Sharks director of rugby Jake White conceded his team were outplayed and outsmarted by the Highlanders in Durban on Friday.
"We weren't at our best and they played really well against us - take nothing away from this performance by the Highlanders," White said.
"Sometimes when we needed to kick we ran, and sometimes when we needed to run we kicked."
The competition leaders missed a golden chance to consolidate their number one position on the overall standings against one of the worst New Zealand teams, going down 34-18, with the visitors dominating against their below-par hosts.
"It was tough. They bossed at the breakdown, they didn't allow us rhythm, they didn't kick out, they didn't give us any set-piece ball, the handling wasn't good."
Richard Buckman, Aaron Smith and Shane Christie all scored tries in the opening 40 minutes, before Malakai Fekitoa's superb solo second-half score wrapped up a bonus-point win.
Despite the Otago outfit dominating, the Sharks were kept in the game by the boot of rookie fly-half Tim Swiel, who kicked six penalties in total, right until the final 12 minutes.
"At 24-18 we still had opportunities," said White.
"We dropped an overlap on the left when it was three on one and we dropped one on the right hand side. We weren't as good as we should have been."
In their defence, the coastal side were dealt a blow before kick-off when both captain Bismarck du Plessis and Jean Deysel were ruled out through injury. Replacements Kyle Cooper and Ettienne Oosthuizen as well as S'bura Sithole and Jannie du Plessis all appeared to pick up knocks during the game.
"It's massive when you lose your captain and you lose the guy who sets up your whole scrum," said White.
"But what comes out of that is you start to realise how important certain players are and players who do get an opportunity need to be ready when they get called upon.
"I'm not saying anyone wasn't, but it gives us an opportunity in the next couple of rounds to make sure that we've got the right combinations going forward."
The result came at a critical time for the Sharks - in their final home match before they travel to Australia and New Zealand to face the Rebels, Brumbies, Crusaders and Blues.
"It's not an ideal way to set off on tour, but it's highly unlikely teams are going to be unbeaten throughout the competition," said White, whose side are now just a point clear at the summit.
"You've seen how tough this competition is and people have realised that no matter who you're play against, it's tough to win.
"When you win you take all the pleasantries and accolades that go with it but when you lose, you've got to dust yourself and get up."