By Jay Greene
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Torsten Valeur, one of Bang & Olufsen's top designers, sits in a windowless room in Gumi, South Korea, staring dumbfounded at a group of Samsung Electronics engineers and thinks, "Oh, s---." Valeur is designing a new high-end cell phone for B&O, the Danish company known for its cutting-edge consumer electronics, and Samsung, a partner providing mobile-phone technology. Valeur, here for a routine three-day product-update meeting, has just received terrible news. Without telling him, the Samsung engineers changed the screen on his phone from 2.1 inches to 2 in. Why? Because 2-in. screens are standard, and that's what is in stock. Worse, they've gone ahead and ordered thousands.
Valeur's vision for his objet d'art is shattered. A 2-in. screen, requiring a thick, black plastic frame, destroys the elegance of his new mobile phone. Everything from the cell phone's unique rotary keypad to the tiny motor that opens the clamshell depends on an innovative approach to conventional form. Valeur is asking himself: "Can I hide this problem? Can I cheat? Can I do something that the customer won't notice?" Finally, the designer turns to the Samsung engineers and tells them the standard 2-in. screens are unacceptable. Samsung will have to cancel the order and replace the screens, at a cost of $2 million, with his original design.
The engineers, surprised, rush out the door in search of a solution. They can't find one. "There was a half day's silence," Valeur recalls. Without an answer, and tired of drinking weak Korean coffee, he departs, flying back to Denmark, ready to kill a critical new product over a tenth of an inch of glass.
Perhaps the strangest part of this story is that Valeur doesn't even work full-time for B&O. He's one of a handful of contract designers who create the company's incredibly beautiful and very expensive products. Yet Valeur is empowered by Bang & Olufsen's chief executive to veto anything he doesn't like. All of the designers hired by the company have this power.
Bang & Olufsen is a business built on design genius, not more conventional design processes. Its product development is driven by a half-dozen or so creative individuals, not by managers. There is no other business model quite like it on the global scene. Only Apple Inc. (AAPL) comes close, and in that case it is the unique design talent of its CEO, Steve Jobs, working with a team led by Jonathan Ive, that gives us iPods and iPhones. Almost all other big corporations do design and innovation in a much safer way. They have long conversations with consumers and work collaboratively in creative teams, and do studies using corporate ethnographers. B&O simply bets on the insights and "feel" of a handful of designers.
Bang & Olufsen's model is a throwback to an earlier time when CEOs worked closely with gifted designers to differentiate their products in the marketplace. Think about the chairs Charles and Ray Eames designed for Herman Miller Inc. (MLHR) or Richard Sapper's ThinkPad laptop for IBM (IBM). Go back further and you have Raymond Loewy's iconic Coke bottle for Coca-Cola (KO) and Walter Dorwin Teague's Brownie Kodak (EK) camera. These products, of course, had their moment, but what is modern one day can quickly become outmoded the next. This is now happening to B&O's flagship products as digital technology sets a new norm. An early foray into digital music players flopped, failing to come even close to the iPod's success. The great challenge facing the company in the years ahead is to hold on to its eye-catching esthetics while incorporating the advanced technology that consumers have come to expect.
That said, B&O is still in a decades-long run as a consumer-tech superstar. It is the world's only big luxury electronics maker. Great design, mixed with robust technology, allows it to charge obscene sums to well-heeled consumers who want to buy originality and quality from an exclusive brand. That's how the company (56 stores in the U.S., 1,400 worldwide) generated $96.6 million in operating profits before taxes in the fiscal year that ended May 31, up 22% from a year earlier. That gave B&O gross margins of 46.6%. Competing on price and product variety would be a dangerous game. The company is a pipsqueak in a consumer-electronics world dominated by giants such as Sony (SNE), Samsung, and Royal Philips Electronics (PHG). B&O rang up $831 million in sales in fiscal 2007, just a bit more than 1% of Sony's 2006 revenue. Like Apple, it brings out very few products a year. In fiscal 2007 it released just 10 new models. But unlike Apple, B&Okeeps its handful of products on the market for up to a decade or longer without abandoning them for new models or cutting their prices. Case in point: Its BeoLab 8000 speakers, which sold for $3,000 a pair when introduced in 1992, are still being sold today--for $4,500.
B&O's strategy demands uniquely elegant designs. Above all, it requires an obsession with detail. Take Valeur's cell phone, now on the market as the Serene. (Yes, the Samsung engineers came up with 2.1-in. screens.) It isn't your run-of-the-mill Motorola (MOT) RAZR. When closed, the Serene is a black flip phone in the shape of a trapezoid. A nudge with a fingertip engages a tiny motor that gradually peels open the phone until, fully displayed, it resembles a bird in flight. That 2.1-in. screen sits on the bottom half of the phone so it won't get smudged by your cheek. And rather than displaying rows of numbers, the keypad is designed in a circle, evoking memories of rotary-dial phones.
WHAT CONSUMERS DON'T KNOW
The tall, slender 41-year-old Valeur looks much younger than his years and has short, dirty-blond hair. One gray spring morning, he is wearing a designer's uniform: collarless gray shirt, dark gray pants, black shoes. Soft-spoken and polite, he surprises with his uncompromising demand for perfection. Valeur originally hated the sound of the engine that opens the phone. It made a whizzy noise like a zipper. So he slowed the engine down and even altered the size of the tiny gear teeth to generate a more sedate and seductive whir. Screen size, engine sound--individually, each of Valeur's demands might seem like fetishes. But collectively these details are what make B&O products succeed as luxury items.
Valeur's design allowed B&O to price his Serene cell phone at a lofty $1,275. The company's BeoLab 5 stereo speakers, rocket ship-like towers that self-equalize, creating crystal clear sounds at a heart-pounding 2,500 watts per speaker, sell for $19,700 a pair. And its new BeoVision 9 TV, a 50-in. plasma-screen wonder that swivels to adjust itself to your viewing position, runs $19,900.
B&O's business-by-genius M.O. is a fragile model. It depends on the instincts of a handful of quirky and creative individuals and the ability of executives to manage them. Sitting in a showroom of B&O products in the company's glass-and-stone headquarters, known as The Farm--near founder Svend Olufsen's own farm in the remote Danish town of Struer--CEO Torben Ballegaard Sorensen explains how B&O's designers operate. They don't, for example, do even the basic market research ethnography common among consumer-oriented companies. Sorensen says consumers often don't really know what they want. Instead, B&O designers intuit the products that will fly. "[Our] ideas...are not the result of market analysis but rather a deep understanding of how our consumers live," says Sorensen.
That kind of intuition can get you into trouble. A business model based on it has real risks. Most companies design their products and services using teams that include engineers. Design niceties are sometimes wrung out in the collaborative process, but production problems are often sidestepped. At B&O, the designers dominate. Far from being team activities, design and engineering are separate functions. Designers do their creative thing and then tell the engineers to execute. The downside: costly failures and delays when design ideals can't be matched with real products.
AN ELECTRONIC MASTERWORK
The problems creating the Serene cell phone stemmed from working that way. But those troubles were minor compared with what happened to one of B&O's most iconic products, the BeoSound 9000, a six-CD player that displays the row of discs through a tinted glass window. The 3-ft.-by-1-ft. device, which can hang from a wall vertically or horizontally, has a mechanism that zips up and down to play each disc. In a living room or den, it's a dazzling performance.
The BeoSound 9000 was the brainchild of David Lewis, a designer whose creations, more than any other's, are responsible for the aura around the Bang & Olufsen brand. The proud and occasionally gruff Lewis has been knighted by Queen Margrethe II of Denmark for his design work, and three of his creations are part of the Museum of Modern Art's permanent collection in New York. With thick, wavy silver hair and matching mustache and beard, Lewis wears rectangularly framed glasses and buttons his shirt to the top with no tie. He is the image of the cool designer, and when he is not working for B&O, he designs everything from kitchen appliances to dental equipment for other companies.
The story of the BeoSound 9000 begins with Lewis in the 1990s lamenting the loss of beautiful album art as CDs began to replace LPs. "I was sour that something had disappeared," he says. He had a vision for a CD player that would display six CDs facing people so audiophiles could see and appreciate their labels. The problem was that no mechanism existed to move the player from one disc to the next in the way he envisioned.
Lewis conceived of the BeoSound 9000 without even consulting B&O's engineers. When he turned his idea over to them, they couldn't build it. It took two years for them to come up with the technology to make his concept work. The BeoSound 9000 finally came out in 1996, and even today there's no comparable CD player out there. It looks as avant-garde now as it did then, a primary reason why, 11 years after its release, B&O can continue to price the CDplayer at $4,750.
Giving that kind of clout to designers represents a power shift that would frighten executives at other companies. Harvard Business School professor Robert D. Austin, who teaches a class called "Managing in the Creative Economy" and has studied the high-end consumer-electronics company, says it shouldn't. B&O offers a lesson in how to compete in an era when globalization and commoditization are putting pressure on costs like never before. "If they're not already confronting this question about how they can get more margin, they will," Austin says of executives at other companies. Already, some of the biggest names in retailing are figuring that out. Target Corp. (TGT), for instance, has lined up designers such as Isaac Mizrahi to make its products more upscale and boost profit margins.
B&O'S DIGITAL DIVIDE
The B&O Way, of course, requires bona fide geniuses. And they tend to be in short supply. At B&O, no designer is more identified with the company than Lewis. The 68-year-old Brit studied at Central School of Art & Design in London, since renamed Central Saint Martins College of Art & Design. He originally hoped to be a furniture designer. When the class he wanted was full, Lewis opted for industrial design. In the early 1960s he moved to Copenhagen to be with his Danish wife, Marianne, and got a job working for Jacob Jensen, who was then a B&Odesign legend. Lewis gradually became B&O's top design gun, creating the vast majority of the company's portfolio for the last four decades.
Replacing top talent is always difficult, and replacing Lewis is proving problematic. "He's not that young anymore. We have to have a successor to him," says Flemming Moller Pedersen, director of Idealand, the B&Ounit that works as a liaison between the contract designers and the engineers. In an effort to identify new blood, Pedersen invited six other outside designers in the spring of 2004 to gin up proposals for a new TV for the European market. Lewis caught wind of the competition and pitched his own concept, unsolicited. When it came time for Pedersen to pick a winner in a blind selection, Lewis' design won.
But Lewis hasn't been able to help the company transfer its product design excellence to the digital world. Entertainment is already digital, with music stored on home PCs and movies starting to pour through the Internet onto screens big and small. TVs have gone digital as well. Brushed-aluminum TV frames and pleasant-sounding motors mean little if the products can't deliver the required digital experience. B&O needs new kinds of geniuses for the 21st century, those with expertise that its current designers have yet to acquire.
Bang & Olufsen has already stumbled. Take the digital music player. Even the company's loyal cognoscenti prefer Apple's iPod, with its elegant design and easy interface, to the $460 BeoSound 2--conceived by none other than Lewis in 2002. BeoSound 2 has been, by all accounts, a dud. Lewis says his mistake was not appreciating how quickly digital memory would grow. He figured with 50 songs on a device, the amount the original memory card would hold, consumers wouldn't need a screen to navigate through their music. Instead technology moved fast, memory capacity exploded, and people wanted to carry around a lot more music than just 50 tunes. B&O won't divulge sales data for the BeoSound 2, but both Lewis and Sorensen acknowledge it is doing poorly. B&O is only now introducing BeoSound 6, a new digital music player that holds about 1,000 songs and comes with a screen. The $650 stainless steel device is designed to have an ageless feel to it, like a Dunhill lighter.
The BeoSound 2 bomb revealed that the company's designersdidn't understand rapidly changing digital technology. This dearth of knowledge led to the launch of a skunkworks operation in late 2003 called IdeaLab. The goal is to replicate B&O's design expertise in the world of digital products. "My job is to make sure that [design excellence] is still valid in the new world," says Christopher D. Sorensen, the American who runs IdeaLab. Sorensen, who previously worked for the consulting firm Accenture Ltd. (ACN), has built IdeaLab into an 18-person operation. Its mission: Come up with breakthrough digital concepts that can be turned over to designers to create new product masterpieces. Like Apple's iPod.
So far, the going has been slow. Lewis doesn't have much interest in working with the new digital group. "They have their own agenda," he grouses. After four years, IdeaLab is about to find out how good it is at applying B&O's design genius to the new world. In the coming year it plans to introduce a family of products, internally dubbed A18. They shoot music from one digital device to another around the house. Executives acknowledge it will have similarities to the critically acclaimed Sonos Digital Music System, already on the market. Last year, IdeaLab's Sorenson discussed the concept for the A18 with a handful of designers (not Lewis), hoping one would come up with a B&O-flavored product. Anders Hermansen, who fashioned the company's hot-selling $160 A8 earphones, wrestled for weeks with the concept. Then, while he was resting on the ground in a forest, as he often does to ponder design problems, the solution came to him. "There was no other way of seeing it," recalls Hermansen. "It was so clear to me."
Hermansen rushed back to his studio north of Copenhagen and worked up a prototype through the cold January night with a colleague. When it was finished at 4 a.m., he jumped into his car, drove the four and a half hours to Struer, and showed up at Pedersen's office unannounced just as the workday was beginning. "This one was great," Pedersen says, describing it as less classically B&O and a bit more wild in its design.
As beautiful as the A18 prototype was, though, it had a problem. Hermansen isn't particularly tech-savvy (he bought his first PC last December), and the controller on his A18 came with just one button, making it difficult to wade through a music library. Hermansen resisted adding more. "For me, it was not natural with all those buttons," he says. He envisioned using the controller with one hand, a glass of wine in the other. "It should be possible to handle the product in a simple way," he argued. In the end, Hermansen reluctantly added another two buttons without harming the integrity of his creation, which hits the market next spring.
Apple, of course, faced a similar problem with its iPhone and solved it elegantly by using new "touch" software to do away with buttons entirely. B&O hasn't yet mastered this skill of combining digital and industrial design. Back when David Lewis emerged as B&O's primary designer his strength in industrial design meshed perfectly with the analog world of entertainment. Now B&O needs a genius who can create for the digital world. "We have new customers," says B&O Chief Technology Officer Peter Petersen. "We will need new designers."
Greene is BusinessWeek's Seattle bureau chief.