INTEL Knows Best?

A Major Marketing Mistake

Problem Statement
When Thomas Nicely, a mathematician at Lynchburg College in Virginia, fi
rst 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 woul
d never encounter any problems with the chip. Intel said that a spreadsheet use
r doing random calculations would only have a problem every 27,000 years, theref
ore 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 calculation
s were particularly vulnerable to the flaw in the defective chip then Intel it w
ould 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 chi
ps. 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 conten
tion 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 que
stions. During the course of this paper I will address several of them. The fi
rst of which is how did a company with such a stellar reputation for consumer sa
tisfaction fall into the trap that the customer does not know best? Secondly, w
hat made this chip defect more of a public issue than other defective products m
anufactured 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 compa
nies learn from Intel's marketing blunder so that they do not make the same mist
ake?
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. Bot
h 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'." How
ever, even with this type of philosophy the resulting dominance he has achieved
in the computer arena cannot be overlooked. Intel practically dominates the co
mputer market with $11.5 billion in sales. Intel has over 70% of the $11 billio
n 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 ach
ieve this sort of profit margin?
In mid-1994 Intel launched a $150m marketing campaign aimed at getting c
onsumers 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 conjun
ction with the "Intel Inside" logo and stated 'with Intel Inside, you know you h
ave got. . . unparalleled quality'. This provided immediate name recognition f
or the company and led the consumers to associate Intel with high quality comput
ers. Then Intel went the extra mile in the marketing world and spent another $8
0m to promote its new Pentium chips. The basis for this extra $80m was to "spee
d the market's acceptance of the new chip". The marketing campaign was a succe
ss. Intel had managed to achieve brand recognition. "Once the products were br
anded, companies found that they could generate even higher sales by advertising
the benefits of their products. This advertising led consumers to regard brand
s as having very human personality traits, with one proving fundamental to brand
longevity -- trustworthiness." Consumers readily identified a quality, up t
o date computer as one with a Pentium chip and the 'Intel Inside' logo stamped o
n the front. This "push" marketing strategy of Intel totally dominated the mark
et, thus forcing the Pentium chip to the forefront of the computer market, all a
t the expense of the cheaper 486. This "push strategy" of Intel made it plainl
y clear to its purchasers that Intel was looking out for number one first and it
s purchasers such as Compaq and IBM second. Making the Pentium chip the mainst
ay of the computer industry was the goal of Intel, but a goal that would later c
ome 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 use
d 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 Qui
cken 3.0 had a bug that resulted in the capitalizing of the second letter of a n
ame 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 ess
ence 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 Intui
t's customers were feeling as though they had a better product by buying the up
grade, Intuit was padding its pocket books through all of the upgrade sales. Ot
her examples of companies standing behind their products are in the news week a
fter week. Just a few years ago Saturn, the GM subsidiary, sent thousands of ca
rs to the junkyards for scrap metal due to corroded engines, a result of contam
inated engine coolant. Johnson & Johnson, the maker of Tylenol, recalled eve
ry 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? Furthermor
e, why did Intel not come forth immediately when it first discovered that its ch
ips had a problem?
Intel's engineers said that the defective chips would affect only one-t
enth of 1% of all users, and those users would be doing floating-point operation
s. (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 th
at the chip would supposedly affect and the high cost ($475m) associated with re
placing the chips, Intel decided a case by case replacement policy "for those li
mited users doing critical calculations". Intel's VP-corporate marketing dire
ctor, Dennis Carter, stated, "We're satisfied that it's addressing the real prob
lem. 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 cons
umer world that Intel had sold a defective product and was now refusing to repla
ce it. This selective replacement policy is a "classic example of a product dr
iven company that feels its technical expertise is more important than buyers' f
eelings". Intel was faced with a decision. Should they take the attitude of b
rand is most important and we will take all necessary action to preserve it or t
ake 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 cos
t 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 atti
tude) and came out with a 100% replacement policy. What was the reasoning behin
d 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 p
ublic outcry at having spent thousands of dollars for PCs that did not work as a
dvertised, and the reluctance of corporate users of PCs to purchase new computer
s 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 u
sers who wanted to replace the chip themselves, or providing free professional r
eplacement of the chip for those who did not feel comfortable doing it themselve
s. Intel's new policy was in line with public expectations, but it had been del
ayed for several precious weeks. So one might ask, "What did this delayed chang
e 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 th
e 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 reven
ues in 1994 to $11.5 billion, a 31% increase. Apparently consumers rallied aro
und the new replacement policy and continued to purchase the Pentium equipped co
mputers at a very fast rate, despite the initial reaction of Intel towards repla
cing the defective chips. This renewed faith was not regained overnight, but ne
vertheless 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 fai
th in Intel?
Following Intel's announcement of its 100% replacement policy for the de
fective chips it recalculated its replacement policy on all future defective pro
ducts. Intel realized that its "fatal flaw was adopting a 'father knows b