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 co🦄mpetitive in the marketplace. This would r𝓰educe the profitability of the company.

Obsolescence risk is most significant for technology-based companies o♚r companies with products or services based on tec🐭hnological 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 th🌃is 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 expꦺenditures any time a ma𒈔jor product, service, or factor of production becomes obsolete.

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 i🔯nstead 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 li꧅ttered with dead companies whose products or technology were rend💖ered obsolete. Examples are the technology companies Control Data and Digital Equipment from Morgan Stanley's 1982 “recommended” buy list.