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