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?
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...