 1992. Its post-transition defense sales are only 15%—down from 70%. In terms of technological base, the company has acquired additional external assets (marketing and new customers), but essentially unchanged its technological assets, processes, or culture. Conclusion The defense conversion dilemma is not easy. Redirecting defense-related capabilities to commercial applications while maintaining a reasonable level of business activity involves, at best, a moderate level of risk, but in most cases, high, or even very high risk. How to do a fully painless and successful transition is still not clear. In this article we highlighted, however, some of the basic differences between the defense and the commercial sectors and suggested a framework for the analysis of the conversion problem for a better understanding of the various types of conversions. It may guide compa- 288 A. J. SHENHAR ET AL. nies and managers in assessing their level of risk and making decisions on diversification, alliances, and mergers. Much more learning, however, is left for subsequent research. For example, as we noted, diversification of defense companies is by far more complicated than diversification attempts by commercial firms. Not only is the market different, but also products and often technology must change. How these difficulties are affecting the final result must be further investigated, and is there a correlation between the level of risk and the actual end result? Further research must also look empirically at the interaction between managerial activities and conversion successes. It must test some of the failures, and not only successes, and identify the real success or failure factors. Our framework provides a possible road map for this type of research and we hope subsequent studies will address some of these questions. The authors thank the following organizations for their support and encouragement during the course of this research: The Research and Development Division at the Ministry of Defense, Israel, The Institute for Business Research and the Interdisciplinary Center for Technology Analysis and Forecasting at Tel-Aviv University, The Center for the Development of Technological Leadership at the University of Minnesota, and The Minnesota Consortium on Defense Conversion. References 1. The White House: National Security Strategy of the United States. U.S. Government Printing Office, Washington, DC, August 1991, p. 30. 2. Kanter, H., and Van Atta, R. 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