George Bailey
IBM Business
Consulting Services
A recent survey by IBM showed that 55 percent of consumers planned on purchasing consumer electronics devices this holiday shopping season, proving that consumer electronics are the hottest items in market today. The Consumer Electronics Association (CEA) estimates that consumer electronics will top $130 billion in the United States in 2006 and grow more than twice the current rate of GDP growth in the United States over the next four years.
Despite this, consumer electronic companies have not been able to capture the profit margins of a hot growth industry. What's more, the revenue is still spurred by those "technology hungry customers" and not by the "smart shopper" who is expected to dominate the future market. How can the consumer electronics industry adapt itself to take advantage not only of a renaissance period of growth and rapid adoption of innovative technology but also generate real profits?
The Ghost of Christmas Past
The holiday surge for the consumer electronics industry is a fairly new phenomenon. Historically, consumers had been priced out of giving electronics as a holiday gift. Manufacturers did not reap the profits of a high-volume, low-cost market, but they enjoyed elongated product lifecycles that often extended into years.
Look at the life of the VCR--when it hit the market in 1972, it sold for over $100. In fact, up until 5 years ago, it still sold in that price range. But, in comparison, the DVD player--which came to market in 1997--can already be bought for under $50. These elongated product lifecycles allowed manufacturers to adjust pricing to increase demand without having to invest in extensive innovation.
The sales channels of Christmas Past were also much different with big box retailers still emerging and specialty electronics retailers dominating the market. Competition for shelf space was limited and a differentiation between brands was much easier to market. In fact, brand was king in the world of Christmas Past.
The Ghost of Christmas Present
Today, consumer electronic companies are operating in a whole new world. Product lifecycles have shifted from years to months, there is disintermediation in traditional sales channels and consumers are focused on price. Innovation is happening in pockets and those companies are soaking up the profits while they can. For most companies, the last three months of the year are critical for them as they roll out new products in time for the holiday shopping season.
Today, much of the pricing power resides in the retail channel. Consumers have feasted on electronics products over the past five years forcing intense competition in the retail channel. This competition has transferred into pricing pressure and a volume demands to make up the difference.
Risks have been taken of late by low-cost direct retailers to move into the consumer electronics space. Their results have been mixed with their brands and delivery models not winning over customers in mass. The retail channel is the king world of Christmas Present.
The Ghost of Christmas Future
The Christmas of the Future will feature consumers seeking devices that easily interoperate with each as convergence becomes critical. Consumers already are telling the market they want multi-function devices (a recent IBM survey showing that two-thirds of buyers are seeking such features). With convergence comes the need for improved service because the level of product sophistication is sure to increase.
Companies will need to concentrate on core competencies, and then form teams across its divisions to drive down costs. By concentrating internally on those parts of the business that provide competitive advantage, companies can benefit from using external resources to perform functions from travel expense management to design engineering This will then allow them to focus on delivering breakthrough innovations in the marketplace.
The industry is suffering because it's focused on innovation through synergy, the dated concept that 1 + 1 = 3, implying that the combination of two things provides more than additive value. One way to move beyond the traditional business model is for companies to focus on creating Meta-value. This is the idea that the convergence and integration of technologies, devices, services and content go beyond synergy.
By contrast, meta-value is the notion that the result can include completely different, emergent properties. For instance, combining two hydrogen atoms with an oxygen atom doesn't merely create three atoms, it creates wetness.
Done correctly, this business model optimization will likely lead to industry consolidation, as emerging technologies continue to create previously unthinkable partnerships and joint ventures. Today's consumer electronics players need to think very carefully about how to create the Meta-value of tomorrow. It is only through an outside-in customer-centric view of the world that Meta-value can truly be discovered. The traditional players risk becoming ghosts like Jacob Marley who carry their out-dated, technology-focused business models as if they were the chains of their sins. The companies that can create Meta-value will be the kings in the world of Christmas Future.
Some content and ideas from this article appear in the forthcoming book "Irresistible! Markets, Models and Meta-Value in Consumer Electronics" by Pearson Publishing and IBM Press.
biography
George Bailey is an
IBM Global Electronics leader for IBM Business Consulting Services and co-author of "Irresistible! Markets, Models and Meta-Value in Consumer Electronics."
