Environmental Analysis

Introduction
The cyclic nature of the business cycle is clearly demonstrated by the defense contracting industry. The industry is at its peak when republicans are in control and in a trough when democrats are in control. There are other factors that affect the defense contracting industry such as military conflict, the state of the labor market, and technological turnover. This paper will analyze the labor market and the technology turnover variables for the last five years relative to the information technology segment of the defense contracting industry. It will provide insight as to the challenges and opportunities that exist for the operating environment of the defense contracting industry.

Key Macroeconomic Variables
There are very few major defense contracting companies and many smaller, supporting companies. Lockheed Martin, Boeing, Northrup Gruman, and Raytheon are some of the major defense contracting companies that compete for defense contracts. Some of the key macroeconomic variables that affect all these companies are the policies reflected by the controlling political party, military conflict involving the United States, unemployment rates, the education and skill levels of the available labor force, and technology turnover.

Both political parties have innate policies regarding the defense of the United States. The democratic party feels resources would be better utilized in areas other than defense and therefore attempt to cut the budget for defense when they are in control. The republican party, on the other hand, feels national defense is a critical need for the nation and attempt to raise the defense budget when they are in control. The companies in the defense contracting industry must closely monitor the political landscape of the nation and try to forecast which party will win elections. If our nation is involved in military conflict defense spending is increased and more money is available to the companies in the industry and demand for their products raise. The defense contracting industry employs skills from all sections of the labor spectrum. The information technology segment of the labor force is limited and competition for those skills is heavy. When the industry is in a trough of its business cycle it is hard for it to compete for highly skilled engineers it needs to produce its products. Furthermore once companies do employ highly skilled workers at the peak of its cycle it is equally hard to maintain those workers as the cycle moves downward toward the trough. Companies must analyze the need for technology improvement regarding the benefit versus cost. In the defense contracting industry this analysis is even more critical. Usually defense budgets are not flexible enough to keep up with the latest technology and the contracts the defense offers are usually long term, greater than five years, so the contracting industry must analyze the state of technology and provide the best equipment available.

Labor and Technology
Taking a closer look at the labor and technology variables will provide better insight to the challenges and opportunities for the defense contracting industry. According to Country Watch the United States general unemployment rates for the years of 2001 through 2005 are 4.7%, 5.8%, 6.0%, 5.5%, and 5.1%. And according the Bureau of Labor Statistics the unemployment rates for the information industry for the same years are between 3% and 3.5%. This indicates a very low amount of available, highly skilled workers for the defense contracting industry and because this industry depends on the national defense budget it is difficult to provide a comparative wage to attract these workers. The difficulty level also changes as the political party in control changes. Because of republican control of the congress and the current military conflicts the national spending on defense has risen between 2001 through 2005, however, the democratic party took control of the congress in the last election so the expectation is that national spending will decrease in the coming years. The following chart depicts the employment rates in the general and information sectors compared to defense spending.

Technological advances in the information sector has grown at a rapid rate. A new generation of integrated circuits is introduced approximately every 18 months along with a cost increase. It is impossible to continuously upgrade information equipment as rapidly as new equipment becomes available. It is even more critical to plan technology turnover in the defense contracting industry. The budget limitations in this industry along with relatively long contract time-frames enforces a technology planning process so that products produces are not outdated before they are deployed to customers. The following chart shows the costs of technology upgrades compared to defense spending.

As the chart shows the cost to upgrade equipment rises each year. The challenge for the industry is to find a point at which technology will support the requirements of the customer and plan for future upgrades.

Challenges and Opportunities
The challenge for the defense contracting industry regarding employment is recruiting highly skilled workers capable of producing highly complex information technology products, retaining these workers once recruited, and planning for the future budgetary constraints imposed by the changing political climate. The opportunities in this area is the ability to provide highly skilled workers producing a highly complex product. The labor force employed in this industry is highly competent and motivated to provide the highest quality products for the defense industry.

The challenge for the industry regarding technology turnover is defining a point at which the equipment meets the customer's requirements while staying within the limited budget constraints inhierant in defense spending. Another challenges is planning for future technology turnover and incorporating this turnover into future budgets. The opportunities in this area is the ability to quickly adapt to budgetary constraints and implementing a complex, high quality product regardless of the constraints. All defense contracting companies strive to provide the highest quality products allowable within the constraints of their budget.

Conclusion
The defense contracting industry must to analyze general macroeconomic variables, but it must monitor even more closely the variables pertaining to the political environment of the United States. It must plan for changes in its labor force depending on projected defense spending which cycles depending the the political party in control of congress. Planning for its labor force also involves monitoring of the general labor force and the available highly skilled workers it must compete with the other technology industries. Planning for advances in technology is a critical analysis for the defense contracting industry. Because contracts are relatively long compared to advances in technology, the industry must carefully plan for technology turnover.

References
Macroeconomic Data, Unemployment Rate. Retrieved May 15, 2007 from Country Watch. http://www.countrywatch.com.ezproxy.apollolibrary.com/cw_topic.aspx?type=data&vcountry=182&disc=1&tableid=1

Us Department of Labor, Industry at a Glance: Information. Retrieved May 15, 2007 from The Bureau of Labor Statistics. http://stats.bls.gov/iag/information.htm