Offensive strategies for defense companies. (surviving defense spending cutbacks)

When Germans frolicked on remnants of the Berlin Wall in 1989 to celebrate liberty and the symbolic disintegration of the Soviet empire, the free world watched on television and vicariously joined in. After the euphoria subsided, elected officials in the United States and American defense company leaders had to face the inevitable employment and financial ramifications of military base closings and curtailed government spending for weaponry, equipment, and supplies.

Today, defense companies themselves are on the defensive, their slice of GDP having slipped to just under 4 percent. Many are engaged in a struggle for survival by restructuring and looking to new markets as their traditional industry erodes. The rankings of the top ten U.S. defense firms as determined by sales to the military reshuffled extensively between 1991 and 1994. Not a single company maintained the same rank in both years.

Until the demise of the Soviet Union, the U.S. defense industry had for years been a growth proposition. Occasional hot wars and the ongoing Cold War prompted the manufacture of conventional weaponry and supplies and the production of nuclear warheads in support of a policy of Mutual Assured Destruction.

With the easing of East-West tensions, a vital corporate issue with national fallout has been: What strategies will defense companies pursue as U.S. spending for military purposes subsides? Not only does this question affect defense companies and their thousands of employees, it also has reverberations for the many companies that supply them and work as subcontractors. Defense cutbacks are also an important economic development concern for the 50 states and communities across America, which are dependent for employment and tax revenues on defense-related facilities and defense companies. Until recently, for example, San Diego, California, had never been subjected to a prolonged Rust Belt species of recession.

How are defense companies coping to offset, at least partially, the loss of government business? Their options are few, the road to the future is treacherous, and historical precedent foretells that many of them will not survive.

SKEWERED BY A SEA OF CHANGE

The harsh reality is that companies in declining industries generally have not adapted well to epic change. Eminent economist Joseph Schumpeter articulated the seemingly oxymoronic phrase "creative destruction" to describe the Darwinian process whereby a capitalistic economy sloughs off existing industries and technologies and replaces them with more advanced ones. A few innovative corporations are adept at practicing creative destruction of their own profitable products and services to their competitive advantage. But most, it seems, are not.

Although creative destruction is continuous, it is more pronounced in a time of great invention. For instance, the 40 years following the American Civil War constituted a period of dramatic advances in living standards brought about by the likes of Thomas Edison, Henry Ford, and the Wright brothers. The electronics revolution of the present age has fostered sweeping progress in medical care, communications, and entertainment. What has transpired at Walt Disney World's futuristic EPCOT Center in Central Florida is indicative of the swift pace of change. EPCOT, opened in 1984, is already experiencing trouble sustaining its attendance and holding on to its corporate sponsors because the park is no longer very futuristic.

The fact that corporations are not particularly adaptive in the face of creative destruction is easily verifiable. In 1928, the Dow Jones Industrial Average of bellwether American corporations included such companies as Nash Motors and Victor Talking Machine; now they are merely vestiges of the past. When the original Fortune 500 list of the largest American industrial companies circa 1954 is compared to today's listing, the turnover is remarkable. Moreover, in the short span between 1973 and the early 1990s, the Fortune 500's share of non-farm employment went from 20.2 percent to 10.9 percent.

Oil companies currently dominate the Fortune 500, holding six of the top 21 places. Yet if history does repeat itself, most of these corporations will be eviscerated through creative destruction of the oil industry by alternative energy sources.

By tracking the comings and goings of corporations on the Fortune 500 listings, one inescapably reaches the conclusion that imbuing a company with protean qualities is far easier said than done. Otherwise, more of the largest American corporations--with access to the finest leadership and management money can buy--would have changed with the times and maintained their places of preeminence. The word "protean" itself is derived from Proteus, a sea god from Greek mythology who had the capacity to change shapes at will--a talent evidently not in abundant supply in large corporations.

Sagacious Benjamin Franklin averred that "success has ruined many a man." Achievement …