Moving in: electronics companies shift—with some pain—to the consumer world
The digital revolution taking place in the home is having an impact on the entire electronics ecosystem. All companies in the value chain need to make adjustments to play successfully in the consumer market. Learn from the companies that have been there, done that.
By Debra Bulkeley, Executive Editor -- EDN, September 4, 2007
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James Druckrey, an executive with Seagate Technology, faced his colleagues, many of whom were 20-year veterans with the disk drive manufacturer. The former president of Gibson Guitar's audio division, who had joined Seagate in 2005, was about to convince the executives that the cost of a special feature for a new consumer product in development was vital.
Druckrey talked about the "soul of the machine," the Bauhaus design philosophy, and the "dynamic reveal," or OOBE (out-of-box experience).
Recalls Brian Dexheimer, executive vice president and chief sales and marketing officer of Seagate, "The executives were like, 'What planet is this guy on? What do you mean 'soul of the machine'? And you are going to add to the cost? Are you kidding me?"
The product that Druckrey, senior vice president and general manager of Seagate Branded Solutions, described at the meeting last year is the Seagate FreeAgent, a line of external hard drives that began shipping this spring. One notable product feature: an amber light that glows along three sides of the slim, black disk drive, with the same glow for the Seagate logo on the front of the drive. It's the feature Druckrey lobbied for.
The meeting underscores the dramatic mind-set shift that Seagate management needed to make as it began selling to the consumer market. In selling to the business market, the company didn't think of its technology as anything more than hunks of plastic that get shipped around the world. All of that changes in the consumer market. "It came down to wanting the relationship with consumers to begin when they get home, not when they leave the store," Druckrey says. "That's a very different point of view from what the company was used to."
What Seagate and other technology companies have learned is that selling to the consumer world may feel like doing business on another planet. Business models get turned upside down as R&D moves aside for sales and marketing efforts, supply chain partners shift, and employees with retail experience are hired. More risk is introduced. The accustomed 3- to 5- to 7-year life cycles are replaced with 12- to-18-month (or even shorter) life cycles in the consumer market. For Seagate it meant adjusting to an OEM source supply chain when its core business owned everything—its design and manufacturing operations did it all.
The strategy that Seagate has in place appears to be working. Seagate's revenue from consumer products is less than 8% of total company revenue, but that's double what it was three years ago. "I wouldn't be surprised if it was 15% of total company revenue at the end of the decade," says executive VP Dexheimer. (See sidebar, "Lessons learned from Seagate Technology.")
This report looks at several factors that electronics companies need to consider as they move into the consumer marketplace, including how to mitigate risk in the supply chain, the tools that help more accurately track supply and demand, marketing strategies for an entirely new audience, and why companies need to look for different skill sets when hiring new employees.
B2C megashift
The big shift to the consumer market from the business market began about five years ago, when client-side technologies began to explode in the form of digital TVs, MP3 players, and 3G handsets, among other products.
Electronics companies have been serving the consumer market for decades—that's nothing new. What is new is the sheer number of companies that are now starting to feel the waters that are washing up on their shores from the digital revolution taking place in the home.
And while they're testing the waters, one fact is clear: The end-market shift that is moving to the consumer will create operational challenges for the semiconductor industry in the years ahead. Part of the reason for this, says John Ciacchella, a principal with Deloitte Consulting and leader of its technology industry group, is that there are new consumer markets coming online in China and India. For example, the GNP in China will equal that of the U.S. by 2020, and India's will equal that of the U.S. by 2050. "Not only is a shift happening in the consumer market but it's also adding a billion free-market consumers," he says.
Some of the challenges for the semiconductor industry, says Ciacchella, include shorter product life cycles and more seasonality, higher and more diverse design and customer service requirements, and simultaneous product introductions around the globe. The new operational requirements will include more-precise inventory management, dealing with more-fragmented and overlapping customer forecasts, delivering to distinct and growing customer types (OEMs, ODMs, ECMs), continued cost containment/reduction to maintain margins, and stronger management of a complex logistics network.
Statistics comparing the percentage of semiconductors used in consumer products today with those 10 years ago are hard to come by, because defining the consumer market is difficult, says Rob Lineback, senior market research analyst, IC Insights. "Because the buying influence of consumers has spread out, it's kind of hard to define the consumer market," says Lineback, who is doing a research paper on consumerization in the IC industry. "We're trying to get a handle on how much markets are shifting, from the business being the buyer to the consumer being the buyer."
For example, the PDA has been redefined, he says. "Many of those suppliers have gone for consumer customers. Many have refashioned the PDA, and the PDA function has been embedded in another product," he explains.
Another trend Lineback sees is that leading-edge technology is going into consumer products, which hasn't been the case in the past decade. "Panasonic announced that it had begun volume manufacturing of the first 45-nanometer IC product in June, a video IC that will be used in consumer products. This is surprising, because Intel is talking about being the first with 45 nanometers in production. Now a consumer product is getting the first 45-nanometer IC."
How companies are adjusting their business operations and management strategies to serve the consumer market varies, depending on what they are developing and who their customers are. The one constant, however, is that all companies need more knowledge of the consumer mind-set if they are going to be players in the market.
Says Mark Samuel, general manager of the Home Business Unit of NXP Semiconductors, "We trust that companies such as Samsung and Sony know the consumer market, but now we have to have a knowledge of consumer behavior that we didn't have to have before."
Although the payoffs can be big in the consumer market, there is also risk. The business-to-business market has relatively stable customers, whereas the consumer world tends to be winner-take-all, says Ciacchella. "The business-to-business market is all about performance. In the consumer market, fashion is as important as function."
That was the point Druckrey was making to his executives when he made the case for the FreeAgent's lighting feature and design. Result: Reviewers have called the FreeAgent's design "sleek," "stunning," and "elegant." How's that for a product coming out of a company traditionally known as a component manufacturer for Dell and HP?
Druckrey, coming from the retail side, knew that Seagate first needed to think of its disk drives as the consumer did—as a valued keeper of precious pictures and music. These had a value that was emotional—not just financial. He says one of the biggest challenges Seagate faced was understanding that "it's not about us."
"It's not about the speeds and feeds. It's about the young couple having their first baby, which leads to them to buy their first camcorder, which leads to large amounts of digital content and to the necessity to buy a product such as ours for the first time," he says.
The name a company gives a consumer product needs to be well thought out too. When Druckrey brought up this topic during his meeting on the new external disk drive that was ultimately named FreeAgent, one executive said, "Why not name it the Seagate Disk Drive?"
There's another wrinkle companies have to deal with in the consumer market: a different kind of competitive landscape.
"What we're finding in our studies and what people, the CEO in particular, are telling us is that they feel they are doing a good job with current competitors but not with the crossover players," says Deloitte's Ciacchella. "Cisco Systems is getting into the home phone business; Apple is getting into the phone business. These are companies they've never studied or tracked; they've never been in their industry. The competitive boundaries are becoming much more vague."
You are who you partner with
Although collaboration, trust, and flexibility always have been important qualities in business relationships in the electronics industry, they take on a more powerful meaning for companies selling in the consumer marketplace.
Tracking inventory is more critical as semiconductor companies in particular deal with OEMs and ODMs, says Ciacchella.
"Looking at the end-market view and consolidated forecasts is a real challenge for the semiconductor companies," he says.
Many companies use business intelligence platforms and advanced planning tools to keep on top of forecasting. Some of the tools they are using to augment their ERP (enterprise resource planning) systems include technology from E2open, Kinaxis, and i2 Technologies. Software-as-a-service (SaaS) and integration-as-a-service (IaaS) have emerged as delivery mechanisms (see related story, "Case Study: Demand-side forecasting in consumer electronics").
Consumer product companies outsource a big percentage of their manufacturing, which gives them less visibility into the supply chain. Also, global competition has increased and supply chains are now globally distributed. Whereas five years ago, monthly demand reporting was sufficient, now the "goal is to get on a weekly demand cycle," says Dave Haskins, CTO of Kinaxis, which offers its technology, RapidResponse,as an on-demand service.
"It's generally accepted now," he says. "The first thing you do is change from looking at the world in a monthly fashion to weekly."
But the forecasting tools are only as useful as the data entered into the system. Haskins is echoing the sentiments of many when he says, "There's a certain lack of trust in the integrity of the data itself." Along those lines, RapidResponse analyzes the robustness of the data in the system and issues a warning if it identifies anomalies. The tool allows the users to simulate various alternatives: What would the world look like if a plant shut down, for example? What would happen if a particular product increased in price by 20%? "We're finding that our customers want complete visibility and as much accuracy as they can get," Haskins says. "They need the ability to do simulations."
Outsourced supply chains are adding to the accuracy challenge. "The very traditional supply chain model is undergoing a revolution and becoming much more complex," Haskins says. With outsourced supply chains, "Contract manufacturers have to be responsive; they are going to have to respond with better information."
Don Alvine, vice president of supply chain management and chief procurement officer at LSI, couldn't agree more. "The old world is a 'vendor-bashing' mentality," he says. The new world is 'information sharing.'"
LSI, a supplier to the storage industry, has Seagate as a customer. "It is the best company in the world, and it is the most demanding company in the world," Alvine says. "It makes us a much better supplier. It understands where the supply chain is headed. It never says no to a customer, and it does that without building mass amounts of inventory."
Says Alvine, "Any inventory you don't need is evil."
Technology is an important component of how LSI mitigates uncertainty in the unpredictable consumer-driven world. The company uses it to manage order and forecast data as well as to link customer demand and supply. LSI is integrating its ERP system with E2open supply chain management software-as-a-service. LSI requires its suppliers to use E2open so it has accurate data for its forecasts.
Using business intelligence helps it manage uncertainty, he says. Part of the technology LSI uses is homegrown: A patent-pending software model developed in partnership with Lehigh University generates a report that looks at forecasts based on short and long time horizons (monthly, quarterly, yearly). It can graph what certain demand is over a short horizon and a long horizon, as a way to profile uncertain demand.
"We're trying to figure out the right amount of inventory to have on our books," he says. "What amount of materials do we need? We stage inventory at different positions, and we do that according to what comes out of the model."
LSI shares this information with its suppliers. The goal, Alvine says, is that "due to our sharing this level of information with them, they, in turn, will share information with us."
Inaccurate forecasting data can have dire consequences, says Charlotte Diener, senior vice president for global supply chain operations at On Semiconductor. "Everyone is worried about supply risk, but what is worse is demand risk."
One of Diener's customers forecast way too high, and its forecast never materialized. "We were ramping up our capabilities and our production, and our customer's forecast dropped like a rock," she says. "In one month, it looked like we had less than a week of product supply, and at the end, we had more than 40 weeks of supply."
On Semiconductor, which has seen its consumer business grow from 40% of revenue five years ago to 65% (excluding automotive) now, uses technology from i2Solutions to help it with supply flexibility. i2Solutions' Scenario Planner, for example, enables On Semiconductor to do range forecasting for the products it supplies to the consumer market, including power controllers, power management, and discrete and logic components.
"Product life cycles are so much shorter—it used to be two years, and now it could be six months," Diener says. "You don't know, when a product is introduced to the market, whether it's going to be successful."
Says Samuel of NXP Semiconductors, "The reality of the new world is that a lot more relationships need to be established. We are very heavily reliant on our partners. This is absolutely the new age of bringing products to market faster."
Act like a retailer
Although retailers know the tools of the trade when it comes to learning who uses their products, this is alien territory for the traditional electronics OEM. That's why some traditional business-to-business companies now selling to the consumer market are adopting retail marketing strategies.
Scott Birnbaum, vice president of Samsung Electronics' LCD Business for the Americas Region, recalls that when Samsung wanted to differentiate itself in the television market, the company sent employees to a furniture store and asked customers questions about their television likes and dislikes.
"We were the first company to look at the TV as a piece of furniture," Birnbaum says. "We took the television and made it a piece of art." One result of this philosophy is the Samsung Bordeaux LCD TV, introduced in the spring of 2006.
Seagate is another case in point: It is spending more than $1 million on a consumer market research project that will survey three thousand of its users worldwide. "We hope to derive a crisp profile of who uses our products," says Dexheimer. "All the things the consumer companies would know off the top of their head—that's what we want to learn."
Samsung performs extensive "market sensing" on a regular basis, "looking for the next big thing," Birnbaum says. He adds that an MBA student he hired reads blogs regularly to learn what consumers are saying about Samsung products and their competitors'. He's also on the lookout for what they want to see in a next-generation product. The company learns from all this and is able to make improvements, Birnbaum says.
NXP's Samuel says his group also visits blogs on a regular basis to keep on top of products on the market and also to scout for potential business opportunities. "We look at the blogs to see what a product couldn't do from a technology standpoint and to see how our technology could solve the problem. Then we can go to the company that made the product and say, 'We have the technology that could solve that problem for you that people were commenting on in the blog.' That's a good selling tool for us."
Companies throughout the value chain are also creating innovative ways to feel the pulse of the consumer market. NXP, for example, created a Connected Living Showcase in San Jose, CA, where it features consumer products incorporating NXP technology that will be available in the next 12 months.
Targeted at NXP customers, the showcase has had an average of four customers weekly visit it since it opened about a year ago, Samuel says. "As technology providers, we have to present a vision to our customers that they can take to their retail chain," he adds. "You can't show a technology that you can't fulfill for two or three years; you have to show something that you can produce quickly."
Other ways in which companies are adding consumer intelligence to their ranks is by hiring people from retail companies such as Best Buy, Sony, and Apple.
Industrial design, technical support, and a range of choices are what motivate consumers. So when a technology company in the business-to-business market decides to enter the consumer world, their current employees understandably don't have experience with the consumer mind-set. "Frankly, to solve that problem we had to hire people from consumer products," Seagate's Dexheimer says. "All of the stuff that touches the consumer, all of the outbound business, and the sales organization are completely different. We hired people who have spent their careers calling on retailers as opposed to OEMs."
Birnbaum notes that his group is hiring people with complementary skill sets to make for a diverse team. "If you look more for diversity of thought, you will be innovative," he says.
The new reality is this: For many companies that want to stay competitive, the consumer market is where they need to be.
Adds Dexheimer, "I don't care what business you're in—networking, processing. Your future is going to be driven by what's going on in the home."
Author information
You can reach Debra Bulkeley, executive editor for Electronic Business, at 781-734-8404 ordebra.bulkeley@reedbusiness.com.
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Lessons learned from Seagate Technology Walk into a Best Buy, and you'll likely see a Maxtor product near one from Seagate. That may not seem unusual, except that Seagate acquired Maxtor in 2005 and technology companies typically phase out acquired brands. Not Seagate, though, whose strategy was to take advantage of the two companies' synergies. Today each brand has its own specific target audience in retail outlets. Seagate is a different company today than it was 20 years ago, when it was known as a disk-drive supplier to OEM computer companies. When the first signs of the digital revolution started to appear in the home, about five years ago, the company realized that people would need to expand their storage capacities and that they would want to protect their valuable content. Those were the first signs that the company should get into the business of selling technology to consumers, recalls Brian Dexheimer, executive vice president and chief sales and marketing officer responsible for Seagate's market-focused organizations (Enterprise Compute, Personal Compute, Consumer Electronics, and Branded Solutions). What started with about 10 employees devoted to consumer-product development in 2003 has grown into Seagate Branded Solutions, with about 150. Although this is still a small number compared to the 150,000 employed companywide, Dexheimer says, the consumer business has had a huge impact on the company culturally. For instance, during the company's quarterly all-employee meetings, about half of the questions from the audience are about Seagate's branded business. "Our employees are really excited about the change in Seagate from a component provider to a company that has relevance in their neighborhood. Our employees feel more relevant—I see that," Dexheimer says. The journey in the consumer world has had its challenges, to be sure. Dexheimer offers a few tips for others to keep in mind if they embark on a similar journey:
"There are a lot of companies in Silicon Valley that need to make this transition and will really struggle with it," he says. "Even if you hand someone a blueprint on how to do this, you have to be able to let go of some of the paradigms." Dexheimer encourages his peers to take the plunge. "The great news is that many technology companies in the Valley that have grown have the opportunity to grow with the move to the home environment." —Debra Bulkeley |
