Jan Chipchase is writing a series on Design research in big corporations. In Part 2: A Backgrounder for Corporate Design Research he succinctly captures the benefits that Design research methodologies have over traditional Market Research methods:

The basic premise of design research is that spending time in the contexts where people do the things that they do can inform and inspire the design process with a nuanced understanding of what drives people’s behavior “” which can then be used as a foundation for understanding and exploring the opportunities for new products and services.

I don’t think you can overstate the value that in-person, observational research brings to product design.