Definition
Planned obsolescence is a strategic process in which manufacturers intentionally design products to become obsolete or non-functional after a certain period. This is done to increase sales and consumption by compelling consumers to buy newer versions or models. It is commonly employed in various industries, such as technology, automobile, and fashion.
Key Takeaways
- Planned Obsolescence is a strategy where the manufacturers intentionally design a product’s lifespan to become obsolete or non-functional after a predetermined period. This approach motivates consumers to purchase the latest version of the product.
- While the strategy might stimulate economic growth and technological advancement, it often raises ethical concerns due to the excessive waste generated by obsolete products, contributing significantly to environmental degradation.
- Planned Obsolescence is a common practice in many industries, particularly technology, apparel, and automotive. However, public backlash against the policy has led to legislation in various countries, reducing the applicability and attractiveness of this strategy to responsible companies.
Importance
Planned obsolescence is an important financial term because it relates to a strategy many businesses use to ensure continuous demand for their products.
By intentionally designing and producing consumer goods to become obsolete or no longer functional after a certain period, companies can regulate product lifecycle and generate sustainable revenue.
The concept helps companies maintain a competitive edge and stimulate consumer spending, thus fueling economic growth.
However, due to its potential for wastefulness and adverse environmental impact, it also raises questions regarding corporate responsibility and sustainable practices.
While planned obsolescence is critical to companies’ financial health and longevity, balancing it with ethical and environmental considerations is equally vital.
Explanation
Planned obsolescence serves a strategic purpose in finance and business, primarily to stimulate consistent consumer demand and keep the market cycle robust. It is a policy of deliberately planning and designing a product to have a limited useful life so that it becomes obsolete after a certain period of time.
In terms of financial strategy, businesses use it to guarantee continuous revenue flow. It creates a predictable stream of returning customers, which aids in forecasting revenues, budgeting, and business development strategies.
Moreover, the use of planned obsolescence proves influential in shaping customer behaviors and market trends. It encourages consumers to invest in newer models and updates, keeping the market alive and companies competitive.
While this policy feeds into our consumer culture and the drive towards innovation, it can also lead to wastage and environmental concerns, and in some locales, regulations are put in place to manage these adverse effects. Nevertheless, planned obsolescence remains a vital strategy for businesses navigating the dynamics of a fast-paced, highly competitive market environment.
Examples of Planned Obsolescence
Smartphone Industry: One of the most well-known examples of planned obsolescence is in the mobile phone industry. Companies, such as Apple and Samsung, frequently release new models with updates and features that make older models seem outdated. Additionally, with software updates, older smartphones often slow down, encouraging customers to purchase a newer version.
Car Industry: Many auto manufacturers have been known to implement planned obsolescence, where parts are designed to last a certain period of time, beyond which they fail. Consequently, consumers are required to either replace the parts or purchase a new vehicle altogether. This ensures continuous demand for their products.
Consumer Electronics: Household items like televisions, refrigerators, or washing machines also experience planned obsolescence. Manufacturers design these items with a “limited lifespan”, after which they need replacement. This model allows manufacturers to stay in business by regularly selling updated versions or replacements for these household items.
FAQ for Planned Obsolescence
What is planned obsolescence?
Planned obsolescence is a purposeful strategy to ensure the current version of a product will become out of date or useless within a known time period. This strategy spurs consumers to purchase the next product release, contributing to consistent recurring revenue for the product’s producer.
Why is planned obsolescence controversial?
Planned obsolescence is controversial because it raises ethical and environmental concerns. On the one hand, it pushes consumers to buy new products frequently, generating waste when the old ones are disposed of. On the other hand, it can be viewed as a manipulative marketing strategy that forces consumers to spend money unnecessarily.
What industries commonly use planned obsolescence?
Electronics, automotive, and fashion industries are some of the sectors where planned obsolescence is frequently observed. These industries regularly introduce new product lines with enhanced features or designs, rendering previous models obsolete.
Can planned obsolescence be beneficial?
Planned obsolescence can be beneficial when it serves to boost technological innovation and development. Newer models usually provide better functions, features, or designs that are more efficient or appealing to consumers. Therefore, while outdated products become obsolete, consumers benefit from improved product offerings.
Related Entrepreneurship Terms
- Product Life Cycle
- Consumer Demand
- Repetitive Consumption
- New Product Development
- Depreciation
Sources for More Information
- Investopedia: This website offers an extensive database of finance and investing terms, including planned obsolescence. Puzzle out your query and find more afield.
- The Balance: This site provides expert-driven financial advice and explanations on key terms such as planned obsolescence.
- Corporate Finance Institute: A leading provider of online financial education solutions. It harbors a vast library of resources including information on planned obsolescence.
- The Economist: A globally trusted source of financial information offering articles and explanations on a wide array of subjects, including planned obsolescence.
