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INTEL Knows Best A Major Marketing Mistake

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 Int

uit’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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