Lockheed Martin Research Paper

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My research paper for Managerial Economics, Spring 2010. The paper analyzes the structure of the aerospace industry and Lockheed Martin\'s role in that industry.

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Lockheed Martin Research Paper

  1. 1. Rice 1 The Aerospace Industry and Lockheed Martin: A Brief Market Structure Analysis Matthew E. Rice I. Introduction The structure of the aerospace industry has undergone many changes during the past several decades. Inter-firm relationships within the aerospace industry have also undergone many changes during the past several decades. The aerospace industry, once monopolistically competitive, has shifted to an oligopoly. Lockheed Martin Aeronautics provides an excellent case study of the aerospace industry and the changes which have occurred. II. Lockheed Martin Aeronautics Lockheed Martin Corporation is located in Maryland and describes itself as a “global security company.” The company has several business divisions including Lockheed Martin Space Systems, Electronic Systems, Information Systems and Global Services, and Aeronautics. The company employs almost 150,000 people throughout the world (Lockheed Martin 0, 11). Lockheed Martin Aeronautics produces military aircraft and the technology that supports those aircraft (Lockheed Martin 11). Lockheed Martin Aeronautics had net sales of approximately $1.5 billion in 2008, $12.3 billion in 2007, and $12.3 billion in 2006. The largest purchaser of Lockheed Martin Aeronautics’ products is the U.S. government. Foreign governments and other purchasers constitute a very small percentage of sales (Lockheed Martin Corporation 4, 9, 48). III. Defining the Market There is much variation in how the aerospace industry is defined; the broadest definition is that “…the [aerospace] industry would develop and manufacture vehicles, subsystems and
  2. 2. Rice 2 parts essential for both atmospheric and space flight, whether manned or instrumented, or necessary for effective operation in flight or space” (Stekler 31). A broad definition of the aerospace industry is necessary due to the broad scope of the industry. The aerospace industry is a part of the high technology sector (Bluestone 3). The aerospace industry can be sub-divided and analyzed in many different ways. This paper will analyze the general aerospace industry as defined above. The military aircraft industry, and Lockheed Martin Aeronautics’ role in that industry, is explored. Specific information from the aerospace industry is used in the analysis of the military aircraft industry. IV. Shifts in Market Structure The aerospace industry was monopolistically competitive prior to World War Two. Monopolistic competition is characterized by the existence of many firms, firms differentiating their products, and by the free, or almost free, entry and exit into and out of the market (Mankiw 374). After World War Two ended a large number of aircraft firms exited the industry (Bluestone 55). When large numbers of firms exit an industry, it is referred to as an industry shakeout (Tremblay 47). The industry shakeout caused the aerospace industry to be transformed into an oligopoly. An oligopoly is characterized by the existence of only a few firms, firms offering similar or differentiated products, and the existence of barriers to entry (Mankiw 346). The aerospace industry has maintained its oligopoly status due in large part to significant barriers to entry, particularly in the form of large capital and research and development costs (Bluestone 55). For an example of the large capital investments necessary in the aerospace industry, in 2008 alone, Lockheed Martin Aeronautics spent approximately $230 million on property, plant, and equipment (Lockheed Martin Corporation 75).
  3. 3. Rice 3 The concentration ratio, sometimes referred to as the four-firm concentration ratio, clearly illustrates the aerospace industry’s oligopoly market structure (Mankiw 346; Tremblay 43). The concentration ratio is calculated by taking the amount of output produced by the four biggest firms in an industry and dividing by aggregate output. The U.S. aircraft manufacturing industry has a concentration ratio of 85 percent (Mankiw 346). Some experts “…contend that once CR4 [the four-firm concentration ratio] exceeds 40 percent, the level of effective competition diminishes and an industry can be classified as an oligopoly” (Tremblay 45). The aerospace industry’s concentration ratio has likely risen significantly during the past 20 years. Beginning in the 1990s, the number of major aerospace firms in the United States has been reduced from 16 to four. The reduction in the number of aerospace firms was caused by numerous acquisitions and mergers by the big four firms in the U.S. market: Boeing, Lockheed Martin, Raytheon, and Northrup Grumman. Lockheed Martin is now composed of what was once General Dynamics, Lockheed, Martin Marietta, and Loral. The pattern of acquisitions and mergers is unlikely to continue due to antitrust concerns that any further consolidations will eventually lead to the monopolization of the aerospace industry. For instance, a merger between Lockheed Martin and Northrup Grumman was recently blocked due to antitrust concerns (Esposito 459-60). V. Competition and Cooperation The aerospace industry is characterized by high levels of competition and collaboration, a situation which often occurs within an oligopoly (Esposito 452; Mankiw 350). “The sheer volume of government hardware procurement and research and development funding has produced an industry that is largely a monopsony—an industry that has only one primary customer” (Bluestone 9). The existence of only a few customers in the aerospace industry has
  4. 4. Rice 4 created high levels of competition between firms (Bluestone 8). Aerospace firms heavily compete on price (Lockheed Martin Corporation 13). Despite the high-level of competition, a great deal of collaboration still exists between firms in the aerospace industry. Collaboration between firms occurs because of the high technological and financial barriers which are inherent to the aerospace industry (Esposito 452). Firms must invest large amounts of money in capital and research and development to surmount the technological barriers that exists in developing aircraft and aircraft systems (Bluestone 55). To overcome these technological barriers and reduce risks firms have integrated, as was seen in the 1990s, and have formed collaborative relationships (Esposito 459). Lockheed Martin is a prime example of the balance between competition and collaboration. Lockheed Martin and Boeing are fierce competitors in the fighter aircraft market, however, they were also among the first firms in the United States to form a collaborative relationship. The two firms both participated in a co-operation program to create the F-22 Raptor in the 1990s; Lockheed Martin was responsible for about two-thirds of the project (Esposito 456- 7, 459, 460-1). VI. Conclusion The aerospace industry is clearly an oligopoly with the existence of only a few firms, similar yet differentiated products, and barriers to entry. The aerospace industry displays the balancing act which often occurs in oligopolies between competition and collaboration. Lockheed Martin is an excellent example of the dynamic aerospace industry; the company has been through mergers and acquisitions, endured fierce competition, and has formed collaborative relationships to reduce risk. Further changes will undoubtedly occur in the aerospace industry but those changes will be complicated with technological, financial, and regulatory issues.
  5. 5. Rice 5 Works Cited Bluestone, Barry, Peter Jordan, and Mark Sullivan. Aircraft Industry Dynamics: An Analysis of Competition, Capital, and Labor. Boston: Auborn House Publishing Company, 1981. Esposito, Emilio. 2004. Strategic Alliances and Internationalisation in the Aircraft Manufacturing Industry, 443-468. Technological Forecasting and Social Change Vol. 71 Issue 5. Lockheed Martin Corporation. Lockheed Martin Corporation: 2008 Annual Report. Bethesda: Lockheed Martin Corporation, 2009. Lockheed Martin Corporation. Lockheed Martin: Powered by Innovation, Guided by Integrity. Bethesda: Lockheed Martin Corporation, 2009. Mankiw, N. Gregory. Principles of Microeconomics, 4th ed. Mason: South-Western Cengage Learning, 2007. Stekler, Herman O. The Structure and Performance of the Aerospace Industry. Berkeley: University of California Press, 1965. Tremblay, Victor J. and Carol Horton Tremblay. The U.S. Brewing Industry: Data and Economic Analysis. Cambridge: The MIT Press, 2005.

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