the abandonment of a product or asset because of the loss of its value through outdated functionality.
Functional Obsolescence Details
The word obsolescence means disuse, discontinuance, and obsoleteness. The term functional refers to the ability of a product to perform its normal operations. When those two words are combined, they refer to an abandoned product because it’s too old, too inefficient to perform, or replaced with something better.
A product or asset always has value because it serves a purpose or function. As time passes, new technology developments produce new, more efficient products. Market anomalies, cultural preference, and environmental impact can also cause the product to be functionally obsolete.
An outdated product will cause more problems in the long run. Old and inefficient machines tend to consume more time and energy to operate, increasing operating costs. It also has less durability, so you have to spend an extra maintenance fee to keep your machine healthy. The essential part is profit—old products produce less profit for the owner. If a product costs you time and money more than it can generate, why even keep it?
Real-World Example of Functional Obsolescence
Functional obsolescence doesn’t apply only to old products, but it also applies to misplaced or misconfigured products. A bicycle is a valuable product; it’s a transportation tool that doubles as exercise equipment. However, a bike is not functional/useful in a country where bike lanes are non-existent, like in most developed countries. As a result, cycling becomes a dangerous and problematic activity. So, most developed countries use motorcycles because they're relatively cheap, fast, and readily available.
Consumer electronics is the fastest growing industry on earth. Massive technology leaps happen every year or so. It’s easy to buy the latest and greatest smartphone, only to be technologically overtaken by a newer smartphone a few months later. However, one electronic product is quite resistant to functional obsolescence—a personal computer (PC). With a PC, you can choose which part you need improving the most and then buy that individual part, making upgrading easier and less expensive, unlike smartphones where you need to buy the entire thing.
The real estate market is a high-stake business where a tiny mistake could cost you millions. Functional obsolescence is one of the most important deciding factors for buying real estate. A neighborhood has various intrinsic properties: cultural preference, age groups, ethnicity, job groups, economic policies, and nearby living facilities. The function of your real estate must match with the aspects of the environment around your real estate. Nobody will buy an expensive mansion in a low-income area, even though it's in perfect condition. The people around your house won’t have enough money to purchase the estate, let alone maintain it.
Types of Functional Obsolescence
There are two types of functional obsolescence. The first one is called curable obsolescence, a scenario that takes a reasonable amount of resources to fix. Like the PC example above, when you have a broken hard disk, you could buy a new hard disk for a fraction of your PC's price, plug it in, and your problem is solved.
Meanwhile, incurable obsolescence is a scenario that takes an unreasonable amount to fix, or it isn't possible. For example, you want to buy a slightly broken-down house with a classic Dutch style. However, since your neighborhood houses follow the modern minimalist style, your traditional Dutch-style home doesn’t fit in at all. To successfully resell the house, you need to destroy 95% of your house, then rebuild it with a new style. Even if you fully renovate the home, the selling price won’t be enough to recoup that renovation cost. It’s simply not financially viable.
Significance of Functional Obsolescence
The primary reason for functional obsolescence is change. Life is a state of constant struggle against the environment. Humans need to adapt—change their behaviors, adjust diets, move places. But we’re not Neanderthals anymore. We invent things to deal with our problems; technological advancement brings rapid change to our society. As a result, functional obsolescence is very prevalent.
Functional obsolescence serves as a primary risk assessment before buying products or assets. Take a good look at the product and ask yourself these questions: is it in good condition? Does it fit your criteria? How long will it stay functional? What’s the worst-case scenario? And finally, deliver your final verdict.
Functional vs. Economic vs. Physical Obsolescence
The three types of obsolescence are often mistaken for one another. Functional obsolescence is the loss of value because of the degradation of functionality.
Economic obsolescence is the loss of value because of external economic factors. The unpredicted violent tides of the stock market can cause a company to bankrupt in mere days. New legislation posed by the government could significantly limit the operation of a particular company. The sudden loss of resources or labor could massively disrupt the supply chain, causing product shortage.
Physical obsolescence is the loss of value due to physical deterioration. A well-worn shoe indicates that it has served its purpose bravely, but it holds no value anymore. A poorly maintained building could cause its roof to fall off, wall paints to peel off, its tenants moving away, and ultimately reducing its value significantly. The main difference is that physical obsolescence tends to happen because of the lack of care and maintenance, and functional obsolescence happens because of rapid technological advancement.