INTEL Knows Best?
A Major Marketing Mistake
Problem Statement
When Thomas Nicely, a mathematician at Lynchburg College in Virginia, first went public
with the fact that Intel's new Pentium chip was defective Intel admitted to the fact that
it had sold millions of defective chips, and had known about the defective chips for over
four
months. Intel said its reasoning for not going public was that most people would never
encounter any problems with the chip. Intel said that a spreadsheet user doing random
calculations would only have a problem every 27,000 years, therefore they saw no reason
to replace all of the defective chips. However if a user possessed a defective chip and
could convince Intel that his or her calculations were particularly vulnerable to the
flaw in the defective chip then Intel it would supply those people with a new chip.
This attitude of 'father knows best' fostered by Intel created an uproar among users and
owners of the defective chips. Six weeks after Mr. Nicely went public, IBM, a major
purchaser of Pentium chips, stopped all shipments of computers containing the defective
Pentium chips. Intel's stock dropped 5% following this bold move by IBM. IBM's main
contention was that it puts its customers first, and Intel was failing to do this.
Intel's handling of this defective chip situation gives rise to many questions. During
the course of this paper I will address several of them. The first of which is how did a
company with such a stellar reputation for consumer satisfaction fall into the trap that
the customer does not know best? Secondly, what made this chip defect more of a public
issue than other defective products manufactured and sold to the public in the past?
Finally, how did Intel recover from such a mistake? How much did it cost them and what
lessons can other companies learn from Intel's marketing blunder so that they do not make
the same mistake?
Major Findings
Intel is spearheaded by a chief executive named Andrew Grove. Grove is a "tightly wound
engineering Ph.D. who has molded the company in his image. Both the secret of his
success and the source of his current dilemma is an anxious management philosophy built
around the motto 'Only the paranoid survive'." However, even with this type of
philosophy the resulting dominance he has achieved in the computer arena cannot be
overlooked. Intel practically dominates the computer market with $11.5 billion in
sales. Intel has over 70% of the $11 billion microprocessor market, while it's Pentium
and 486 chips basically control the IBM-compatible PC market. All of these factors have
resulted in an envious 56% profit margin that only Intel can seem to achieve. So what
did Intel do to achieve this sort of profit margin?
In mid-1994 Intel launched a $150m marketing campaign aimed at getting consumers to
recognize the Pentium name and the "Intel Inside" logo. In order to achieve this goal of
brand recognition Intel advertised its own name in conjunction with the "Intel Inside"
logo and stated 'with Intel Inside, you know you have got. . . unparalleled quality'.
This provided immediate name recognition for the company and led the consumers to
associate Intel with high quality computers. Then Intel went the extra mile in the
marketing world and spent another $80m to promote its new Pentium chips. The basis for
this extra $80m was to "speed the market's acceptance of the new chip". The marketing
campaign was a success. Intel had managed to achieve brand recognition. "Once the
products were branded, companies found that they could generate even higher sales by
advertising the benefits of their products. This advertising led consumers to regard
brands as having very human personality traits, with one proving fundamental to brand
longevity -- trustworthiness." Consumers readily identified a quality, up to date
computer as one with a Pentium chip and the 'Intel Inside' logo stamped on the front.
This "push" marketing strategy of Intel totally dominated the market, thus forcing the
Pentium chip to the forefront of the computer market, all at the expense of the cheaper
486. This "push strategy" of Intel made it plainly clear to its purchasers that Intel
was looking out for number one first and its purchasers such as Compaq and IBM second.
Making the Pentium chip the mainstay of the computer industry was the goal of Intel, but
a goal that would later come back to haunt them for a brief period of time.
Throughout the history of the computer industry many manufacturers have sold defective
products. According to Forbes journalist Andrew Kessler, "Every piece of hardware and
software ever shipped had a bug in it. You better get used to it." Whether or not
'every' piece ever shipped has had a bug is debatable, but there have been numerous
examples of valid software bugs. For example Quicken 3.0 had a bug that resulted in the
capitalizing of the second letter of a name incorrectly. Intuit, however, handled the
situation by selling an upgraded version (Quicken 4.0) which fixed the problem, and left
the consumer feeling as though he or she had gotten an upgraded version of the existing
program. In essence Intuit had not labeled the upgrade as a debugging program, therefore
it had fixed the problem and satisfied the customer all at the same time. While Intuit's
customers were feeling as though they had a better product by buying the upgrade, Intuit
was padding its pocket books through all of the upgrade sales. Other examples of
companies standing behind their products are in the news week after week. Just a few
years ago Saturn, the GM subsidiary, sent thousands of cars to the junkyards for scrap
metal due to corroded engines, a result of contaminated engine coolant. Johnson &
Johnson, the maker of Tylenol, recalled every bottle of medicine carrying the Tylenol
name and offered a 100% money back guarantee to anyone who had purchased a bottle that
might be contaminated. The precedence was already set, so why would a company with the
reputation of Intel fail to immediately replace all of the defective chips it had sold?
Furthermore, why did Intel not come forth immediately when it first discovered that its
chips had a problem?
Intel's engineers said that the defective chips would affect only one-tenth of 1% of
all users, and those users would be doing floating-point operations. (Floating point
operations utilize a matrix of precomputed values, similar to those found in the back of
your 1040 tax booklet. If the values in the table are correct then you will come up with
a correct answer. This was not the case with the Pentium. A table containing 1066
entries had five incorrect entries, resulting in certain calculations made by the Pentium
chips to be inaccurate as high as the fourth significant digit.) Considering the low
number of people that the chip would supposedly affect and the high cost ($475m)
associated with replacing the chips, Intel decided a case by case replacement policy "for
those limited users doing critical calculations". Intel's VP-corporate marketing
director, Dennis Carter, stated, "We're satisfied that it's addressing the real problem.
From a customer relations standpoint, this is clearly new territory for us. A recall
would be disruptive for PC users and not the right thing to for the consumer". This
policy infuriated the millions of Pentium purchasers who had bought a PC with a Pentium
chip. Word spread like wildfire throughout the consumer world that Intel had sold a
defective product and was now refusing to replace it. This selective replacement policy
is a "classic example of a product driven company that feels its technical expertise is
more important than buyers' feelings". Intel was faced with a decision. Should they
take the attitude of brand is most important and we will take all necessary action to
preserve it or take the attitude of what would be the monetary cost of doing the right
thing and replacing all of the defective chips, and would it be worth it? Initially they
decided that the monetary cost of replacing all defective chip would not be cost
efficient due to the sheer numbers involved. Intel had sold an estimated 4.5 million
Pentium chips worldwide, and approximately 1.9 million in the U.S. alone. Intel later
reversed its selective replacement policy (Intel knows best attitude) and came out with a
100% replacement policy. What was the reasoning behind this change of attitude at
Intel?
As a result of the selective replacement policy, IBM announced it would stop all
shipments of PCs containing the flawed chips. This combined with the public outcry at
having spent thousands of dollars for PCs that did not work as advertised, and the
reluctance of corporate users of PCs to purchase new computers resulted in Intel changing
its public policy concerning the defective chips. Intel's new policy was to offer a
100% replacement policy to anyone who desired a new chip. This policy entailed either
sending replacement chips to those users who wanted to replace the chip themselves, or
providing free professional replacement of the chip for those who did not feel
comfortable doing it themselves. Intel's new policy was in line with public
expectations, but it had been delayed for several precious weeks. So one might ask,
"What did this delayed change in attitude cost Intel in terms of dollars and repeat
customers?"
The resulting costs to Intel were enormous in some respects, but almost negligible in
others. Intel's fourth-quarter earnings were charged $475m for the costs of replacing
and writing off the flawed chips. This was 15% more than analysts had predicted.
Fourth-quarter profits dropped 37% to $372m. This was a sharp drop in profits, but
$372m is still a number to be reckoned with in the fast paced industry of computers. So
did this drop in profits mean that Intel was losing its edge? I tend to think not, since
Intel reported that the sale of Pentiums had doubled between the third and fourth
quarters, thus lifting revenues in 1994 to $11.5 billion, a 31% increase. Apparently
consumers rallied around the new replacement policy and continued to purchase the Pentium
equipped computers at a very fast rate, despite the initial reaction of Intel towards
replacing the defective chips. This renewed faith was not regained overnight, but
nevertheless it happened, therefore Intel is unlikely to lose its commanding lead in the
industry. So what type of assurance was it that led to this renewed faith in Intel?
Following Intel's announcement of its 100% replacement policy for the defective chips it
recalculated its replacement policy on all future defective products. Intel realized
that its "fatal flaw was adopting a 'father knows b
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