INTEL Knows Best? A Major Marketing Mistake Essay, Research Paper

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