Essay/Term paper: Intel knows best? a major marketing mistake

Essay, term paper, research paper:  Information Technology

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