Almost everyone who has ever taken a psychology class in college was introduced to Abraham Maslow’s theory of the hierarchy of needs. In essence, the theory postulates that all human beings possess a series of five basic categories of needs running from the most basic, physiological and safety, to the more cerebral or emotional, which he defines as love, esteem and self-actualization. Only when the basic needs are achieved can and will an individual pursue the others. There can be shifts in focus between the five categories as events such as wars, natural disasters, broken relationships or a job loss requires individuals to address anew earlier, more basic needs.
Private companies, like individuals, also have a hierarchy of needs. Academics, business consultants and pundits have sought to apply Maslow’s theory to the corporate world. In many ways the corporate hierarchy parallels that of individuals. At the most fundamental level, businesses have a set of basic, largely physiological needs. These include products or services to sell, a competent workforce, financial resources to acquire materials, hire workers, establish corporate infrastructure and, perhaps most important, paying customers or a revenue stream. Second comes a stable, predictable business environment that involves the legal and tax systems in which a company operates, the supply chain that supports its operations and the money available to customers. The control of corporate intellectual property (IP) fits here. The next level in the corporate hierarchy focuses on making money, the essential incentive for all business activity. Specific elements in this category include corporate profits, stock price and return on invested capital. The fourth level in the corporate hierarchy could be termed relative market position. Here a company would focus on brand recognition, market position and R&D or innovation. The final level of corporate need has to do with its identity in the marketplace and the larger society. Companies will seek to maintain their positions in sectors with which they are uniquely associated, which they may have helped create or in which they believe they provide a unique set of products and services. They also will spend money and undertake other philanthropic activities in order to be viewed as good corporate citizens.
Because Maslow’s hierarchy was focused on the individual it was largely sui generis, the specific conditions that satisfied a need are unique to that person. For companies, however, the circumstances that satisfy its needs are determined in the context of the overall economy. The business environment is highly competitive. Because capital and labor are mobile, they can make choices where to go, which companies and economic sectors in which to invest or to work for, how much risk to accept and what level of profits or returns on investments to seek. A company must satisfy its bankers’, investors’ and workers’ hierarchies of need in order to stay in business. In general, capital and labor will move to where the returns are higher and/or the risks lower.
Defense companies are in an unusual position. As private businesses, with shareholders, they have a hierarchy of needs very similar if not identical to that of commercial companies. They must have customers and a revenue stream, generate profits, and be able to compete with others in their sector. They are dependent on the same sources of financing as non-defense companies. But those sources have choices as to where they put their money. The stock price for all private companies is determined by the soundness of their business activities, the relationship between risks and returns and not by the social good they provide in terms of support for national security.
At the same time, defense companies are in a part of the overall economy that has unique features, some of which are not conducive to meeting their hierarchy of needs. There is only one customer, the federal government. The business environment is highly cyclical, even unpredictable. Contracts can be cancelled at the convenience of the government. Corporate IP may be subject to government taking. Corporate costs and prices are subject to the customer’s review and profits controlled. The margins for defense companies are significantly below those for similar commercial companies in comparable sectors.
It is increasingly difficult for defense companies to get their needs satisfied, particularly in a period of declining defense budgets. Not only does the customer have less to spend but it is making it more difficult for the companies to make money. Looking forward, defense companies see smaller budgets, fewer procurement programs and, hence, reduced revenues. The Pentagon wants these companies to spend more of their own money to develop next-generation products. But without a reasonable prospect of a production program that produces a revenue stream and profits, what incentive is there for a company to risk its own funds? Moreover, if a company were to use its own money to develop a new capability, the government might lay claim to the IP, undercutting any incentives to make such investment. Or it could just walk away, leaving the company with a budget hole and no prospect for filling it.
Defense department acquisition officials like to say they respect the private sector and its inestimable contributions to national security. Such statements would have greater credibility if the Pentagon understood and responded to the defense companies’ hierarchy of needs.
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