Case Analysis: The Intel Pentium Chip Controversy (A)
Immediate Issue: As Andrew Grove, during my meeting of December 17,1994 with my internal team, Should I approve replacing the defective Intel chips of all concerned users with no-question asked? Also, should we also pay for the labor and other incidental costs? How should we integrate our decision into our financial books?
• Negative Publicity: Since Oct 30th, we have encountered a self-propelled negative publicity campaign against Pentium brand and it doesn’t seem to fade away if we don’t do anything.
• Business Ethics: We knew this problem since October, but tried to hide it with the hope that it will fade away. We will be scrutinized from an ethical perspective.
• Cost of my decision: How much would it cost to replace the defective chips (fully or partially)? How much would it cost if I do nothing?
• Risks and Liabilities: Some of our chips are being used by large engineering firms, financial industry, research firms and educational institutes. Is there a chance that we may be sued for damage to our users? What if our chips are used in a space program?
• Role of the Internet: The pace at which it went from a simple technical report by Dr. Nicely to a full fledge all media campaign against Pentium within a short period of time emphasizes to me that I can’t underestimate the power of internet.
• Major players in the market: Nothing hurt us more than IBM announcement to drop Pentium. Who else in the market has the same power? How should we deal with such players
• Pentium brand: We have invested hugely on this brand. Is it an asset or liability for us?
• Corporate Image: Intel is the Mercedes Benz of the processor industry. This is one our most precious assets.
• Market and Shareholder’s reaction / Stock Price: How would market react to our decision? Market needs certainty and a response from us; otherwise it may continue to drop.
• Competition: How would competitors react? Do they have the capability to take advantage of this opportunity? How easy is it for a computer manufacturer to switch from Intel to another brand?
• Financial and operational resources: Do we have enough money to support our decision? Do we have production capacity to produce enough to replace and also sell new chips? Do we have a quick technical fix to the issue?
• Incentive structure/ Employee Moral: Our employees will suffer every time stock price falls. How far can we go with this situation before our top employees start leaving the company?
• My Personal considerations: Bonus/ Stock Option/future of my career / reputation: my decision may affect these considerations differently in short and long term.
• Timing: We are close in the shopping season, and if we don’t act quickly the sales of computers with “Intel inside” Pentium logo may drop and retailers will be stuck with large inventory on hand.
• Customer Service: At the end of the day no matter how good our decision looks like to us, it will fail if it doesn’t satisfy the customers.
• Type and size of market segment affected: Which segments are affected, business, personal ? what is the size of the problem in each market?
• Income Tax in the financial statement: It will decrease our decision cost
Assumptions and Missing
• 20% of the chips sold in Quarter 3 are still in inventory so in case of return , no incidental expense to be accrued.
• Only 10% of the personal users and 50% of business users may need to return their chips.
• Fab 10 Facility in Ireland with capacity of 12.5 million chips per year is ready to make non-defective chips.
Our delay to respond properly to the first wave of reports and news on the internet was our biggest mistake. We could have avoided the problem, if we had replied to the specialists’ concerns before they took it to the public attention. We must have informed the customers...
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