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EXCLUSIVE REPORT: Guidelines for New Product Development in Home Entertainment
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May 17, 2007, 09:55

By Devendra Mishra

If product innovation is the lifeline of business for sales growth and profitability, the recent IBM Summit for Consumer Electronics Emerging Technologies, held in the Bay Area in early May, could very well have been one of the most important conference events of the year. At the Summit, co-sponsored by the law firm Orrick, Herrington and Sutcliffe and IBM, George Bailey, General Manager of Global Electronics Industry at IBM, reminded a VIP audience of senior CE executives that perhaps more than any other industry, the consumer electronics industry relies on continuous innovation, and that to be successful, CE companies must focus on delivering integrated solutions to consumers, not just innovative products.
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At IBM’s Almaden Research Center in San Jose, California, where Big Blue delivers unsurpassed performance with ultrascale computing, Fernando Silva, the Director of Private Label Product Lines at Best Buy, delivered a keynote address that left no doubt in anyone’s mind that we live in a consumer-centric world, in which collaboration should drive innovation. At Best Buy, Silva explains, customer centricity means “treating each customer as a unique individual, meeting their needs with end-to-end solutions, and engaging and energizing our employees to serve them. It is our primary strategy for providing a differentiated experience for customers.”

By tuning in customers and employees more closely, Best Buy is benefiting from new ideas every day—ideas that in the past would not have made their way to headquarters and been implemented at other stores. Through the employees who work closest to the customers on a daily basis, the retailer has “discovered several material growth opportunities for the company. The opportunities with the highest potential include small-business customers, new services offerings and international growth, which we estimate are at least $230 billion markets in aggregate,” according to the 2007 Best Buy Annual Report.

For decades, consumer electronics manufacturers have focused on creating products and retailers have focused on selling them. Fernando Silva demonstrated that retailers are now moving into the manufacturers’ space in the uniquely inter-dependent world of today, and away from the manufacturing-centric world. Through better understanding of the end consumer, Best Buy is emerging as a new ally of manufacturers and technology product developers alike.

At Best Buy, Silva has assembled a team of engineers and technologists and product experts with 600 years of cumulative new product development experience from Apple, Xerox, Kodak and other leading R&D companies. In his words, “they receive, reiterate, vote and synthesize end-to-end solutions to improve the  lives of our customers by listening to them. It is the intersection of the three constituents - Best Buy (retailer, buyers and sales associates), Partner Suppliers (Fortune 500 companies and start ups) and Product Developers (Private Label Solution Providers) that determines what customer needs have to be met. Silva’s team, which invites input from approximately 120,000 sales associates in over 1,150 stores in the US, Canada and China, taps into the “one million hours spent daily by the sales associates wearing Blue Shirts who are now agents of our customers and not of product manufacturers as they used be in the past.”

In the supply chain, as the evolution takes place from “Technology to Ideation to Shelf,” the Blue Shirts are empowered to help identify the fundamental truth  - “who are we actually designing the product for? “

Silva believes that “the sales associates obtain customer feedback, intimately understand the customers’ needs and wants, and determine how this product will satisfy the desires of the customers. As a result, the Best Buy customer base has been segmented into basic lifestyle groups. The purchasing officer is identified for each segment and the associated purchasing index is developed. The data obtained from solicited inputs is collected into a data warehouse, analyzed and intelligence is then extracted for product development, product redesign, new business model development and new service offerings.

In addition to identification of new product needs of customers, existing products are redesigned for improved functionality and new service offerings are also launched. The results of this strategy are there for everyone to see with the emergence of Best Buy’s own product brands -- Geek Squad, Insignia, Dynex, Init and RocketFish.

Best Buy ended the fiscal year 2007 with 40 percent of its U.S. stores, operating under the consumer-centric model. The number of Geek Squad agents has grown to 5,000, and home theater installation services were brought in-house to provide a better and more consistent experience for customers. Memberships in the Reward Zone, the customer loyalty program, have reached 7.2 million, and as a result Buy has learned more about customer purchase patterns than ever before.

Silva pointed out that among the different channels of retail distribution,  the greatest advancement in private label products has been achieved by the grocery industry with nearly 30 percent of their total revenues now coming from private labels. Furthermore, according to Bear Stearns research, Europe leads the private label trend with 23 percent of total sales, followed by Canada with 20 percent and lagged by US with only 15 percent. As a result, Best Buy has decided to expand its private label business. The Best Buy executive articulated that the $36 billion, Number 1 retailer of consumer electronics believes that “our job is to innovate in the application of technology and it is not our place to create the technology. The Blue Shirts are engaged in product development to improve marketability and build world-class private labels.”  

The importance of new product development for true customer needs cannot be over-emphasized. At the Consumer Electronics Show in Las Vegas, companies debuted more than 20,000 new products. While revenues for the consumer electronics industry are up nearly 50 percent since 2001, net margins are still around 2 to 4 percent, per IBM’s George Bailey. For an industry projected to reach $200 billion by 2010, a 20 percent increase over 2005 revenues, the collaborative process of Best Buy may prove to be a huge differentiator as product innovation continues to be unleashed.

Bailey pointed out that the marketplace for consumer electronics retailers has undergone a significant concentration between 2001 and 2005; where in 2005 the top three retailers (Best Buy, Wal-Mart and Circuit City) accounted for 48 percent of the North American market –- an increase of 33 percent compared to 2001.

In this rapidly evolving CE marketplace, Best Buy is developing an extraordinary core competency for CE innovation by gathering and synthesizing customer intelligence that will advance collaboration with suppliers while building a huge competitive private label business for itself. Silva emphasized that Best Buy is providing “service which is always the co-production between the provider and the customer in a customer-centric environment where one must innovate to create new markets”.  
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