This DesignChain article explores the design process involved in Apple's iPod. While specifics are limited, they discuss the basic design process that was involved with the iPod's creation. In an atypical move, Apple utilized a 3rd party, PortalPlayer, for the reference design.
In an effort to reduce costs and accelerate development, all components were off the shelf components... however, the design was created in an "outside-in" fashion:
Carey says the company had a vision of what the player should be and what it should look like. The subsequent design parameters were dictated by its appearance and form factor.