What Is Obsolescence Risk?
Obsolescence risk is the risk that a process, product, or technology used or produced by a company for profit will become obsolete, and thus no longer competitive in the marketplace. This would reduce the profitability of the company.
Obsolescence risk is most significant for technology-based companies or companies with products or services based on technological advantages.
Understanding Obsolescence Risk
Obsolescence risk is a factor for all companies to some degree and is a necessary side effect of a thriving and innovative economy. This risk comes into play, for example, when a company is deciding how much to invest in new technology. Will this technology remain superior long enough for the investment to pay off? Or will it become obsolete so soon that the company loses money?
Obsolescence risk also means that companies wanting to remain competitive and profitable need to be prepared to make large capital expenditures any time a major product, service, or factor of production becomes obsolete.
Budgeting for obsolescence risk is challenging because it is difficult to predict obsolescence and the exact rate of technological innovation.
Example of Obsolescence Risk
A publishing company is an example of one that faces obsolescence risk. As computers, tablets, and smartphones have become more popular and affordable, more consumers have started reading magazines, newspapers, and books on these devices instead of in their print forms.
For the publishing company to remain competitive, it must minimize its investments in the old paper publications and maximize its investments in new technologies. Even as it makes this shift, it must remain alert to new and unimagined technologies that could supplant the currently popular ways of reading and require still more investment.
The stock market "graveyards" are littered with dead companies whose products or technology were rendered obsolete. Examples are the technology companies Control Data and Digital Equipment from Morgan Stanley's 1982 “recommended” buy list.
Key Takeaways
- Obsolescence risk arises when a product or process is at risk of becoming obsolete, usually due to technological innovations.
- Reducing obsolescence risk means being ready and able to make capital expenditures and investments in new technology and processes.
- Technology-based companies or companies that rely on technological advantages are most vulnerable to obsolescence risk.
FAQs
What Is Obsolescence Risk? Obsolescence risk is the risk that a process, product, or technology used or produced by a company for profit will become obsolete, and thus no longer competitive in the marketplace. This would reduce the profitability of the company.
What is obsolescence risk? ›
Obsolescence Risk refers to the possibility that a product, service, or technology becomes outdated or less valuable as a result of innovation and advancements in the industry.
What is the process of obsolescence? ›
Obsolescence is the process of becoming antiquated, out of date, old-fashioned, no longer in general use, or no longer useful, or the condition of being in such a state.
What is obsolete system risk? ›
Using outdated operating systems can result in a wide range of risks, including security vulnerabilities, compatibility issues, slow system performance, and legal consequences.
What is the obsolescence method? ›
Planned obsolescence describes a strategy of deliberately ensuring that the current version of a given product will become out of date or useless within a known time period. This proactive move guarantees that consumers will seek replacements in the future, thus bolstering demand.
How to avoid obsolescence? ›
ACTIONS AND STRATEGIES FOR AVOIDING OBSOLESCENCE
Avoiding obsolescence or minimizing its costs can be accomplished through actions in planning and programming; design; construction; operations, maintenance, and renewal; and retrofiting or reuse of a facility (throughout the facility life cycle).
What are the 3 types of obsolescence? ›
In commercial real estate, there are three types of obsolescence:
- Functional obsolescence.
- Economic obsolescence.
- Physical obsolescence.
Common examples of planned systemic obsolescence include changing the design of screws or fasteners so that they cannot easily be operated on with existing tools, thereby frustrating maintenance. This may be intentionally designed obsolescence, a withdrawal of investment or standards being updated or superseded.
What drives obsolescence? ›
What causes obsolescence? Manufacturers may decide to discontinue parts due to low demand, growing production costs, or because they are no longer profitable to produce. The result is parts (or even families) going obsolete. In 2023 alone, more than 328,000 EOL notices were issued.
What are the signs of system obsolescence? ›
Signs Your Software is Failing or Outdated
- User Perspective: Frequent crashes or errors. ...
- Business Perspective: Declining customer satisfaction or retention rates. ...
- Regulatory/Compliance Perspective: Non-compliance with industry standards or legal requirements. ...
- Employee/Operational Perspective:
IT risks include hardware and software failure, human error, spam, viruses and malicious attacks, as well as natural disasters such as fires, cyclones or floods.
What is obsolescence mitigation? ›
Obsolescence. Obsolescence Management takes into account the life span of all the moving pieces of your complex system with a plan to replace obsolete parts as they age, before it becomes a crisis.
How to use obsolescence? ›
Examples of obsolescence in a Sentence
the obsolescence of the old technology Once a useful tool, slide rules have fallen into obsolescence.
Is obsolescence really programmed? ›
According to the law, programmed obsolescence is defined as all techniques by which a marketer (manufacturer, importer, distributor, reconditioner) aims to deliberately reduce the lifespan of a product in order to increase its replacement rate, thereby encouraging product rotation and renewal, leading to over- ...
Which technique is used to control obsolescence? ›
Forecast demand for inventory
By taking a look at historical data, you can predict future demand for each SKU and make informed decisions to avoid purchasing too much of an item that might become obsolete faster than it can be sold.
What does obsolescence mean in property? ›
Functional obsolescence in real estate describes a property that has decreased in desirability or functionality due to an outdated design feature, physical deterioration, or undesirable external factors.
What does obsolescence mean in business? ›
In economics, the perceived obsolescence definition is when consumers believe a product is no longer useful or no longer holds value, so they purchase the newer model or upgrade that product. The obsolescence definition refers to something becoming obsolete and no longer useful in this context.
What is meant by obsolescence in insurance? ›
Replacement cost less physical depreciation and obsolescence is the amount that an insurance company will pay for an insured property after it considers the diminished value because of wear and tear or because new technology has replaced it in the market.
