SAN FERNANDO VA LLEY STATE COLLEGE

Trends in Marketing of Li. Defense Electronic s Re search and Development

A the sis sub mitted in partial satisfaction of the requirements for the degree of Master of Science in

Busine ss Administration

by

Horace Augus tin Lindsay

January 1970 The thesis of Horace Augustin Lindsay is Iapproved

Committee Chai�

San Fernando Valley State College 1970 January

ii TABLE OF CONTENTS

Page

List of Tables v

List of Figures vi

Abstract vii

Chapter I - How the Government Buys Research and

Development 1

A. Introduction 1

B. Procurem ent Organization 1

c. The Procurement Cycle 4

D. The Customer 8

E. Procurement Methods 10

F. Types of Negotiated Contracts 14

G. New Procurement Techniques 16

Chapter II - Defense Marketing 19

A. Characte ristics and Trends 19

B. Hypothesis and Criteria for Testing 33

c. The Defense Marketing Role 34

l. Introduction 34

2. Market Intelligence 35

3. Market Planning 38

4. Proposal Formulation 39

5. Customer Relations 42

6. Contract Negotiation 42

iii Page

D. The Defense Marketer 44

1. Organization 44

2. Marketing Influence 47

3. Job Requirement 54

4. Current Training and Qualifications 57

Chapter III - Conclusions and Recommendations 61

Bibliography 64

Appendi cies 69

iv LIST OF TABLES

Table Page

I. Budget Expenditures for Re se arch and

Development, 1954 through 1966. 27

II. Departm ent of Defense Prime Contract

Awards by State, 1965 through 1967 . 31

III. Department of Defense Prime Contract

Awards by State , 1968. 32

IV . Bunke r-Ramo Corporation Summary Budget

for Advertising, Trade Shows and Collateral ,

1968-1969. 43

v LIST OF FIG URES

Figure Page 1. Defense Procurement Organization. 2

2. Typical Air Force Oriented Procurement Cycle. 5

3. Typ ical Air Force Cont ract Cycle (Competitive ,

Negotiated). 6

4. Number, Cost, and Profit for Various Fixed Price

and Cost - Type Contracts. 17

5. Recent Trend in Expenditures for Exploratory

Development 21

6. Relationship of Research and Development to Total

Defense Expenditures. 22

7. Relationship of Defense Electronic Research and

Development to Total Defense Electronic

Expenditures. 25

8. Levels of Defense Employment, 1965-1968. 26

9. Organization Chart, Litton-Data Systems Division. 46

10. Thompson Ramo Wooldridge , Inc . , Computer

Division in 1958 Without the Existence of a Market-

ing Organization . 50

11. Thompson Ramo Wooldridge , Inc . , Computer

Division in 1961 With the Existence of a Custome r

Requirements (Limited Marketing) Organization. 51

12. Th ompson Ramo Wooldridge , Inc. , Computer

Division in 1964 With Established Marketing

Organization . 52

vi ABSTRACT

TRENDS IN MA RKETING OF DEFENSE ELE CTRONICS RESEARCH AND DEVELOPMENT by Horace Augustin Lindsay

Master of Scienc e in Busine ss Administration

The defense industry comprises a large portion of all indust­ rial activ ities, and huge sums of money and other resources are spent in acquiring and sustaining defense business. The general subject of defense marketing has not as yet been adequately docu­ mented,and current operations and practices of defense marketing organizations are based largely on past experience rather than established principle s. In this the sis is described the organization and methodology employed by the government in the procurement of defense electronic research and development. The impact of this environment on the defense-oriented company and the functions to be performed by the marketing organization for successful accom­ plishment of corporate objective s are also presented. In addition to providing a concise description of defense marketing and recent trends in the industry, an hypothe sis is asserted and tested to show that the traditional marketing principles associated with product, planning, selling and pricing are important aspects of the defense marketer's job, and that the defense marketer is hampered in the performance of his functions by a general lack of formal training in busine ss administration, and a strong engineering orientation in the defense industry.

vii CHAPTER I

HOW THE GOVERNMEN T BUYS RESEARCH AND DEVELOPMENT

A. Introduction The procurement of resea rch and development systems and equipment by the Department of Defense is a complex activity involving high level policy decisions , congressional approvals, lengthy procurement cycles, and nu merous technical, financial , and contracting agencies. It is the purpose of this chapter to de scribe briefly the procedures and technique s employed by the government in procuring a de sired capabil ity , and is to serve as a framework for a clearer understanding of the environment in which the defense marketer must function.

B. Procurement Organization 1 The Defense procurement organization is de s igned to satisfy three basic obj ectives: policy making , procurement implementa­ tion, and review. Figure 1 shows a functional procurement organiza­ 2 tion within the Department of Defense. The activit ies above the dashed line establish procurement policy and monitor procurement implementation to asce rtain that policy obj ectives are satisfied. The activities below the dashed line are involved in the actual planning , purchasing and contract admini stration. 1. Policy Making: - Policy decisions are made at the Secretary of Defense and Chief of Staff level. Areas of policy making include:

1 Unite d States Department of Defense, Armed Services Procure­ ment Regulation, 1-1 00 (Washington: GOve rnment Prtnting O£hce , January 1969), p. 101. 2 Presentation to Officials of the French Government at the Pentagon, Washington, D. C. , March 7, 1968.

1 I SECRE TARY OF DEFENSE I

l Secretary of the Air Force I !Secretary of the Navy j secretary of the Army I I j Air Force Chief of Staff Army Chief of Staff l I I Chief of Naval Operations l J

Chief of Naval Material ! ---- r------1------r--Pol------icy- Leve 1 - Operational Level

Commandant of the Administrative Office Marine Corp s Office of Naval Research Bureau of Naval Personne l Military Sea Transportation Field Activi ties I Service _I I I I J Naval Air Naval Naval Naval Naval Naval Systems Electronics Facilities Ordnance Ships Supply Command System Systems Sy stems Systems Systems Command Command Command Command Command I I I I I Field Activities L·------�------�-� -�-----� -�------I FIGURE 1 Defense Procurement Organization (Naval Detailed)

N 3

a) Determination of which Service will be re sponsible for procuring specific items (e . g. , tactical aircraft, tactical missiles, command control systems, communi­ cations system, etc. ). b) Assigning priority to maj or procurement activities (e . g. , anti-missile systems , space vehicles, strategic aircraft, intelligence systems), c) Budgeting allocations by Service and areas within each Service, d) Planning, to acquire capability to satisfy established national obj ectives, e) Establishing guide lines on methods of purchasing (i . e. , competitive vs. non-competitive procure ments), f) Determining the type of contracts to be let in the pro­ curement of select systems, g) Establishing guideline s for program cost estimating , cost-effectiveness objectives, and government commit­ ment to fu ll production of a developed syste m. 2. Contract/Program Implementation: - Consistent with policy directives, general guidance and budget authoriza­ tions re ceived from the office of the Secretary of Defense, programs for the acquisition of equipment and syste ms are implemented. The method, schedule , and phases associ­ ated with program implementation is referre d to in this paper as 11The procurement cycle 1 1 and is the topic of a following section. 3. Procurement Review:- Both pre-contract and post contract reviews are conducted. At the various purchasing offices, there are contract review boards that review all large or unusual awards (e . g. , large dollar value , sole-source, other than low bidder) . These boards are staffe d by senior procurement pers onne l who are not directly involved in the particular 11buy. 11 Pre-contract reviews normally involve a fac ilities, personnel, and labor- rate survey, to determine the capability of a potential contractor. Post contract 4

reviews are intended to ascertain that the best intere sts of the government are maintained. They normally include a review of program management and performanc e, and an audit which concentrates on accounting and pricing aspects.

C. The Procurement Cycle 3 The government buy s through a formal process based on Development of Defense guidelines relative to program planning, programming, budgeting and acquisition. The total acquisition period will depend on the type of system being procured, the anticipated cost and the level of priority associated with the procure ­ ment. The period normally ranges from two to five years . Pro­ curements can be initiated and/ or implemented in many ways; however, the following procedure is considered normal. Figure 2 shows a flow chart, prepare d by the writer, wh ich depicts in simplified form , a procure ment cycle and some of the interrelation­ ships which are involved. Based on the dictate s of Armed Services Procurement Regulations and comments obtaine d from Air Force contracting personnel, the contract cycle chart shown in Figure 3, was likewise prepare d. 1. The cycle usually starts by the '' Using Command1 1 (e . g. , Air Force Tactical Air Command) establishing a require ­ ment, for example an advanced radar system. This requirement is documented and forwarded to higher head­ quarters (i . e. , Air Force Headquarters - Pentagon) for approval. 2. If approved, the re quirement would then be forwarded to the appropriate procuring agency (i . e. , Air Force Syste ms Command) for study, to determine , if the technology exists , the most efficient method of implementation, and the anticipate d cost. Depending on the technological area, this

.3 salvatore F. Divita, ''Selling R&D to the Government, 1 1 Harvard Business Review, XLIII (S eptember- October, 1965), p. �-- Disapproval

f jHq AFSC determine s As using command, Hq USAF coordinates Approval feasibility of Hq TAG establishe s requirement with impleme ntation and f- an operational using command establishe s a requirement budgetary cost 1-l:j ('1) Not feasible Ill Ul I .... . • 0"' ...... Forwards Hq ESD performs pre liminary ('1) Hq USAF Approval Hq USAF reviews (via Hq AFSC) engineering analysis and pre - includes program and pare s Preliminary Technical ..--- � program cost estimates Development Plan with in budget cost refinements Disapproval I j Not End Hq ESD commences DOD and Congre ss Hq USAF compares funded (or start procurement action, review total USAF � proposed budget over) selects contractor, 1-- budget and make f-.- to appropriation and provides z Funded 0 appropriation contract direction ...,...... (") Ill ...,...... Regional Contract 0 ::s Administrative Service administers contract, I. monitors QA, and ensure s security

FIGURE 2 Typical Air Force Oriented Procurement Cycle

l.11 Figure 3 TYPICAL AIR FORCE CONTRACT CYCLE (COMPETITIVE NEGOTIATED)

MONTHS 0 1 2 3 4 5 6 7 8 9 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I SELECTION PROCEDURES ESTABLISH SOURCES

I AcD l I

WRITE SPEC WORK J STATEMENT

PURCHASE FI­ AFSC P.A. PROCUREMENT REQUEST NAL REVIEW PLAN REC D COORD­ PROC (OVER 50 DRAFT ESD INATION REV MILLION)

fE�t!ld� ��� Udb ACT) I FUNDS INIT-IATED' FUNDS COMMITTED PROCUREMENT CYCLE COMMENCES UPON RECEIPT OF COORDIN­ CONTRACT EXECUTION ATED PR BY CONTRACT NEG 1 1

FUNDS COMM. PARTIAL FUNDS OBLIGATION COMPLETE FUNDS OBLIGATION

"' 7

task may be relegated to a subordinate laboratory . For the hypothe sized radar system, either the Electronic Systems Division or the Rome Air Development Center (both divisions of the Air Force Sy stems Command) would be assigned this task. If implementation of the requirement appears feasible , and it is within the bounds of current objective s, a preliminary program plan with cost estimate s will be submitted to Air Force Headquarters for inclusion in the curre nt or forthcoming fis cal budget. 3. At Air Force Headquarters, afte r much "horse trading , 11 and compromising, the program as approved or modified is include d in the proposed Air Force budget. Dependent upon actions and/ or de cisions by the Department of Defense and Congress, the program, if approved or re tained as a part of the final budget allocation, is scheduled for imple­ mentation in a given fiscal year, or throughout a number of years . 4. With program funding approved, the procuring agency (e . g. , Electroni c Syste ms Division) prepare s a statement of work as part of a re quest for proposal , and publicly announces its intention to procure a given capability . Potential bidders express interest in a procure ment by submitting to the procuring agency , a stateme nt of cap­ abilities as they apply to the particular forthcoming procure ment. The procuring agency then rules on their qualifications , and prepare s a qualified bidde rs list. The requests for proposal are forwarded to these qualified bidders , who in turn prepare their technical , management, and price proposals fo r program implementation. 5. The procurement agency organizes a proposal evaluation team, composed of repre sentatives from the user organi ­ zat ion (e . g. , Tactical Air Command) and their own electroni c specialists . This evaluation team grade s the submitted proposals on the basis of pre-established criteria and makes a "technical" (including management) 8

rating. 6. The price analysts care fully review the submitted price proposals, cons idering such factors as overhead rate , labor rates, ge neral and admini stration rate s, and profit. They likewise make a price proposal rating. 7. Two or more companies who receive high technical ratings , and submitted "lower" prices are called in for ne gotiations . Th e company which appears to offer the best product for a given price is selected for the award. 8. Following contract award , a project officer is ass igne d to monitor performance on the contract, and provide direction to the contractor. 9. During the proposal evaluation and contract period, the Defense Contract Administration Service in the contractor 's re gion repre sents the procuring age ncy by performing such functions as: contract administration, quality assurance, production monitoring, data financial manage ment, and ins uring industrial security . The above discussion and flow chart are very general in nature , but portray the complexity and organizational intera ction in the procure ment of an electronic syste m. The procurement of larger systems such as airc raft and ships are considerably more involved and depend to a larger degre e upon political actions .

D. Th e Customer Sal Divita in his article "Selling R&D to the Government' ' states that the customer4 is not easily identifiable . Th e customer may be the Air Force, the Navy , NASA , and so forth; or as such sub­ elements of these organizations as the Electronics Systems Division or the Bureau of Weapons ; or perhaps as the primes (e . g. , Boeing, Lockheed, or General Dynamics). However, the customer for any given procure ment is, in fact, many people in many different organi­ zations . For example, buye rs , contract administrators , proj ect engineers , planners, financial analysts , users, and civilian

4 rb id. , p. 63 . 9

executives -- all of the se and more constitute the customer. Each of these has a say in almost every procure ment action. Each represents a different organization, and in many cases each repre­ sents different, widely scattered facilities. For example: Suppose the Air Force wants to buy a new airborne radar system for a new fighter aircraft. In this case, the Tactical Air Command at Langley Air Force Base, Virginia, may be involved as the using agency. The Aeronautical Systems Division in Dayton, Ohio, may be involved as the technical laboratory and as the pro­ curing agency (or operating command) . The Air Training Command, Randolph Air Force Base, Texas, may be involved from a training standpoint. The Air Forc e Logistics Command, Dayton, Ohio, may be involved from a logistics support standpoint. The Re search and Technology Division, Bolling Air Force Base, outside Washington, D. C. , may be involved from a technology standpoint. Perhaps the Electronic Systems Division at Bedford , Mas s­ achusetts , may be involved from an electronic support standpoint. The Air Force Systems Command at Andrews Air Forc e Base, out­ side Washington, D. C. , may be involved from a planning standpoint. The Air Staff at the Pentagon may be involved in connection with the approval and the establishment of the requirements . The Director­ ate of Defense Re search and Engineering may be involved as the Department of Defense technical arm. On top of all this , the financial com munity throughout all these arms of the Air Force and the Department of Defense may be involved. Although each of the Service agencies discussed above do have a specific charter relative to the procure ment and development of the hypothetical airborne radar system or other equipment and services, the actual interactions between pers onnel and agencies will vary considerably dependent upon the type of procurement. However, based on several years of personal involvement and observation, the above example is considered to be typical . Furthe rm ore , the skills re presented by this spectrum of organi zations are diverse, and the points of view of the individuals there in likewise differ. In addition to the complexity of the government customer, the re is the fact that 10

prime contractors often perform the final phases of the R&D systems acquisition proce ss for the ultimate government customer. Of course, when this happens , the stru cture of the government cus­ tamer become s many times more complex for the R&D electronic syste ms contractors . For example: Suppose the Air Force decided to buy the airborne radar system from a prime contractor. In such a case, the electronic companies (and other subsystem contractors ) would find it necess ary to sell the ir capabilities at two levels: (l) the prime cont ractor level -­ those airframe companies that plan to bid for the total airborne system; and (2) the government level -- those people who would pass judgment on the radar subsystem as a part of the total prime contractor's bid. Hence, the number of people who go to make up the customer is actually multiplied by the nu mber of companies (primes) that show an intere st in the procurement at hand. The customer for R&D, therefore , is a complex organism. It is an organism that is tied together by highly formal relationships , as is typical in large organizations . In addition, its people are tied together by formal -informal relationship s. The se relationships are found between engineers and engineers, planners and planners , financial analysts and financial analysts, and so forth -- within agencies and within companie s, between agencies and between companies, and between agencies and companies. The point stressed here is that many people are involved in dec iding on a procurement, and each pers on may play a very special and distinct role. Some evaluate , some recommend, some review, some ap­ prove, and some dec ide . From the standpoint of marketing, it is important that each be re cognized for his contribution to the pro ­ cure ment decis ion-making process.

E. Procurement Methods The technique for procurement of goods and services by the government varies cons iderably de pende nt up on the type of goods or serv ice, the dollar value , or the amount/ quantity that is involved. However, there are essentially only two basic procurement methods , which are referre d to as "formal advertising, " and ''negotiation. " 11

As described below , formal advertising involves public announce­ ment of the require ment and the method of solution. In contrast, the basis for procurement by ne gotiation is primarily the need for security surrounding the procure ment and implementation of national defense programs in accordance with U. S. code , 11Survey 5 of Procurement Statistics. 11 There fore , within the Department of Defense, procurement by ne gotiation is the predominant means . For example, the Department of the Navy projects that an excess of 90% of all contracts let within fiscal year 1969 will be by negotiation. A description of the categorie s and applications of procure ment by formal advertising and ne gotiation is pre sented below . 1. Formal Advertising: - This form of procurement can be divided into two classes: conventional and two -step. The conditions under which conventional advertising can be used are as follows : (a) The equipment or service to be procured must be de scribed in detail, (b) A fairly large number of bidders must be qualified and willing to bid for the award , and (c) The period for preparation of bids and the date of award announcement must be predetermined. The procedures used in conventional advertising are for the contracting agency to: (a) Prepare and publicize the request for proposal , (b) Open the submitted bids publicly, (c) Evaluate the bids as to their re spons iveness and price, (d) Determine if the bidder is qualified to satisfy the re quire ment, and (e) Award the contract to the lowest priced qualified bidder whose bid is judged to be re spons ive .

5 united States Department of the Navy , Naval Materiel Bulletin, P-4200, Survey of Procurement Statistics (Washington: Govern­ 'ment Printing Office, 1968), p. 4. 12

6 In two -step advertisement, the following procedures are followed: a. A request for technical proposal is issued wh ich includes: (i) A description of the requirement, (ii) The criteria for the te chnical proposal evaluation, and (iii) The final date of submittal. b. After the technical proposals have been evaluated, th e bidders who submitted acceptable te ch nical proposals are requested to submit price proposals. Upon sub­ mittal of the price pr oposals, th e remaining proced­ ures are identical to th ose described above for conventional advertising. 2. Negotiation: - Contracts are awarded on the basis of ne gotiation for various reas ons.7 Some of the se include circumstances when comp etitive bidding is not possible: th e government mu st depend in part on the contractor to define the requirement; national defense is involved; or th e requirement involves research, developme nt , and/or experime ntation.{- By definition, the vas t maj ority of Department of Defense contracts fall into th is category, and the refore defens e electr onic products accordingl y. The significant features surrounding ne gotiated con­ tracts are that both th e technical and pr ice bids are kept secret, and a pr ice and statement of work are ne gotiated with th e selected contractor. This means that the govern­ ment contracting officer examines th e statement of work submitted by the bidder to determine if he is including any tasks or features which are not required by the governme nt.

6 united States Department of Defense, Armed Services Procurement Re�ulation, 2-503. 1 (Washington: Gover nme nt Printing Office, June 196 ), p. 252. 7 United States Department of Defense, Armed Services Pr ocurement Regulation, 3-214. 3 (Washington: Gover nment Pr inting Office , March 1963), pp. 315- 316. 13

He also examine s the price proposal with the aim of detecting and eliminating any "fat•• in the bidders submitted price. 8 3. Non-competitive Procure ments:- Non- competitive pro­ cure ments normally involve one of the following situations: an unsolicited proposal, a technical and de sign competition, or a procurement which require s a high start-up cost. a. Unsolicited Proposal s: These are proposals for re search or development wh ich are made to the government by a prospective contractor without prior formal or informal solicitation from a purchasing activity. To re ceive preferential consideration, the unsolicited proposal must offer significant scientific or technological promise, represent original thinking, the re sults must be de sire d in a time frame which would preclude formal solicitation, and it must be submitted in confidence by one firm . b. Technical and Design Competition: This type of award is competitive in nature , but is not strictly on the basis of price. This situation exists when techni cal super­ iority is a primary consideration in the selection of the successful bidder from among those submitting proposals in re spons e to a government solicitation. c. High Start-up Costs : The procure ments of equipments and syste ms are often similar to or based on prior contractual efforts , which re quired the purchase or development of special tool s and capabilities. These costs are sometimes borne by a particular bidder in anticipation of a future award. In such cases, the selection of a contractor other than the one already equipped to perform the de sired function would be extre mely costly and time consuming to the govern­ ment. 14

F. Types of Negotiated Cont racts There are three basic types of negotiated contracts: fixed price , cost type, and letter contract. 1. Fixed Price Contract: - The term fixed price normally means that the bidder proposes to furnish specified goods and/or services within a particular period for a stipulated price . The bidder must establish his price such that it include s any risk or penalties which he may have to assume,�r Fixed price contracts normally take three basic forms: (a ) Firm Fixe d Price: No possibility to expand in scope or to increase cost to government. If the cont ractor can perform the job at a much lower cost than con­ tracted for, the unexpended funds can be retaine d as profit. However, if the scope of the effort is mis­ judged and funds are expende d in excess of contract authorization, even on essential tasks , the contractor must ab sorb these costs as an operations los s. (b ) Firm Fixed Price with escalation: When serious doubt exists as to the stability of market and labor conditions du ring an extended period, such contingencies, if 9 ident ifiable , can be covered by escalation. This pro­ vides for upward and downward revision of the ne goti­ ated price the reby reducing the risk to the contractor. (c ) Fixed Price Incentive: This form of contract provides for an adjustment of profit and the computation of the final contract price by means of a formula based on the ratio of the final negotiated cost to the total target 10 cost. It provide s a profit incentive to a contractor to reduce performance costs , but also provide s a profit sharing formula under which both the government

9 Negotiated Procurements , Government Contracts Report No. 105-71 TNe w York: Commerce Clearing House, Inc. , July 1967), p. 3869. 0 1 Negotiated Procurements, Government Contracts Report No. 105-76 (New York: Commerce Clearing House, Inc. , July 1967), p. 3874. 15

and the contractor share in such reduction and con­ versely, share in the burden of increased pe rform­ ance costs . 2. Cost Type Contracts:- There are three types of cost type contracts: reimbursement , cost plus fixed fee, and cost plus incentive fee. (a ) Re i mbursement: This type of contract establishes 11 estimates of total cost for the purpose of obligating funds and for the purpose of establishing ceilings wh ich the contractor may not exceed at his own risk without prior approval of the contracting officer. This form I of contracting is used wh en the uncertainties of performance are such that costs can not be estimated with enough accuracy to permit the use of a fixed- price contract. (b ) Cost Plus Fixed Fee: In this form of contracting , the bidder estimates the cost of the program and based on a predete rmined profit (fe e) rate structure computes the fixed fee wh ich he expects to receive upon com­ pletion of the contract. Should the program cost actually exceed the estimate , the government will normally pay the additional cost (direct and indirect), but the contractor will not receive a higher fee (p roportionate to the highe r cost). (c ) Cost Plus Incentive Fee: This type of contract is similar to the cost plus fixed fee with the following differences: a. If the contractor can reduce costs , improve pro­ duct quality or delivery schedule in comparison to the negotiated contract, the government agrees to increase the contractor 's profit rate in accordance with pre-established criteria, and

!! Negotiated Procurements, Government Contracts Report No. 105-87 (New York: Commerce Clearing House, Inc. , July 1967), p. 3903. 16

b. The contractor is normally penalized (reduced profit) should actual cost, quality or schedule be le ss favorable to the government than the basis on which the contract was negotiated. 3. Letter Contract: - A letter contract is a preliminary con­ 12 tract which is to be replaced and/ or superceded at a later date by a definitive and comprehensive contract. It authorizes the immediate commencement of program tasks. Since a letter contract authorizes performance before many areas of the contract are negotiated, its use is authorized only when no other type of contract is suitable , and then only when it is ne ces sary to the national defense to give the contractor a binding commitment to start performance, or there is not enough time to negotiate a definitive contract. Contract Distribution and Profitability:- Figure 4 shows � the numbe r, cost and profit for various fixed price and cost-type contracts completed in the fiscal years 1959 to 1968. It is based on a sampling of 65 defense producers. They included a mix of very large producers (sales of over $200 million per year), medium size producers (sales of $25 million to $200 million) and smalle r producers (sale s of le ss than $25 million). The contracts covered were la rge negotiated one s susceptible to cost and price analysis. Negotiated firm fixed price and formally advertised con­ 13 tracts are not included in the analysis . However, from the data presented it appears that the cost type contracts are le ss profitable .

G. New Procurement Techniques During the "McNamara years", the Department deve loped and instituted new procurement techniques with the obj ective of achieving

12 Ne gotiated Procurements , Government Contracts Report No. 105- 96 (New York: Commerce Clearing House, Inc . , July 1963 ), p.2912. 13 The Bureau of National Affairs, Inc. , Federal Contracts Report No. 266 (Washington: ·Government Printing Office, March 1969), p. K-4. ($ Amounts in Millions) AWARDED BEFORE JAN 1964 AWARDED AFTER DEC 1963 Imttally Negottated lmttally Ne gottated Department and No. ot wr ottt No. of Profit Type of Contract J Contracts Cost o/o Contracts Cost o/o A.KMY FPR 188 $ 1,440 8. 8o/o 1 72 9 . So/o FPI 30 205 9. 6 34 190 10.0 CPIF 26 54 6. 8 22 12 7. 5 CPFF 474 658 6. 8 108 75 6. 9 TOTAL � 2, 357 �. 3 1b5 341} 9. 1 NAVY _71 FPR 111 529 1 0. 3 1 2 9. 9

FPI 86 I 1' 163 9. 3 16 41 10. 3 CPIF 4 18 7. 1 10 20 7. 7 CPFF 381 938 6. 2 39 20 6. 5 TOTA L s�z Z,b4� �. 4 bb 83 8. 7 AIR FORCE FPR 60 576 9. 8 3 313 10. 5 FPI 223 3,499 9. 0 50 234 9. 4 CPIF 106 845 6. 7 35 202 6. 8 CPFF 685 3, 03 8 6. 2 13 7 175 6. 9 TOTAL 1, 074 7, 958 7. 7 225 924 8. 7 DOD FPR 359 2, 545 9. 4 5 387 10. 3 L£FPI 339 4, 867 9. 1 100 465 9. 7 IF 136 917 6. 7 67 234 6. 9

FF 1' 540 4, 634 6. 3 284 270 6. 8 ' TOTA L 2, 374 1$1 2, 963 8. 0<7o 456 �1 , 356 8. 8J'o _ FIGURE 4 NUMBER, COST, AND PROFIT FOR VARIOUS FIXED PRICE AND COST-TYPE CONTRACTS* >:

...... -.1 18

a higher level of cost-effe ctiveness. The techniques which are cons idered most important as they apply to electronic syste ms are:

• Multi-year Procurement • Life Cycle Costs

• Total Package Procurement l. Multi-year Procurement: - When requirements are well de fined and the goods and/or Services must be produced or will be required over a number of years, a single contract covering the entire period of performanc e is preferred by the government. Multi-year procurement offers the government the advantages of: a . Lowe r costs (c ompared to several short cont racts), b. A stabilized cont ractor work force, c. Reduced procurement lead time, and d. Increased standardization. It does, however, have the disadvantage s of precluding the reprogramming of funds to another effort (should this be de sired at a later time), and contractors are nor mally reluctant to accept this type of contract due to unpredictable rising costs. 2. Life Cycle Costing: - This involve s making contract de cis­ ions on the basis of total cost of ownership and not solely on the basis of the lowest bid. Cost of ownership include s: initial purchase price , ope ration, maintenance and system life. Although this is a very meaningful evaluation criteria, it is often costly and adequate future logistic fa ctors are not always readily available . 3. Total Package Procurement: - This involves the ne gotiation of a contract at the outset of the acquisition phase for the development, production, and selected support of a partic­ ular system. Support may include training, spare parts, maintenance and support equipment, as well as cont ractor technical services for the useful system lifespan. CHAPTER II

I. DEFENSE MARKETING

A. CHARAC TERISTICS AND TRENDS

1 . Char acteristics of th e Defense Mar ke t The defens e mar ke t is not primarily regulated by simple, direct supply demand relationships of the type that normally govern com­ mercial markets. Instead, th e federal budget process determines both the magnitude and composition of militar y purchases. Another characteristic which distinguishes th e defens e market is th at it is essentially monopsonistic. By the process of "creating11 comp eti­ tion to compete for defense business, and selecting the des ired contr actors for system acquisition purchases, th e governme nt con­ trols the entry into and exit fr om the market, and thusly determines the gr owth or decline of individual firms. Through contr act ne go­ tiation, the government, in effect, imposes its ways of doing busi­ ne ss on the supplier which includes the specification of various internal operating policies and procedures which ar e to be adhered to. The recent fair employment practice requirement placed on all government contr actors is one example of this typ e of contr ol. The militar y marke t for electronics sys tems (e. g., radios, radars, computers, etc. ) is char ac terized by production which is 14 undertake n after th e order is received. Inventory equipment ar e normally small in cost, and normally subsystem items such as 15 mechanical parts, cables, electr onic devices, etc. The reason for th is approach is that individual military requireme nts te nd to be special purpose rather than general purpose, the high cost of R&D, and a short product life cycle due to rapid technological advanc ement.

14 Murray L . Weindenbaum, 11Product Management of Defe nse Markets, 11 an ar ticle in Reflections on Pro__gress in Marke ting, ed. L . George Smith (Chicago: American Mar keting As sociation, 1965), p. 56. 15 Bion B. Bierer, 11Marke ting R&D for Military Products, 11 Harvard Business Review, XL (September-October 1962), p. 111.

19 20

However, in most cases, especially when a particular development is complex, costly, and/ or essential to national defense, the govern­ ment will financially sponsor the research and development effort. 16 The defense market has relatively simple channels of dis­ tribution. The manufacturer normally sells to or contracts with a procur ing agency (e. g. , Electronic Systems Division) and delivers to the final customer (e. g., Hq ., Tactical Air Command) . How­ ever, to the extent that on occasion the goods may flow from the firm to a military depot, to base supply stations , then to the actual user, it is analogous to the flow from manufacturer to whole saler, to retailer and to the final customer in the private economy. The major difference is that the military contractor is not norma lly concerne d with the distribution channel, after the equipment is 11sold of£11 or accepted by the depot. Howeve r, subcontractors and/ or military equipment suppliers often do have channels of distribu­ tion in that for relatively stable (technologically ) items for which there is a geographically wide demand, manufacturer's represent­ atives and distr ibutors are used as outlets for the ir equipment.

2. Defense Market Trends Of major importance to planning the role and activities of a marketing organization is the identification of current trends in the market and the ir predictive value for future situations . To obtain a sample opinion of defense marketing trends , and the anticipated impact, the marketing / sales personnel, identified in Appendix A, were interviewe d. Although the trends which they identified and the indicators cited as evidence of the ir opinions were highly inter­ related, I was amazed to note how sim ilar we re their de scriptions , and in some cases they were practically identical in form of expression. These men colle ctively represented approximately 250 years of total experience in the defense industry , and I must pre- sume that within their profe ssional community, the ir views are in essence ''matters of fact" wh ich they include in their planning activities. Attempting to synthesize the ir comments into discretely

16 weindenbaum, lo c. cit. 21

1. 25

til 1. 0 G "" Cl! ...... 0 G "0

...... 0

til l=l 0 0. 75 c:1 .... G ...... c l=l .... Q) "" ::;j 0. 50 ...... "0... l=l Q) p.. >< j:,:.l

0. 25

19 64 '65 166 '67 '68 '69

Figure 5

Recent Trend in Expenditures for Exploratory Development*

*Source: Defense Industry Bulletin, Vol. V, No. 3 (Washington: Government Printing Office , March 19 69), p. 33. 22

80. 0 70. 0 60. 0 50. 0 Total Defens e Budget 40. 0

30. 0

til f.! ro 20. 0 ...... 0 "0 ..... 0

til s:: ,g 10. 0 9. o a..0 8. 0 s:: ..... 7. 0 ...------__ , 6. 0 / Research and Developm ent Budget / 5. 0 / / 4. 0 '

3. 0

2.0

1959 160 '61

Figure 6

Relationship of Res earch and Development To Total Defense Expenditures*

* Source: Penetration and Future in the Other Than Market , A Report Prepared by The Bunker-Ram o Corporation, Defens e Systems Division ( Canoga Park , California, March , 1964) , p. 111-2. 23

separate entities, six specific trends are identified, although a high degree of interre lationship still exists . The se six trends are: (a) A reduction in defense research and development spending, (b) An increase in the competition for defense funds, (c) A more cautious and frugal attitude by government in the development of new systems, (d) A greater conside ration of regional economics in defense spending, (e) The diversification of defense contractors into commercial areas , and (f) An increasing defense industry emphasis on the marketing functions . I should also point out that these expressed opinions have a very 17 high correlation to those trends identified by Charle s Hamman in his article on "The Defense Research and Development Market. " Since that article was written in Decembe r 1964, it is evident that the se trends have been continuing for some time. The first trend which I will identify is the slowing of the growth rate of defense research and development . The growth reduction is not related to the defense budget wh ich steadily grows , but a tend­ ency on the part of the government to continue to produce tried and established products and cut back on expenditures for exploratory investigation and developm ents . 18 Figure 5 shows the slowing trend in exploratory development 19 expenditures for the past few years, and Figure 6, based on a study conducted by the Bunker-Ramo Corporation and a published

17 Charles L. Hamman, "The Defense Re search and Development Market, 11 an article in Reflections on Progress in Marketing, ed. L. George Smith (Chicago: American Marketmg As soc1at'i0il,"'" 1965), p. 56. 18 united States Depa rtment of Defense, Defense Industry Bulletin, Vol. V, No. 3 (Washington: Government Printing Office, March T9"6'9f,p. 3 3 . 19 Penetration and Future in the Other Th an Market, A Report Pre­ pared by the Bunke r-Ramo Corporatwn, DefenseSystems Div­ ision (Canoga Park, Calif. , March 1964), p. III- 2 . 24

. 20 D epar t men t o f e D f ense F tnancta. 1 s ummary, s h ows th e re1 atton- . ship between research and development expenditures to the total Defense budget. In the area of electronics, a similar leveling off 21 trend is shown in Figure 7 for the years 1965-1967. This is not to imply that the state-of-the-art is not being continually pressed in numerous frontiers, but that there is a higher degree of select­ iv ity in choosing those programs with a higher probability of success. Of the government expenditures in research and develop­ ment, the Department of Defense accounts for about half of the 22 total . Th is is a substantially smaller pe rcentage than applie d a de cade ago. For instance, in 1954, the De partment of Defense accounted for 79% of all Federal Government research and develop­ ment , while in 1965 the percentage wa s 4 7%. Table I shows budget expenditures for research and developm ent for the pe riod 1954- 1966 as extracted from the Bunker-Ramo Corporation study . Coupled to the inflationary trend in the value of money, it becomes apparent that the capacity developed to pe rform research and development activity must be stabilized or even cut back from the exponential growth which has occurred up till recently . Th is is evidenced by 23 the total Defense employment levels shown in Figure 8. The second trend, which is a natural sequel to the dis cussion above, is that toward more severe competition due to the inc reasing number of people that the industry currently supports . When the de mand for research and development services began to build up

20 united State s Department of Defense, Defense Industry Bulletin, Vol. V, No. 3 (Washington: Government PrintingOffice, March 1969), p. 39. 2 1 Robert J. Bramlett , 11 19 66 Review and Forecast for the Elect­ ronic Industries, 11 Electronic Industrie s, XXV (Janua ry 1966), pp. 36-39. 22 H amman, op. c1't . , p. 845 . ·-- 23 John B. Campbell, 11War Work Payrolls Start Heading Down , 1 1 Busine ss Week (June 14, 1969), p. 134. 25

rn 1-t rd ...... 0 "0 10.0 '+-< 0 rn ..... l:l 8. 0 ..... - - · -- 0 .... - - _... ,.,. ,...... -- - _.,. -- ...... Total Expenditure ...... 0 6. 0 l:l .... Q) 1-t :j 4.0 .... "0.... l:l Q) 2. 0 Research and Development 1'-tl�

1963 164 165 166 167

Figure 7

Relationship of Defense El ectronic Research and Development to Total Defense Electronic Expenditure s*

*Source : "1966 Review and Foreca st for Electronic Industries, " Electronic Industrie s, XXV (January 1966) , p. 37 . 26

en s::1 0 ..... 3. 0 ...... 8 s::1 2. 8 ...... Q) :> Q) 2. 6 ......

�Q) 2. 4 8>- 0 ...... p.. 8 2. 2 J:il

2. 0

-----·

0 19 64 165 166 167 168

Figure 8

Levels of Defense Employment, 19 65 to 1968*

*Source: "War Work Payrolls Start Heading Down, " Busine ss Week (June 14, 19 69), p. 13 4. 27

TABLE I

BUDGET EXPENDITURES FOR RESEARCH AND DEVELOPMENT 1954 THROUGH 1966 (DOLLARS IN MILLIONS) ,� : Fiscal Depart- year ment of NASA AEC D/HEW NSF Other Total Defense 1954 2, 487 90 383 63 4 121 3, 184 1955 2, 630 7 4 385 70 9 140 3,308 1956 2, 639 71 474 86 15 161 3,446 1957 3,371 76 657 144 31 183 4, 462 1958 3, 664 89 804 180 33 220 4, 990 1959 4, 183 145 877 253 51 293 5, 803 1960 5, 654 401 986 324 58 315 7, 7 38 1961 6, 618 744 1, 1 11 374 77 356 9, 278 1962 6, 812 1,2 51 l, 25 1 512 105 409 10, 373 1963 6, 849 2, 540 1, 335 632 142 49 0 11,988 1964 7, 516 4, 171 1' 503 791 197 496 14, 674 1965 7,222 4, 900 1, 569 1:01 208 655 15, 355 1966 6, 880 5, 100 1,557 36 266 706 15, 445

�

24 after World War II, the capability in the nation as a whole wa s relatively quite small. However, in re sponse to this continually increasing demand , many new firms were started and existing organizations expanded to take advantage of this demand. The development of the capability which was sought by the se varied organizations required time. In the se early years , the capability lagged the demand, but by early in the 1960's the exponentially 25 inc reasing de mand began to level off. With the supply equaling, and in some cases surpassing the de mand, whereas the government used to make numerous ''sole-source" contract awards , it became common practice to publicize forthcoming requests for proposal and encourage a high level of competitive bidding . This competition has become so keen in recent years that for major select programs, 26 which are actually few and far between, the total cost spent by various firms in preparing competitive bids, may actually exceed the dollar value of the actual contract award. It ha s been my observation that companies will use the technique of spending funds in excess of the anticipated program profit just to obtain the direct dollar ''base'' and "generated overhead" to maintain their current work force. Other competitive tactics are to deliberately bid below cost for a program, with the hope that through a later program change in scope , the initial losses may be re covere d when they are no longer in a competitive position. There appears to be no apparent solution to this situation short of increased spending on the part of the government, or a reduction of the number of firms in the industry. Another trend is toward more carefully conceived programs with objectives and probable re sults being well defined. In the booming years of the late 19 50's and early 19 60's when new and improved technique s were being frantically sought , many firms were funded to perform parallel efforts with the hope that one or more would prove to be useful. The se programs were negotiated on a

24 Hamman, op. cit. , p. 847. 25 Ibid. 2 6-- Ibid. 29

cost-type contract basis, whi ch in essence guaranteed payment of whatever funds the firm expended on the project. Such parallel activity has been considerably curtailed in re cent years and further 27 re ductions are anticipated in the future . In addition, pressure s placed on the defense indu stry by Charles Hitch , Assistant Secretary of Defense under McNamara for more careful cost estimating , has re sulted in even some large , pseudo- developmental program s to be bid on a fixed price basis. Cost type contracts are now quite rare , and to a large degree are now relatively unwarranted. Before developm ent efforts of any magnitude are now permitte d to com­ mence, the particular area is studied "to death . 11 In many cases the se studie s are performed "in house" at company expense. Wh en studie s or contract definition phases are funded by the government , they are usually conducted on a fixed price basis, and, since there is normally a competitive bid for the study , it is normally pe r­ formed at minimal cost to the government. For major programs where a formalized contract definition phase is conducted prior to system acquisition, the gove rnment tends to get even greater value for their money . For example, the formal contract definition phase may last for six months, howeve r, the two or thre e companies who may be competing for th e following award are "expected" to continue working and furnishing the government with additional information for an extended period of up to 15 months , while they are deter­ mining which contractor to select, or are attempting to ''dig up'' the require d program funding. Government re search and development has considered social and economic implications, for the impact of these expenditure s on a re gional economy are significant . Current expenditure s have had 28 a high geographic concentration in New England, California, and Texas , to na me a few. Repres entative s from other areas have be en active ly emphas izing this fact in discuss ions with membe rs of both

''2?Chauncey Dean, "Defense Marketing: Product and Price Environ- ment, 11 an article in Reflections on Progress in Marketing, ed. L. George Smith (Chi'cago: American MarketmgA"Ssocratron , 1965 ), p. 464. 28 Campbell, lac .. cit. 30

the legislative and executive branches of the government . Eve ry country has both its progressive and depressed areas. Howeve r, the balance tends to be "tilted11 in accordance with the areas where defense spending is concentrated. The tendency to use the economic power of the government through contracting , to reduce the degree 29 of difference between the areas with high economic growth rate s and those which are depressed, is be coming more evident . Tables 30 II and III show the gradual shift in defense expenditures by state . In the future this trend is expected to result in programs of action which will significantly affect the newly established major market locations for defense research and development , and more equitably distr ibute the industrial development "base" throughout the United States. 31 These change s in the highly technical research and develop­ ment capability in the United States, presents a challenge to corporate planners and defense marketers. They are faced with the problem of cutting back on the ir capability or finding new areas in which to apply the ir surplus. Many companies have branched out into the commercial markets (e. g. , medical electronics, police force management, and aircraft navigation and control). Both the fe deral and local state gove rnments are encouraging this trend because it is recognized that the technology deve lope d for the military can, in many cases, be applied meaningfully to commercial as well as individual pursuits . Supporting this trend is the fact that significant commercial developm ents are continually be ing de rive d from va st military research and development expenditures. Prim­ ary among the se are the supersonic transport (based on the B- 70 de s ign) and the fast deployment logistic ship, which is to have an atomic power plant similar to those used in nuclear submarines and aircraft carriers.

Z9 H amman, op . ct't . , pp . 848 - 849. 30 united State s Department of Defense, Defense Industry Bulletin , Vol. IV, No. 11 (Washington: Government Printing Office, Nov . 1968), p. 32. 31 Dean, op . cit. , p. 465 . . . 31

TABLE II

Department of Defense Prime Contract Awards by State* Net Value of Military Procurement Actions by Fiscal Year

FISCAL YEARS 1965, 1966 AND 1967

(Amounts in Thouaanda)

Fi•eal Year 1965 Fiecal Yrar 1967 STATE

Amount Percent Amount Percent Amount J•ercent

TOTAL, U.S. $26,631, 132 $35,713,061 $41 ,817,093

NOT DISTRIBUTED BY STATE 3,363 ,052 3,999, 758 4,435,384

STATE TOTALS 23 ,268,080 100.0 31,713 ,303 100.0 37,381,709 100 0

Alabama 165, 176 0. 7 281 ,596 0. 9 297,065 0.8 Alaska 74, 175 0.3 71 ,666 0.2 85,�4R 0.2 Arizo.na 176,857 0.8 248,228 0.8 249. 559 0. 7 Arkansas 39 ,284 0.2 95,701 0.3 127, 180 0.3 California 5,153,639 22 .1 5,R13 ,078 18.3 6,688 ,812 17.9

Colorado 249 ,151 1.1 255,893 0.8 210,409 0.6 Connecticut 1,1R0, 111 5.1 2,051 ,560 6.5 1 ,935,H95 5.2 Delaware 3R,239 0.2 37,445 0.1 51 ,672 0 I District of Columbia 247. 576 1.0 32R, lll 1.0 357,666 I 0 Florida 633,332 2. 7 766,955 2.4 799,005 2.1

Georgia 662,417 2.8 799,362 2. 5 1,148,3f>5 3.1 Hawaii 72,213 0 3 64 ,170 0.2 65,44fl 0. 2 Idaho 11,724 0.1 20,004 14.772 Illinois 421 ,899 1.8 919,779 2.9 1,063 . 776 2.8 Indiana 604,925 2.6 1,068,259 3.4 898,247 2.4

Iowa 133,951 0.6 247,619 0 8 279,328 0.8 KBD88.8 229,051 1.0 312,629 1.0 398,918 I 1 Kentucky 42 . 749 0.2 70 , 057 0.2 124 ,294 0.3 Louisiana 255.834 1.1 302,906 1.0 656,031 I. 8 Maine 68,771 0.3 51,340 0.2 fi6,55H 0.2

Maryland 5R4, 333 2 5 H42 ,527 2. 7 867. 990 2 3 Massachusetts 1,178,729 5.1 1,335,952 4. 2 1,422,272 3 8 Michigan 632,R97 2.3 918,426 2. 9 1,033 ,706 2.8 Minnesota 259, 500 I I 497.994 I 6 650, 5H4 1. 7 MiuiMippi 152,188 0. 7 162,305 0. 5 114,800 0.3

Miuouri 1,060 , 781 4 .6 1.112,66f) 3.5 2,277,597 6.1 Montana 69,375 0.3 13,779 7H,4!",2 0.2 Nebraska 42,708 0.2 80,478 0.3 103,!",22 0 3 Nevada 19, 142 0.1 32 ,02R 0 I 29 ,31!") New Hampahire 52,400 0.2 109 ,591 0.3 162,551 0.4

New Jersey 820,309 3. 5 1,090, 122 3. 4 1,234 , 768 3 3 New Mexico 84, 137 0.4 86,230 0 3 H0,472 0 2 New York 2,229 , 473 9 6 2,Hl9, 153 H.9 3,261 , 7!i0 8 7 North Carolina 28R , 408 1.2 449,331 1.4 447,608 I 2 North Dakota 48.997 0.2 83 .113 0 3 16,729

Ohio R63 ,113 3. 7 1,5HR,955 5 0 1,602, 593 4 3 Oklahoma 119,803 0. 5 15H,492 0 5 157 ,3!10 0 4 Orqon 39,624 0.2 89 , 9R3 0. 3 99,319 0 3 Pennsylvania 98R ,811 4 2 1 ,665,0H7 5 3 1,649 ,091 4 4 Rhode Ialand 86 ,323 0.4 13 1,722 0. 4 198,030 0_5

South Carolina Rl ,580 0 4 176 ,424 0. 6 1RO, 777 0 5 South Dakota 21,062 0 1 23 ,315 0.1 9,486 Tenneuee 197 ,2R3 0.8 502 , 16M I 6 !\3M,225 1.5 Texaa 1,446 , 769 6.2 2,29 1,454 7 2 3. 546 .978 9 5 Utah 191,173 O.R 169,6HI 0. 5 !7R ,850 0.5

Vermont 32 ,202 0 1 R1 ,066 0 3 100, 157 0.3 Vireinia 469,097 2 0 425 ,487 1 3 665.376 1.8 Wuhin&ton 545,6()7 2 3 444 ,36R I 4 606,114 1 8 Welt Vircinia 90 ,312 0.4 149 , 300 0 5 142, U2 0 4 Wi.con1in 203 , 003 0.9 364 ,6114 1.1 3R3,602 1.0

WyomiDI 7,867 11,112 32 ,868 0 I

*source: DEFENSE INDUSTRY BULLETIN, Vol . IV, No. 11 (Washinton: Government Pr inting Office, Nov. 196B),P. 33. 32

TABLE Ill

Department of Defense Prime Contract Awards by State* Net Value of Military Procurement Actions by Department

FISCAL YEAR 1968

{Amounte in Thousands)

Total Uefen•e STAT t: Army Na�y Air Foree SuppiJ' Amount Perr.f"nt A�renCJ'

TOTAL, U.S. $41 ,241,125 $12 ,223 ,146 $12 .703 ,851 $11 ,482,531 $4,831,597

NOT DISTRIBUTED BY STATE 3,994 ,362 1,021 ,600 1,211 . 732 948,157 812,873 _ STATES TOTALS 37,246 .763 100.0 11,201 ,546 11,492,119 10,534 ,374 4,018,724

Alabama 409, 189 I I 207.744 60,912 60,227 80,306 Aluka 106 , 602 0.3 36 , 142 6,301 57.745 6,414 Arizona 287,045 O.X 105,276 62,091 109,196 10,482 Arkansas 121 ,272 0.3 37,640 2,568 47. 047 34, 017 California 6,470,306 17 4 1,160,634 2,201 ,735 2,462 ,250 645 ,687

Colorado 262,66.4 0.7 43.634 14,040 180,358 24,632 Connecticut 2,355, 135 6.3 7!13 .479 1.336,493 270,439 44,7:14 Delaware 42,614 0.1 11,692 6,�66 5,658 18,598 Diatrict of Columbia 349,7f3 0.9 112,011 177,669 49 ;289 10,774 Florida 975,812 2.6 340,2fl6 94,308 478,646 62 ,602

Georgia 964,223 2.6 74 , 108 52,313 753, 055 84 . 747 Hawaii 95 ,623 0.3 28,835 52,721 9,528 4,539 Idaho 17,051 3,485 2,383 1,559 9,624 Illinois 932,115 2.5 488,409 128, 120 147.985 167,601 Indiana 1,107,508 3.0 692,177 126 ,850 207,973 80 ,508

Iowa 260,980 0. 7 141 ,956 26,912 43,087 49,025 Kan688 292 .�93 0.8 116,466 14,474 125,302 36,051 Kentucky 60 , 366 0.2 25,076 2,387 4,592 28 ,311 Loui.alana 460,659 1.2 146 .516 134,825 9,f>21 169 .797 Maine 7.>,3X3 0.2 17,061 41,690 3,917 12.715

Maryland 703,857 L9 175 ,747 360,394 129,822 37,894 Mauachuaeth 1,618,960 4 3 473,274 482,594 554 ,012 109,080 Michigan 796,211 2. I 524 .901 86,397 94 ,603 90,310 Minnesota 620 ,123 I.7 204 .716 171 ,083 210 .773 33 .551 Miui11ippi 369,261 1.0 14 ,12fl 290.615 12,931 51,590

MiMouri 1.356,838 3.6 462,552 741 ,96� 98,309 54 ,008 Montana 20,467 0.1 2,493 873 12,370 4, 731 Nebraska 120,452 0.3 62,491 553 15,622 41,786 Nevada 17,897 7,043 2,462 6, 762 1,630 New Hampshire 155,995 0.4 6,833 114,751 19,527 14,884

New Jersey 1,108,458 3.0 370,6fJfi �32 ,400 201 ,798 203 ,605 New Mexico 87 ,163 0.2 48.721 4,349 29 . 546 4,547 New York 3,483,885 9.4 783 ,913 I ,822,9.12 611,531 265, 509 North Carolina 487,259 1.3 247,639 94 ,393 22,664 122,563 North Dakota 68,072 0.2 6,558 50 42,339 19, 125

Ohio 1,640,506 4.4 44.>. 142 360,461 727 ,160 107. 743 Oklahoma 164,806 0.4 31,610 6,544 75 .574 51 ,078 Oregon 119.749 0 3 12 ,874 2X , 994 11,840 66,041 Penn1yJvania 1,727,333 4.6 633. 545 592 ,215 262,478. 239,095 Rhode bland 126,362 0.3 27 , 149 67 .137 1,238 30,838

South Carolina 133,041 0.4 1�.857 31,878 23 , 256 64,050 South Dakota 33 ,fiR5 0.1 953 7,664 23 ,259 I,709 Tennessee 541,631 1.5 318,316 45,756 78,604 98,955 Texas 4,087 ,132 11.0 1,047 ,608 7RR, sr,s I,762 , 762 488,207 Utah 131 ,195 0.4 34,781 6,027 63 ,263 27 , 124

Vermont 104,957 0.3 89 ,531 3,154 10,689 1,583 Vir1lnia 692 ,671 1.9 264 .740 327,339 35,815 64 , 777 Wuhin&'ton 529 ,532 1.4 40 ,816 111,240 312,163 65,313 We.t Vira:inia 131 ,522 0.4 96 . 750 10,153 7,525 17,094 Wiaeonain 406,409 1.1 258,836 53 ,687 41.978 51,908

Wyomin1 14,851 780 42 6,787 7,242

* Source: DEFENSE INDUSTRY BULLETIN, Vo l. IV, No. 11 (Washi ngton: Government Pinting Office, Nov. 1966), P. 32. 33

Of primary importance to the defense marketer, is the fact that 32 his true role has been little unde rstood or appreciated. In the 1950's when the gove rnment placed its de mands di rectly on industry, there was little apparent need for a marketing organization. It was 33 not until the industry entered a period of over-capacity that companies began to establish marketing programs for military research and development. Since then, military marketing ha s struggled for identity and purpose. The gove rnment on the one hand suggests that marketing is an extra expense that ought to be abol­ 34 ished, and industry on the other hand has in part ignored the problem, because of a general lack of understanding. It is the writer's opinion that the increasing competition for available defense funds should certainly place greater emphasis on the need for marketing , and that in the forthcoming years, the senior marketing executive and his staff will be far more influencial in the decision making mechanism of the defense oriented corpora­ tion than he currently is today.

B. HYPOTHESIS AND CRITERIA FOR TESTING Up to this point in this thesis is presented a summary of how the government buys res earch and development and the associated characteristics and trends of the defense market. At this point , the author will state the following hypothe sis : In the competition for defense electronic systems, the success­ ful defens e marketer must effectively apply the traditional market­ ing principles associated with product planning, establishing strategy, selling and pricing. He is, howeve r, hampered in the performance of his functions because of a gene ral lack of 11formal11 training in busine ss administration, and a strong engineering

TI Salvatore F. Divita, 11Government Marketing: An Appraisal, 11 an article in Marketing for Tomorrow- --Today , eds. M. S. Moyer and R. E. Vosburgh (Chicago: American Mar ke ting Association , 1967 ), p. 4. 33 William H. Reynolds , 11The Marketing Concept and the Aerospace Busine ss, 11 Journal of Marketing, XXX (April , 1966) , pp. 9- ll. 34 Ibid. 34

orientation in the defense industry . The remainder of this thesis will be devoted to presenting the necessary information and arguments which are required to test the hypothesis. This will be based on published literature and inter­ views with both engineering and marketing executives in the follow­ ing �efense electronic firms: Litton Industries - Data Syste ms Division, Electronic Com munications , Inc . - St. Petersburg Division, International Telephone and Telegraph - Federal Systems Division, Honeywell, Inc orporated - Systems and Research Division, Hydrospace Research Corporation - San Diego Division, Inte r­ national Business Machines, Inc . - Los Angeles, and Bunke r-Ramo Corporation - Defense Systems Division . The contacts within the above companies we re made on a personal and informal basis, because the information desired was considered to be of a proprietary nature . The information sought and areas of discus s ion pertained to market intelligence, market planning , proposal formulation, customer relations and contract negotiations . The essence of these discus s ions are presented in Section C below, "The Defense Marketing Role . "

C . THE DEFENSE MARKETING ROLE l. Introduction It is important to be able to think conceptually about the market­ ing role, and its adaptation as a function of varying circumstances . As such, a summarization of previous statements regarding the dom inant factors in the defense industry are listed below as a review: a. The oligopolistic nature of supply and the monopson- istic nature of demand, b. The controlled and regulated bus iness environment, c. The heavy imbalance of the power structure , d. The curr ent and increasing complexity of the de sired product, and e. The lack of product inventory. 35

These and other factors (discussed in Chapter I) are the environmental elements of a defense company, to wh ich it must adapt if it is to be an effe ctive participant in the industry. An analysis of this environment suggests that certain basic functions must be performed by the defense marketing organization. These must include market intelligence gathering , market planning , pro­ posal formulation, customer re lations, and an effe ctive procedure . . . 35 tn cont ract negottatton .

2. Market Intelligence Market intelligence is information of a technical or general nature whi ch contributes to improve ment of a company 's compet­ 36 itive po sition. It is derive d from an analysis of customer require ­ ments , planning information, procurement contracts, budget statistics, political contacts , and competitive move s. It become s the basis for company planning and strategy and is critical to main­ taining a leadership pos ition in the industry. Contract awards are highly correlated with early identification and propo sed solutions for particular requirements . To be effective , the market intelligence function within the marketing organization, should be well defined, its objective s specified, and a formalized reporting procedure established. Each of the firm 's representative s interviewed re cognized the value of marketing intelligence and place conside rable re liance on it.

. Customer Requirements: A customer may be defined as an v.U :JY agency or individual (mil itary or civilian employee of the depart- , ment of defense) who has an approved require ment and the author­ ization to take action to procure a capability to satisfy that require ment. Each of the firms contacted have marketing offices

35J'ohn J. Kennedy , "A Theory on Principles and Practices in Defense Marketing, 11 an article in Reflections on Progre ss in Marketing, ed. L. George Smith (Chicago: American Market1ng

· Assoctat10n, 1965), p. 464. 36 John J. Kennedy , "Strengths and Weakne sses of Defense Market- ing Practices, 11 an article in ThE( Marketing Concept in Action, ed. Robert Kaplan (Chicago: American Marketing Association, 1964), p. 872. 36

staffed with pers onnel who are to maintain close coordination with agenc ies which establish requirements or are in the approval and/ or procurement "cycle" for acquisition of electronic systems. The size of the field office marketing staff will depend on the comp any siz e , number of areas of interest and /or emphasis in the particular market area handled by a particular government agency. ( Regard­ less of the extensiveness of customer "coverage, 11 the basic fu nc­ tions of th ese personnel are to establish a sufficiently good rapport with th e key people involved, that th ey (th e field office repre senta ­ tive s) will be informed of maj or developments . This information is fed back into the home organization for evaluation and dissemina­ tion. Initial reports normally generate requests for additional and more detailed information . As a result of th e complex nature of th e customer, as discussed in Chapter I, requests for information are often simultaneously placed with several field office locations. This often facilitate s the correlation and validation of reported informa ­ tion. Congressional Hearings : Many multi-million dollar and/or controversial military programs are often reviewed by Congre ss. The statements and position taken by the committee members in­ volved, often provide a good indication of the fu ture di sposition of the program. Except for highly clas sified programs , the proceed­ ings of such hearings are accessible to th e public in th e form of Congressional Hearing Reports , arid the larger firms will obtain their own copies for not only market intelligenc e, but als o political and contractual tendencies . Military Contracts: Being under contract to th e government can be the most direct vehicle for obtaining marketing intelligence, and perhaps the shortest "route 11 for intelligence exploitation. It is considered reasonable that a firm under contract to th e government should be granted a privileged need-to-know in specific areas which will permit a more cost-effective contractual performance . This information normally provide s insight into what other firms are doing and government plans for future procurements . Under th e appropriate circumstances th e government will modify an existing 37

contract to add other tasks . This is de s irable because it saves the time and effort associated with a competitive procurement. Many firm s make it a policy , practically fro m the date of contract award, to strive towards having the scope , duration and fu�ding of their . 37 contract s tncreased . Government Statistical Data : The Department of Defense pub­ lishes the defense budget which it pre sents to Congress for approval . This budget is normally broken down by service and functional area (e. g. , aircraft , electronics , etc. ). Backing up this information are detailed listings of individual programs which comprise the budget. This information wh ich can be obtained through the Govern­ ment Printing Office in Washington , D. C. provides an insight into at least which programs are recommended. This listing is in no way infallible as it is subj ect to congressional cuts , and ove rspent on -going programs and emergency requirements will usurp funds from other budgeted programs . In addition , for effective planning purposes, the government budgets for capability attainment on a five-year bas is. This five -year documentation is a valuable basis for corporate planning of a long term nature . Commercial Publications : There are a large number of maga­ zines, newsletters , and services which profe ss to provide market intelligence of one type or another. The title and publishers of the se publications include: Aviation Week - McGraw Hill Publ ica­ tions, Armed Forces Management - American Business Press, Inc. , Datamation - F. D. Thompson Publ ications, Army - Association of the Unite d State s Army , etc. They often have an uncanny reputation for publishing factual and up to the minute information long before it is officially announce d. All of the co m­ panies interviewed subscribe to such periodicals. This does not include individual subscriptions , but issues which are held as reference material in the company library . Most companies leave

37 Federal Contracts Report No. 266 (Summary), a report pre ­ pared by The Bureau of Nationat�-:­ (Washington: The Bureau of National Affairs , Inc. , 1969), p. 2. 38

it to the initiative of individual employees to glean meaningful information from their pages. However, at least two firms admit that the review of the se tr ade journals is an active part of their market intelligence and research effort. 2. Market Planning Market planning is performed to define and update the corp or ­ ate marketing goals and th e means of their ac complishment. It is normally based quite heavily on mar ke ting intelligence, and is th e vehicle to determination of the strategies and other variables to be considered in achieving stat ed obj ectives. Although the defense market in many are as is too dynamic and unpredictable to make long range planning a me aningful effort , and the best opportunity may be to "tr ack" and bid for individual pro­ grams (which normally have a one year lead time) as they come al ong, it is recognized that long range planning is essential for product development and the establishment of goals and objectives. The defe nse firms such as Inter national Business Machine s which plan and develop on a long range bas is take many risks , and wh en "payoffs" occur th ey ar e normally substanti al . Another benefit is that employees see a fixed objective and ar e not perturbed by diversive reactionar y moves. The more reactive firms tend to be smaller and cannot afford the capital investments and the staff which is required to support major planning of research and development activity. However, in times of war whe n many requirements ar e granted immediate priority, th is typ e of activity can be very pro­ 38 fitable . In addition, short-term contracts can turn into long­ term contr acts and high volume product lines can result (e. g. , light weight tactical radio, or battle field television. ) All of the companies contacted have some form of market planning or research organization, and at some time or anothe r have us ed con­ sultants as required to lecture or provide guidance on specific market trends . The use of cons ultants is of particular value when

38 Martin Meyerson, "Price of Admission into the Defens e Business� " Harvard Business Review , XLV (July-August 1967), pp. 111-llo . 39

39 a new product is be ing considered or an acquis ition contemplated. Each firm has some mechanism for forecasting bookings and sales for a given calendar/fiscal year. This mechanism varies from an anticipated growth or decline expectancy to an enumeration of programs to be pursued and won by name, with a reasonable number of alternate s in case of program cancellation or unpredict­ able loss to a competitor. This forecast be comes the basis for "overhead1 1 determination, manpower requirements, and financial planning. It is updated periodically consistent with new marketing intelligence, the degree of complexity or the dynamic nature of the particular area of bu siness.

4. Proposal Formulation Proposal formulation is the advertis ing arm of the defense industry . It is the media through which the customer is made formally aware of the proposed product or service. Within the industrial firm, the marketing organization is as signed the re­ sponsibility for identifying the potential customer, exposing him to the capabilities and products of the company , and establishing the strategy which will influence the potential customer to conside r the particular firm as a credible source of de sired capability. In the procurement of research and development systems, as opposed to "off the shel£11 equipment , the customer requires a yard stick by which to determine the selection of one company ove r another for contract award. The normal procedure is to prepare and is sue a request for proposal with an associated 11statement of work11 (which specifies the characteristics and capabilities of the desired system). The solicited firms which are de sirous of competing for the con­ tract will prepare documentation which specifies their approach and method of implementing the required system, how they plan to man­ age the program, and the price quotation . This documentation is 40 referred to as the proposal and is prepared in three basic sections .

39 Thomas G. Paterson, 11When You Need Advice at a Price , 11 Data Magazine, XII (February 1967), pp. 66-67. 40 stanley R. Ireland, 11Preparing Technical Proposals, 11 Machine Des ign, XXXIV (June 1962), p. 116. 40

The technical section - which presents the technical, opera­ . tional and procedural solution to the problem, The management section - which pres ents the program organization , schedule, personnel, and related experience; and The price section - wh ich identifies the man-loading of the tasks by category, labor costs, material costs , and anticipated profit. In summary , the proposal is first, last and always, a selling 41 document, and in many cases is the basic means by which industrial firms de rive the ir income. A basic goal of the marketing intelligence function is to obtain information which will enhance a company 's competitive pos ition and facilitate the preparation of a more respons ive pro­ posal. All of the contacted firms agreed that this function , above all othe rs, is expected of the marketing organization by the corpor­ ate management and is a continuous activity. It is the marketing re sponsibility to ascertain that the customer is fully aware of his company 's capability and interests in a particular procurement and establish a rapport and working relationship with the customer 42 prior to release of the request for proposal. Other demands often made on the marketing organization include advance infor ma­ tion on details of the statement of work, and the funds which are available to purchase the system. As the marketing re sponsibility also include s meeting the goals in the "forecast, 11 the marketer must evaluate proposal opportunities against resources, making judgments based on volume , nature of business, return on invest­ _ ment, etc. The marketing role also includes establishment of the costs which are to be expende d for any given proposal being ever mindful of limited resources and alternate opportunities. It is the marketing organization which should establish the

4 1 William S. Tilghman, 11So Your Title is Proposal Manager, 11 Data Magazine, X (March 1 965), p. 1 5. 42 Kennedy , loc . cit. 4i

strategy to be used in a proposal. This includes whether it should be fully compliant , austere, over-responsive (more than asked for), what areas are to be stressed, and whether or not alternate pro­ posals are to be submitted. Pricing strategy is likewise a market­ ing responsibility, only deferring to the general manager on financial risks which may be necessary on extremely low bids . This pricing responsibility includes reviewing engineering estimates for job completion, and establishing overhead, gene ral and administra­ tive and profit rates (within the bounds of legal limits ). Several companies did point out , however, and I consider it worthy of note , that early customer contact is not always essential in a competitive award. "After all, " as the Honeywell company repres entative was quick to state , "the only legal basis for a com­ petitive award is supposed to be the proposal document, and that must be the basis for recommendation. " Advertising is likewise a marketing responsibility in the defense firm and is a method of exposing a company 's capabilities to a potential customer and establishing image . Advertising is nor mally directed to a limited audience and as such the bulk of the advertising effort is through prepared technical brochures and advertisements in select trade journals. The larger companies that are very hardware oriented, such as International Telephone and Telegraph, International Business Machines, and Litton Industries, also advertise by establishing hardware exhibits in ass ociation with trade conferences. The percent of total sales alloted to advertising ranged from 0. 2o/o to 1. 3o/o. The expenditure ratio was highly related to company size with Bunke r-Ramo at 0. 2o/o, and International Business Machines at about 1. 3o/o. The distribu­ tion by channel of promotion does vary as a function of the individ­ ual product line s and status of sales, however, the breakout shown in Table IV for the Bunke r-Ramo Corporation is considered to be exemplary . It should be noted that sales in 1968 were $50 million and the advertising budget $126,446, as opposed to an estimated budget of $144, 170 for 1969 whe reas sales are estimated to be about $32 million. 42

I. Media Advertising Space (Trade Journals) $ 74, 650 $ 61' 911 Production (a) In-House art & photo 4, 600 (b) Vendor: Design, Plates 3,400 ·--- 8, 000 8, 000 Sub-Total $82.b5o $ 69 , 911

II. Trade Shows & Exhibits >:< A . Private Showings (BR- 700) $ 7, 500 $ 5, 400 B. Booth Rental & Suites 5, 000 6, 550 c. Display design & set-up 2, 500 5,414 (art & photo) Sub-Total $ 15, 000 $ 17, 364

>:

III. Brochures & Literature A. Brochures (new) $ 6, 500 $ 9, 888 B. Brochures (reprints) 6, 200 9, 717 c. PI Sheets, Letterheads , etc. 2, 000 1' 566 D. Labor Burden (art & photo) 7,500 7' 1 50 Sub-Total $ 22, 200 $ 28, 321 IV . Visual Aids Gene ral Capabilities Motion Picture ( 15 min. ) $ 15, 000

V. Promotional Items Pocket Diaries $ 1,320 $ 1,200 B-R Pens 400 400 Briefcases 450 400 Contingency 500 Sub-Total $ 2, 670 $ 2, 000 VI. Miscellaneous Lite rature Mailing Expense $ 1, 900 $ 1, 600 Travel (PR support) 2, 250 2, 250 Contingency 2, 500 5, 000 Sub-Total $ 6, 65 0 $ 8, 85 0 GRAND TOTAL $ 1 44, 170 $126, 446

TABLE IV

BUNKER-RA MO CORPORA TION SUMMARIZED BUDGET FOR ADVERTISING, TRADE SHOWS AND COLLATERA L 43

5 . Customer Relations Customer relations is the personal sales activity of a busi­ ness, and is a vital link to market intelligence and proposal formulation. It must perform all ne cessary activities to positively affe ct sales potential , close sales opportunities, and follow-up on current business. It is not an exclusive marketing function, but is controlled by the marketing organization consistent with their goals and objectives. Each customer contact with a company counte rpart, whether it be at the gene ral manager, or detailed engineering level, is a form of customer relations , and can enhance or detract from the company image. Although frequent customer relations is de sirable, and each company indulges in this practice extens ively, it is generally accepted that in the se days of strong competition and many laws governing contractor-government relations , th ere is no real substitute for overall effective marketing management to ensure that customer relations personnel are cognizant of , and 43 participate in the overall market strategy plan.

6. Contract Negotiation Each type of contract is de s igned to help the government and the contractor apportion the risks that may arise during the per­ formance. In dec iding which is the best type of contract for the particular situation, the following points should be considered: a. The apportionment of bus ine ss risks between the parties, b. The nature of the work to be performed, c. The relative difficulty of estimating cost of perform­ ance, and d. The administrative difficulties that might arise under each type of contract. The limits to which the company negotiation team can go in taking risks and establishing strategy to conclude a contract

"43 John J. Kennedy, "A Theory on Princ iples and Practices in Defense Marketing ," an article in Reflections on Progress in Marketing, ed. L. George Smith ( Chicago: American Marketing ' A ssociation, 1965), p. 446. 44

negotiation is normally determined by the marketing manager, backed-up by the general manager. Within the Bunker -Ramo Corporation, as with several other firms, the Contracts Depart­ ment is within the marketing organization. As such, the marketer must be familiar with contract types and liabilities. In addition, as these negotiations often involve a test of nerves and skill (i.e., on the part of the government negotiator to get the best product at the lowest price, and on the part of the company negotiator to protect his company's best interests), a knowledge of human behavior and timing are invaluable. As the final step in concluding a contract award, the contract negotiation, especially on a competitive basis, is of prime concern to the marketer and its successful accomplish­ ment is a primary role which he must execute. D. THE DEFENSE MARKETER 1. Organization Characteristically, the defense electronic company has organic to its organizational structure, a Marketing Department at either or both the corporate and division level. Within this depart­ ment exist at least three basic functions: market research, adver­ tising and sales promotion, and a form of home-office sales. In addition, either as an extension of the home office sales activity or as a separate entity, there is normally a field sales organiza­ tion. The organizational structure will vary with the size, type of company, degree of decentralization, and the corporate emphasis on the marketing function being performed by the formal marketing organization. The latter qualification is made with malice of fore­ thought because the marketing function can be performed in many ways, as will be discussed later. In general, it is the role of the field force to gather intelli­ gence on customer goals and objectives. This information is often requested by, or in any case, funneled into technical channels, where the information is interpreted and decisions made. The prep­ aration of proposals is also in many companies a purely engineer­ ing activity, and to the extent that this activity is performed outside the marketing organization or outside the purview of marketing 45

control, a basic marketing role and contribution have been th~rted. The same is true in the areas of present planning, contracts and product pricing. In recent years, several companies have formally expanded the marketing organization to include an advanced planning (product planning), contracts and advanced systems {proposals) groups. Of the companies investigated, the Bunker -Ramo Corpora­ tion comes closest to having a comprehensive marketing organiza­ tion structure, with the basic exception being a formalized market research activity. The lack of formalized capability in this area is explained as being due to the inability to meaningfully predict long­ range business activity, and the short-term objective of being an industry follower, responding primarily to request for proposals rather than attempting to create demands. It has been observed, however, that a formal organizational relationship is not the sine qua non of its marketing influence. Several functions often found outside of the marketing organization, such as advanced systems, product design and the like, may actually operate under the direct control and/or influence of the marketing director, but it is not ''fashionable" to label these activities as marketing. Litton-Data Systems is a classic example of this principle. The formal marketing organization (see Figure 9), consists basically of the field sales force and limited home office sales activities. It is on an apparently equal level with the much larger advanced programs organization which is responsible for "filtering" incoming market­ ing intelligence, performing pre-proposal activities, and actually directing all major proposal efforts. The Litton Vice President of Marketing has a major "say-so" regarding the activities of this organization. So strong, at one time (just one year ago) was the des ire to downgrade the marketing term (but definitely not the function) that the Litton marketing staff (field sales force) was but a part of the advanced programs organization. The trend toward recognizing and accepting marketing as a vital and necessary function within companies appears to be progressively growing, but is still hindered by the previously discussed reluctance to accept the marketer both within the company and by the cus tamer. DATA SYSTEMS DIVISION

J. R. ME LLOR PRESIDENT

� --

-�- -- [- - - I MARKkTING COUNSEL FINANCE I I INDUSTRIAL I I I I RELATIONS , I F AGILITIE S, AND SECURITY I I I I !David 0. Wente, Legal J.D. Pio S. L. Hirsch , T.M. O'Donnel l J. G. Mesaros, Controller I I Director l I Vice President I Patents

NGINEERING OPERATIONS F I I roPEid I SYSTEMS C. F. Romano C. A. Krause � ·D. Smith K. E. Walsh P. E. Nor sell Gregory ice President Vice President ice Presi ent Vice President ice President �·iceB. President \v

FIGURE 9 Organization Chart - Litton Data Systems Division (October 1968)

,.j:>. a-- 47

2. Marketing Influence To some extent , the role and influence of the marketer or the marketing team as a whole will depend in part on the relative posi­ tion and title within a company . The senior marketing executive is far more effective with the title of vice pres ident , then director, or manager if all other basic functions (e. g. , administration, finance , engineering, etc. ) reporting to the president or gene ral manager are at the vice president level. Likewise, at lower levels of the organization where marketing people are supp orting an engineering or line organization , they can be far more effe ctive if they have an independent and direct line to the top , rathe r than being subservient or performing a staff function to the line organization's manager. As such, the first and perhaps most important step is to organize the company to permit a strong and effec tive marketing role . The second is the assignment of "strong" and knowledgeable marketing managers who are capable, will assert the ir authority, and fully perform the ir role. This latter requirement to have "strong " 44 marketing managers can not be overstressed, and the impact of its existence or lack the reof can, in my opinion , become a company "trade mark" within the industry. For example, there is no doubt that Litton-Data Systems is a marketing oriente d division. The marketing organization is competent, and reliable , and the market­ ing vice president, a dynamic individual , participates actively in basic operational de cisions. The engineering organization execute s the ir function in accordance with the strategy and guidelines estab­ lished for them. In the Bunker -Ramo Corporation 's Defense Syste ms Division, within the span of only one year this situation was made most obvious . A selection for Director of Marke ting was made which brought a long-time senior employee into the position. He was a lawyer by profe ssion and was previously a secretary of the company . He came to his new job with little training or exper­ ience in the engineering products or marketing objectives of the

44 salvatore F. Divita , "Sell ing R&D to the Government , 11 Harvard Business Review, XLIII (September-October 1965), p. 6S. 48

firm. Placed in direct competition with a strong director of engi­ neering , the result was obvious , 1 1the tail wagged the dog. 11 About nine months later, as a corrective action , the position was upgrade d to Vice President Marketing , and an extremely competent engineer­ ing manager was promoted to the post. It was less than a month before the changes were noticeable. The marketing organization took on a new status image , morale went up , and marketing decis­ ions became company de cisions. Recognizing the fact that corpor­ ate management can be quite subtle and a "soft voice can be backed up with a big stick, 11 my exa mple may be somewhat subjective, how­ ever, it is my op inion that a vital element of an effective marketing organization is directly related to the caliber of its top executive. This subject is discussed further in a subsequent section. Unde rlying the situations and circumstances described above , are fundamental problems which did, at one time , undermine the marketing sales role , and still continue to be a limiting factor. 45 Sal Divita in his article 1 1Selling R&D to the Government , 11 des­ cribes these factors in the following categorizations : pecking order, psychological walls, inadequate preparation , and inferiority com­ plex. Some of the se have been treated briefly in previous sections of this thesis, howeve r, they will be summarized here for clarity. a. Pecking Orde r: The role of the technical man in the electronic defense business has always been a commanding one . In the middle and late 1950's, the market wa s a seller's market. There were few marketing departments , and little need for market­ ing . The customer came to the company . Now the competitive climate has changed considerably , and it is necessary to submit highly technical and detailed compet­ itive proposals. The character of the 11product11 has not changed over the years. This means that the proposal , because of its technical content, is still prepared almost exclusively by the tech­ nical department, as it has always been. As such , engineers have come to believe that they earn the business, that they de serve the . 45 Ibid. , p. 69. 49

credit for winning competitions , and that the marketer is, at be st, only a marginal contributor. To exemplify the initial lack of marketing emphasis, Figures 10, 11, and 12 show organization charts for the Thompson Ramo Wooldridge Corporation Computer Division in 1958, 1961, and 1964 respectively . They show the inc reased emphasis on marketing with time . b. Psychological Walls: Over the years, the engineer has always been pres ent; the sales man is a ''Johnny-come-lately. 1 1 With few exceptions, the marketer came actively on the scene about 1960 and was supposed to take over the sales responsibility from the engineers. It is not difficult to understand the conflict that th is move generated. Eventually this conflict built a wall between the two departments -- a psychological wall, but one which has to be de alt with if the firm ever hopes to take an aggressive position in the marketplace. This wall now prevents the marketer from fully achieving a meaningful degree of effectivene ss. He cannot even be effe ctive at gathering intelligence unless he has a meaningful rapport with the engineers in the plant . With equipment this is not too difficult, but capability is often brainpower or the thinking of the key tech­ nical and scientific people in the engineering department , and the only way the marketer can achieve this understanding is by talking to , and being accepted by the technical people . It has been my observation in recent years, that management has been forcing th is interface to the point that it has become common practice to have frequent orientation sessions for field marketing people by various members of the engine ering organization. c. Inadequate Preparation: Anothe r important factor contr ibuting to the poor relationship between the marketer and the engineer is the marketer's lack of adequate preparation for his job. Gene rally, the training programs consist of educating the marketer with respect to the company 's organization (i. e. , what activities exist and who is in charge of which activity), and to its experience (i. e. , what contracts we re previously won). In a few cases DIVISION DIRECTOR

I I TECHNICAL ADMINISTRATION STAFF

l FIELD TECHNICAL RE PRESENTATIVE

r r 1 DIGITAL ELECTRONIC INFRARED PENE TRATION TECHNICAL CONTROL SYSTEMS SYSTEMS SYSTEMS SERVICES DEPARTMENT' DEPARTMENT SECTION DEPARTMENT DEPAR TMENT L-- -- -·---

FIGURE 10 Thompson Ramo Wooldridge Corporation, Computer Division in 1958 Without the Existence of a Marketing Organization

1.11 0 DIVISION GE NE RAL MANAGER

ADVANCED RESEARCH I PLANNING l -+----r·---··---' LA BORA TORY

___, __ -· -·---·--·----r------r I ADMINISTRATION �cus� �- ENGINEERING PRODUCT � PRODUCT AND FINANCE EQUIRE MENTS FABRICA TION ASSURANCE

-�· ------

FIGURE 11 Thompson Ramo Wooldridge Corporation, Computer Division in 1961 With The Existence of a Customer Requirements (Limited Marketing ) Organization

U1 ...... DIVISION VICE PRESIDENT AND GE NERAL MANAGER

ADVANCED WASHINGTON SYSTEMS 1-- ---· - - �------1 PLANNING

l r .- I !MANAGEMENT MARKETING INFORMATION OPERATIONS SERVICES ! r�INGJ

I I------=:I I MISC. MMRBM EASTERN EASTERN PR ODUCT FABRICA TION I � !PROGRAMS PROGRAM PROGRAMS TEC HNICAL ASSURANCE OPERATIONS CENTER J -·--·-···-�-· .-.-.·---- ...... --.....

FIGURE 12 Thompson Ramo Wooldridge Corporation, Computer Division in 1964 With Established Marketing Organization

U1 N 53

marketing personnel are exposed to selling techniques. Such training might be adequate if the salesman had previously acquired a knowledge of the marketing function, but he rarely has . Today he is usually an engineer by training or an ex-government employee . John Kennedy in a 19 64 article stipulated that over 50o/o of customer 46 relations /marketing personnel had engineering backgrounds . In recent years, the writer believe s that this percentage has increased significantly. One answer for th is may be the fact that th e defense industry is so highly technological that technological understanding mu st be dominant to marketing "know-how. " Neverthele ss, ne ithe r of the se two areas of experienc e or training (i. e ., engineering or gover nment work) qualifies a man to be an effective marketing repres entative . The issue here is : What special marketing skills or know ­ ledge should th e salesman/marketer bring to his job? This will be treated in Section D. 3 of th is chapter "Current Training and Quali­ fications . " d . Inferiority Complex: Many comp anies behave in such a way as to seem ashamed of the marke ting function and th eir sales ­ men. In the se companies, words like marketing, sales, and sale s ­ men never appear in the or ganization charts or on calling cards . In some cases marke ting people have gone to great lengths to cover up the fact that they are salesmen or marketing representatives. Within the companies contacted the senior marke ting executive has the title of eithe r director or vice preside nt of marke ting. However, many of the middle manageme nt marketing people who interface with the customer on a regular basis, "bear" titles wh ich include : product area director ; manager of systems , operations, hardware, requirements ; customer liaison, and so for th. It appears to be most impor tant that the se people have and can convey the image of being technical rather than marke ting oriented. As such , the marke ter has not gained full respect for his profess ional capacity fr om his colleagues in th e other profe ssional discipline s of the company . It would also appear that far too much emphasis is placed on the ''obvious" selling/ customer relation 54

function, and not enough on other equally important functions such as planning and pricing .

3. Job Requirements a. Introduction Before de scribing the characte ristics and training required of a marketing manager, it is first necessary to clarify terminology as I have on occasion used the terms marketer and salesmen somewhat interchangeably. Stated simply , the sales manager's job is to direct and control the activities of the salesmen. The salesmen are the people who gather intelligence and establish customer liaison. Sales is but one of the important functions which comprise marketing manage ment responsibility which, as stated earlier, is concerned with the integration of all functions dealing with the movement of goods and services from where they are made or available to the ultimate consumer. Consequently, as con­ trasted with the sales manager, the marketing manager is a member of top managem ent whatever form it may take in a particular com­ pany . Furthermore, he must be thoroughly familiar with all the activities in the company to include engineering , manufacturing, finance, and credit. b. Job Responsibilities As previously stated, the re are several functional areas wh ich must be performed within the marketing organization and to a considerable degree, special ized skills are required for their effective implementation . However, in describing the job respons ­ ibilities of the defense marketer, I am defining the term from the viewpoint of total responsibility on the part of the senior marketing executive , or that potential responsibility for one aspiring to such a position. In small companies, the scope of the se re sponsibilities if not the magnitude , may be borne by a relatively junior per son. The re are several ways in which the job de scription of a senior marketing executive may be de scribed. However, to pre­ sent the full scope of his tasks in a comprehensive manner, I will summarize and slightly modify a list of items offered by Fen Dosche r in his article on "The Vice Pre s ident for Marketing: What 55

47 Kind of Man Must He Be. •• It is presented from a president or general manager's point of view. Following each task de scription is a statement regarding the skills and specialized capabilities which the author believes that the marketing manager must pos sess to effectively satisfy the requirement. These qual ifications will be somewhat subjective and probably never complete , but are based on an understanding of the application of established curricula to wh ich the author has been exposed. A collective look at the se required capabilities, however, will be indicative of particular needs for training and/ or experience.

(i) Develop a marketing policy m conformance with established company philosophy and objectives; by example and word instill in all marketing personnel a sense of purpose and enthus­ iasm for the company and its products. This task requires cap­ abilities in management and administration. (ii) Organize the marketing function so as to achieve stated objectives through the effective utilization of available resources of manpower, funds , and time. This task requires cap­ abilities in management and finance. (iii) Build a vigorous , hard-hitting sales force; recruit and select the most promising candidates as sale smen; provide ample training and opportunity for development at all levels; strive continuously to improve the quality of sales management ; and make sure, thr ough pe riodic inve stigation and reassessment , that sales personnel are adequately compensated. This task requires cap­ abilities in sales, sales training and administration . (iv) Sponsor a continuing program of research aimed at determining industry and general economic trends , customer attitude s and prefe rences, the strength of competitive products , and the company's market position; facilitating the development of new products and the improvements of old ones; and re- evaluating sales methods and policie s. This ta sk requires capabilities in

'47 Fen K. Doscher, 11The Vice President for Marketing : What Kind of Man Must He Be ?" an article in The Marketing Job , ed. Elizabeth Marting (New York: American Management Associa­ tion, 1961), pp. 23-24. 56

market research, economics, sales and product knowledge. (v) Analyze and interpret data on indicated trends with a view to useful long- and short-range sales forecasts , subject to periodic adjustment, which can serve as the basis for management decision making. This task requires capabilities in product know­ ledge and financial planning . (vi) On the basis of forecasts , participate in corporate decision making and develop detailed sales plans and budgets wh ich will represent the thinking and programming of all levels and fo rm an integral part of over-all company plans and budgets. This ta sk requires capabilities in finance , sales planning and management. (vii) Plan and direct the actual selling effort; maintain contacts with the field; control selling expense. This task requires capabilitie s in sales and administration. (viii) Cooperate with other functions at the top company level in product planning, providing marketing guidance and direc­ tion. Consult with industrial de sign, product research , engineer­ ing, manufacturing, packaging , and related pe rsonnel on such merchandising problems as pr oduct and package de s ign , style, color, and labeling. This task requires capabilities in product knowledge, custome r understanding, and merchandising. (ix) In conj unction with other membe rs of top management , establish a sound pricing policy. Guided by it , set the prices of all company products and proposals to furnish goods and/ or services. This task requires capabilities in management and pricing . (x) Exercise gene ral policy control over advertising and sales promotion, including the preparation and use of exhibits , and displays. Insure that all advertising and promotional materials are both effective and appropriate to the nature of the company 's pro­ ducts and the customer. This task requires capabilities in manage­ ment, customer understanding , advertising and sales. (xi) Provide tho se customer services that company pro­ ducts de mand and set up the machinery needed to process customer's orders and inquiries in an efficient manne r. This task requires capabilities in customer understanding, product support 57

and contracts. (xii) Encourage good employee relations within the marketing group and develop a communications network that will promote high morale. This task requires capabilities in adminis ­ tration and interpersonal relations . (xiii) Periodi cally review the over-all marketing organization and program , and make adjustments and improvements as needed. This task requires capabil ities in manage ment and organization. The capabilities identified as being necessary to satisfy the categorized job description given above are ranked according to the ir importance and continued need in the following order: (a) Management (b) Sales (c) Finance and economics (d) Product knowledge (e) Customer knowledge and merchandising, and (f) Administration (which may be conside red a subset of management) These de sired capabilities and skill requirements of the marketer will be matched against the current-day training and experience of the men wh o now hold marketing positions in defense­ oriented organizations .

4. Current Tra ining and Qualifications a. Training Management, sales, finance , economics, customer know­ ledge, merchandising and administration, the se are fundamental s of a well rounded business administration program and skills and unde rstanding required to meet the needs of the defense markete r. The particular product or product knowledge is actually incidental, being just the objective to which the business administration prin­ ciples are directed and applied. Extra empha sis on sales or marketing is likewise well within the scope of the normal bus ine ss administration program. Although bus iness would seem to be the logical background of a markete r, of the companies contacted, ove r 58

ninety per cent of their overall marketing/ sales staff (as opposed to such related activit ies as contracts) were either transfe rees from engineering departments or ex-governm ent employe es (i. e. , mil­ itary or civil service) with various backgrounds . The engineering personnel "migrate " into marketing because it repres ents a pro­ motion in the company hierarchy or their broade r view, interest and capability in company affairs are recognized by management to exceed the engineering role. However, the primary emphasis on marketing qualifications has been te chnical knowledge and cap ­ ability. Little or no conside ration has been given to the lack or pres ence of formalized training in the areas of business or more spec ifically, in marketing. Ex- government employees are norm­ ally hired for their knowledge of the customer and "contacts11 which are useful in the sales effort. These people rarely become seni or executive s in the marketing or company hierarchy, except for retired gene ral officers or senior civil servants who are often given impressive titles within the organization (e. g. , Vice President ­ Requirements or Director- Customer Relations ), but actually perform a higher level sales activ ity. Even with the se senior people , a background in engineering is considered to be advantage ­ ous. To determine the characteristics of the typical academic engineering program and identify what fields of endeavor its grad­ uate s are qualified to pursue , a study of several college catalogs was unde rtaken and the following learned. The engineering pro­ gram is arranged to provide the student with a sound background in the fundamentals of the engineering disciplines in preparing for a career in engineering. Basic engineering curricula includes such courses as thermodynamics, heat transfer, electric and electronic circuits, and the use of the basic materials . In addition to an area of spec ialization (e. g. , mechanical, electronic, marine , etc. ), the enginee ring studies are to some de gree balanced to the economic, social, industr ial, and psychological needs of the society it serves. The basic obj ective of engineering training, is to apply science and a knowledge of the technologies to create useful devices and systems. 59

As electives, it is possible that engineering students may be ex­ posed to a couple courses in busine ss law, production management and the like, but the re is no active attempt to provide overall management skills . Eng ineering as a field, is, of course, based on the exact sciences and engineers are trained to think and act accord­ ingly. This is in opposition to many management skills such as administration and interpersonal relations wh ich are arts in the ir implementation requiring "development" on the part of practi­ tioners. A number of managem ent oriente d graduate programs for engineers have become gene rally available in the last de cade . The se include such programs as a maste rs program in eng ineering management offe red by UCLA, and the numerous MBA programs offe red by many colleges and unive rsities. Although the re is a reported high level of enrollment in these programs , not even one of the senior marketing persons interviewed, and no member of the Bunker-Ramo Defense Systems Division marketing staff, holds such an advanced degree, although several have advanced engineering de grees. This is considered to be most ''tragic" as it is such advanced programs as the MBA wh ich are suited to persons with unde rgraduate de grees other than business, providing the m with a broad unde rstanding of the elements and application of busine ss management , with an option to concentrate to a limited degree in the area of marketing . The expre ssed purpose of such programs is to provide preparation for senior management positions in industry. 48 It is interes ting to note , however, that at least one educator believes that specialized courses in defense marketing and the like are unnecessary in a maste rs program. He believes that it is the fundamental courses which are required, and that they pe r mit applicability to any bus iness environment. Time, age or qualification may de te r some practicing

48 Kenneth R. Davis, 11A Generalist's View of Marketing in the MBA Program, 11 an article in Reflections on Progress in Marketing , ed. L. George Smith (Chicago: American Marketing Associat ion, l 9 65 ) ' p. 5 22. 60

marketers from enrolling in formal busine ss programs. However, the re are a number of short courses in bus ine ss and marketing wh ich are offe red by both universities and private consulting firms (e. g. , The National Defense Education Institute ). There is, how­ ever, an increasing emphasis on the part of upper management to have middle management personnel attend the se lectures and sym­ po sia, because they are concentrated in nature and sufficiently short in duration not to significantly hamper normal operations when attended by staff representative s. b. Experience and Qualification As can be expe cte d, the experienc e and qualification of defense markete rs will vary considerably depending on the areas of specialization and the bus ine ss activities of the firms with wh ich they have been affiliated. This latter factor is most significant within the defense industry whe re I have ob served the average length of employment (in the technical areas) with a given company to be about th ree years . As an indication of the training and ba ckground of the current-day defense marketer, I have carefully chosen the resume s of four typical marketing personne l from a list of sixty , obtaine d from the personnel files of the Bunke r-Ramo Corporation . Their names, university and specific company affiliations have been de ­ leted that they may remain anonymous . They are re - titled resumes A, B, C. and D, and are presented in Appendix B. From the se resumes, the strong engineering background of the de fense marketer is evident . It is also to be recognized, however, that the se men (as is generally the case) we re senior engineers with some management experience prior to ente ring the marketing organization. In te rms of qualifications , and I know each of the se indiv iduals personally, they are quite competent and astute individ­ uals, and of conside rable value to the ir organizations . Howeve r, the unfavorable inbalance in the ir formal training and exper ience in the marketing field is cons idered by them to be a limitation on the ir effe ctive performance. CHAPTER III

CONCLUSIONS AND RECOMMENDAT IONS

The defense market, and the methods used by the government to buy electronic research and development have been shown to be quite complex and involved. In addition, the basic aspects of this environment, including: the government defense procurement organization, the procurement cycle , and the complex nature of the customer, have been presented in sufficient depth to provide the necessary backg round to appreciate the defense marketing role and facilitate a meaningful test of the stipulated hypothe sis. In the hypothesis are essentially two assertions: 1) That the defense marketer must apply the traditional marketing principles associated with product planning , marketing strategy, selling and pricing; and , 2) That the defense marketer is hampered in the pe rformance of his functions due to a lack of formal training in business, and a strong engineering orientation in the defense industry. Treating these issues in the order presented, the thesis showed that for the defense markete r to perform his job effectively , he must perform functions associated with 1) gathering intelligence on customer requirements; 2) making continual market surveys to facilitate product planning and marketing strategy; 3) providing strategy and pricing guideline s on proposals for new busine ss activities; 4) establishing good customer relations and establishing a favorable company image, and 5) establishing and maintaining the mechanism for processing orders and ne gotiating contracts. From the information presented in these areas, obtaine d from both personal interviews and published data, it is quite apparent that, although the technique s may differ as a function of the environ­ ment , the basic marketing principles are and must be applied for successful performance.

61 Relative to training and job performance on the part of the defense marketer, it has been shown that a large number ofpracti­ cing defense marketers have extensive engineering backgrounds and hold engineering degrees. Formal training in business is scarce and in some companies, nonexistent. From a study of engineering curricula, it is evident that these scientifically oriented programs do not provide the training necessary for the effective development of strong managerial capabilities required by the defense marketer. This situation is aggravated by the fact that an appreciation of the marketing function has occurred only within the last decade, when competition for the available defense funds became quite intense. Furthermore, the engineering organization, by far the largest element within the defense firm, still visualizes marketing as a necessary or unnecessary evil, whose basic functions could readily be absorbed by engineering, as indeed they tacitly were in the pre- 1960 era. With this knowledge of the situation, it is apparent that the individual defense firms must take positive steps to strengthen their marketing organizations and, thereby, their position in the market place. There is no easy and/ or quick solution. More specifically, it will involve a rather evolutionary upgrading, consistent with the organizational status of the various firms. In addition, it is recog­ nized that no set of established guidelines are infallible as to their results, and that departures from "school solutions" can at times be quite effective. However, it is believed that judicious applica­ tion of the steps listed below could result in the type of marketing organizations which will be knowledgeable, respected, and capable of performing their intended roles. The following courses of action are therefore recommended: 1. Assign the marketing organization a full charter of responsibilities, and establish it at the appropriate level to permit the full exercise of intended authority. 2. Select marketing personnel who know the marketing job and are strong enough to get the job done. Do not draw on inadequate "in-house" talent just because it is available. c .rc 63

3. Require, or at least encourage senior, technically oriented, marketing personnel to enroll frequently (at least once per year) in either industry or university sponsored short courses or seminars in general market­ ing and/ or defense marketing. 4. Require junior marketing personnel to commence or continually upgrade their formal business education. Enrollment in a formal degree program is preferred, if said degree (e. g., MBA) has not previously been obtained. 5. Actively recruit graduating college students who have a combination technical/business background, and make college administrations aware of the need and value of such training {e. g. , BS in technical field plus MBA). These people will grow up in the profession and take pride in job performance. 6. Stress the other aspects of marketing (e. g., research, pricing, policy formulation, etc.), as well as sales, to eliminate the 11 peddler image 11 within and outside the marketing organization. 7. Associate a degree of prestige with the marketing organization and encourage a feeling of membership pride. Most important of all is to recognize that the defense oriented company of the future cannot tolerate the problems which currently are plaguing marketing operations. In that highly com­ petitive market, the remaining competitors may be singularly identified by the high impact of their marketing activities on corpor­ ate affairs. 64

BIBLIOGRAPHY

\ 65

BIBLIOGRAPHY

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Federal Contracts Report No. 266 (Summary), A Report Pre­ pared by TheBureau of National Affairs, Inc . (Washington: The Bureau of National Affai rs, Inc. , 1969).

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Campbell , John B. 11War Work Payrolls Start Heading Down , 11 Business Week, (June 14, 1969 ), pp. 134- 135. _ Davis, Kenneth R. 11A Generalist's View of Marketing in the MBA Program, 11 an article in Reflections on Progre ss in Market­ ing. Edited by L. George Smith . Chicago: American Nrar keting Association , 1965 . Pp . 521-526.

Dean Chauncey. 11Defense Marketing Product and Price Environ­ ment , 11 an article in Reflections on Progress in Marketing . Edited by L. George Smith. Chicago: Ame rican Ma rketing Association, 1965. Pp . 45 1 -466.

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Marting, Elizabeth (ed. ). The Marke ting Job. New York: Ameri­ can Management Association, "1961.

Meyerson, Mart in. 11Price of Admis s ion into the Defense Busines�11 Harvard Business Review, XLV (July-August, 1967), pp . 111- 123 .

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Smith, L. George (ed. ). Reflections on Progress in Marketing . Chicago: American Ma rke ting Association, 1965.

Tilghman, William S. ••so Your Title is Proposal Manage , 11 Data Magazine , X(March , 1965), pp . 15-17.

Weindenbaum , Murray L. 11Product Management of Defense Markets, 11 an article in Reflections on Progress in Marketing Edited by L. George Smith . Chicago: American Ma rketing Association, 1965. Pp . 55-61.

Penetration and Future in the Other Than Market. A report pre ­ pared by The Bunke r-Ramo Corporation - Defense Systems Division, Canoga Park, California (March , 1964).