Lockheed Martin Research Paper - Document Transcript

Lockheed Martin Research Paper -- Document Transcript

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. 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. 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