Defensive Industries

Updated on May 20, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What is Defensive Industries?

Defensive industries refer to specific industries whose production or distribution remains constant irrespective of economic fluctuations prevailing in the country’s economy because of the defensive nature of products like essential commodities and basic needs products. Thus their demand does not decline even in the situation of recessions.

Characteristics

#1 – Non-Affected by Economic Fluctuations

These are unaffected by the economic fluctuations due to the nature of product dealings like medical products, necessities products like rice, wheat, etc., and defense industry products used as weapons in times of war or for self-defense by the military.

#2 – Inelastic Demand

The demand for products dealing with such industries is inelastic due to demand, and supply is continuously increasing.

#3 – High Returns

This provides high returns on the investment because a continuous increase in demand leads to more profits.

#4 – Attract Investors

As the defensive industry provides continuous returns, and the market never faces a downturn. Hence it is the most attractive option for investors, and investors prefer to invest in such industries.

#5 – Low Employee Turnover

It provides the security of jobs to the employees; hence the employee turnover in these industries is less, and job satisfaction is more.

#6 – Secured Business

The business done by these industries is a secured type of business as the products they deal with are long-lasting and not perishable. Hence any person who wants to do a secured business with less risk can deal with the products manufactured or sold by defensive industries.

#7 – Operative in all Economic Situations

It is always operative even in the economic recession or downturn as people cannot live without essential commodities like food grains, medical products, etc.

Defensive Industries

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Video Explanation of Defensive Industries

 

Example of Defensive Industries

  • Many examples are food grain industries, medical industries, water service industries, etc.
  • Water supply and irrigation systems are some of the effective examples in the US. During the recession period in the USA, it continues to grow despite low consumer income.
  • Online recruitment sites are also the best example during the recession. Also, the unemployment rate has increased, and online recruitment sites continue to grow as people search for jobs. Examples of online recruitment sites are LinkedIn, which boosted revenue from job seekers.
  • The healthcare industry is also an example of a defensive industry. People who have a lower standard of living will opt for healthcare services as they are necessary services for living life.
  • The government of every country also gives more attention to such industries and ensures it is available to the citizens at an affordable cost.
  • Walmart is considered defensive as it deals with necessary products.

Need

  1. To Provide Essential Services – These are necessary to provide essential and emergency services to the country’s citizens.
  2. For the Growth of the Economy – For the growth of the economy, there is a high need for defensive industries as they provide a stable return on investment and keep the investors attracted.
  3. To make Available Necessities Products at Affordable Rates – The reason behind protecting the defensive industry is to provide necessary goods at an affordable rate so that everyone can afford them.

Advantages

  1. Protect from global competition.
  2. Keeps the growth of the economy;
  3. Attract investors.
  4. Deals in the products with inelastic demand.
  5. The industry with lower employee turnover;
  6. Gives job security and job satisfaction to employees;
  7. Defensive companies are less volatile.

Disadvantages

  1. Over protectionism leads to monopolistic situations.
  2. No global competition makes the industry sick.
  3. Prevents nature prevents the companies from expanding into products other than necessity products.
  4. Due to defensive nature, its growth is slow as compared to other fast-growing industries.
  5. Provide a low rate of return to the investors compared to luxury industries.
  6. The profits of defensive industries are limited as the government has continuous checks.
  7. The legal formalities and licensing are more complex in these industries.

Conclusion

  • These deal with daily necessities products and services like food grains, water, health care services, medical products, defense products for the military, etc.; the demand for goods supplied by defensive industries is inelastic. Hospitals, medical care services, transport industries can be considered examples of such industries.
  • These industries provide secured jobs due to continuous profits by the companies. Employees working in these industries are more satisfied with their jobs. These industries attract more investors due to their continuous growth. But the rate of return provided by these industries is comparatively less than other industries.
  • These industries provide the basic goods; hence there are continuous checks on the price of the products; hence profits can be limited. Walmart is considered the firm of the defensive industry as dealing in necessity products. Non-competition in this industry makes the companies sick and slow working.

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