Perceived Product Risk of Intel Corporation - Case Study Example

Running Head: Strategic Management Strategic Management s Strategic Management In 1994, Intel Corporation was enjoying the near monopoly it had created in the microprocessor industry. By June of that year, the company had discovered a flaw in its recently released Pentium processor. Intel's experts concluded that the flaw was trivial. It corrected the error in subsequent production, but did not report the flaw to computer makers and the company continued to sell hundreds of thousands of flawed chips that had already been produced. In October, Dr. Thomas Nicely, a mathematician at Lynchburg College, discovered an irregularity in his calculations. Dr. Nicely concluded, after eliminating other potential sources of the irregularity, that the Pentium chip itself must be flawed. After contacting Intel's technical support service to no avail, he posted an electronic message to a Compuserve bulletin board to ask other Pentium owners if they were experiencing similar problems. The message set off a flood of Internet bulletin board postings that confirmed the irregularity. The news media (print and television) soon released the story to the rest of the public and the concern over the flawed chip escalated. In November, Andrew Grove, CEO of Intel, posted a message of his own. He acknowledged the problem, emphasized its minimal significance and made an offer to replace the Pentium chip for users of the Pentium processor who are engaged in work involving heavy duty, concentrated floating point calculations. Meanwhile, Intel worked with Dr. Nicely and other scientists to develop a 'workaround' that it could build into its programs to avoid the flawed calculations. Intel's offer and workaround only accelerated the concern and reaction by the Pentium public. In the face of its self-inflicted PR nightmare and increasingly critical media coverage, Intel decided in December to offer "no questions asked" chip replacement program to all of its Pentium customers. The company would take a one time charge of $475 million against its earnings for the fourth quarter of 1994 to pay for this program. Perceived Product Risk Intel's initial decision to tolerate the flaw was based on a quantitative analysis of its customers' risks. After Intel concluded that these risks were extremely low, it decided that nothing needed to be done. A few months later when its customers were made aware of the flaw, many of them felt they had been intentionally deceived and that they had paid a premium price for a damaged product. Intel's customers ultimately concluded that something had to be done. With all the debate exchanged over the months following the public exposure of the Pentium flaw, the involved parties did manage to agree on one thing. The heart of the issue concerned risk. The issue in this debate can be broken down into two questions: did the Pentium flaw expose Intel's customers and Pentium owners (end-users) to undue risks and were those risks significant enough that Intel should replace all flawed chips Intel's "at-risk" customers, specifically IBM, were concerned that the flaw might diminish its reputation as a best product provider and, consequently, its sales would suffer. There was concern the public might view IBM as the source of the problem rather than Intel, to which the problem rightly belonged. The "at-risk" Pentium owners had already bought their computers. They were confronted with an involuntary risk. It was clear that the customers' and the Pentium owners' motivations to react were based on their assessments of risk. Intel's approach to resolving product defects reflected an implied assumption that the assembler would be responsible for dealing with the end-users (Pentium owners). Intel also assumed that information about the flaw did not need to be passed along to its customers due to the insignificance of the flaw. When millions of computers with flawed Pentium chips passed into the hands of end-users, both assumptions would prove to be poor. Microprocessor defects are not rare in the microprocessor industry. Occasional flaws are not unusual due, in large part, to the difficulty of the microprocessor design and programming. In fact, Intel had experienced problems with its two previous microprocessor generations. According to the case, when a flaw is discovered during internal testing, it is industry practice for chip manufacturers to publish this information and ensure assemblers are aware of the problem. By and large, access to this information is subject to non-disclosure agreements that must be signed by the assembler. The chip makers assume that the assemblers will resolve any problems the end-users may encounter since the assemblers deal directly with them. If an end-user were to discover a defective processor, the end-user more than likely would assume just the one chip is defective rather than assume that the defect is systemic. They would likely return the product to the assembler or retailer and request a replacement. Due to this self-interested assumption, the end-user is less likely to demand a product recall. As a result, it is only when a customer experiences a pattern of product repairs or returns that the problem is likely to be identified as a systemic defect and thus a product recall may be initiated or requested. Once the media had spread the story and the end-users began to express their perceived risk openly, Intel was forced to search for a solution that would satisfy not only its customers but also large numbers of end-users. Intel's initial response was not well received. Intel published the results of its risk calculations, first via bulletin board posting and later in the detailed 30-page white paper. The following is an excerpt from the white paper that expresses Intel's trivialization of the flaw: ...In the commercial PC domain, the majority of applications that do use floating point do not invoke an appreciable number of different divides and hence do not introduce meaningful failures that will pose a data integrity problem during the useful life of the part. For applications such as corporate financial analysis and forecasting, marketing analysis, planning and so forth, the likelihood of encountering reduced precision divides is low. At the same time, Intel acknowledged that the flaw is of potential significance to a small number of PC users in the financial, engineering, and scientific arenas. It is in these arenas that the flaw could become significant because of the use of complex numerical calculations. The white paper supported Intel's initial response to replace flawed chips for users who routinely used these high precision, numerical calculations in their day-to-day applications. Mathematicians, engineers, financial modellers and other "at-risk" groups would be granted chip replacements. In effect, Intel chose to respond only to those end-users, on a case by case basis, which could prove their risk. Intel worked with the end-users individually to help them assess their risk and to replace the chips for those few whose risks exceeded an unspecified threshold that was determined by Intel. The Internet and its Influence This newly discovered form of communication could spread news around the world at push of a button. The Internet had fully revealed the flaw to end-users and the public at large in a matter of days. At that time, Intel could not have anticipated the firestorm of protest that resulted from its initial public response. The Internet allowed the end-users to coordinate a collective response that made it impossible for Intel to deal with them individually on a case-by-case basis. More importantly, the negative reaction to Intel's initial response was amplified by the Internet. To understand this, it is important to understand how quickly the Internet was becoming a mainstream source of networking and communication. The Internet was on its way to becoming the largest and fastest source of networking and communication available to businesses and the general public. The Internet had and still has the capability to support the creation and coordination of exceedingly large groups of people that share a common interest. In this case, The Internet and the Pentium Chip Controversy, a particular Internet discussion group, comp.sys.intel, served as the focal point for a heated and well-informed debate. The exchanges between the debate's participants contributed to the ruckus and the overall escalation of the issue. The Internet's most obvious impact lay in its ability to connect members of an interest group with one another. In this case those members were the end-users. Otherwise isolated individuals became collectively aware of the "potential" risks, thanks in large part to the Internet. The impact of this shared awareness was evident weeks before mainstream print and television media picked up the story. Intel's responses were no longer being driven by individual customer needs. Instead, it was being pressured by a large united group of end-users who were collectively aware of the potential risks. As time passed and the concern grew, the end-users in this group each had developed their own perceived risk. This was fuelled by the shared knowledge that other users, particularly the mathematicians and engineers, had already observed the flaw first hand. The fact that these users were the most "at-risk" did not matter to this group. The important factor was that "some" end-users had experienced the problem and the other end-users owned and used the same flawed Pentium chips. So, they also must be at risk. Worse, Intel found itself facing an exceedingly large group of collectively well-informed end-users, each of whom assumed that the worst case scenario could happen to them. Because of the Internet, the debate became a conflict that centred on perceived risks. The Scientists and the Public The Internet had made it possible for the scientific and the lay community to interact with on another with out aristocratic or academic barriers. This unusual relationship helped drive the public response to the Pentium flaw. The scientists that participated in the debate continuously generated a stream of analyses and experiments that fed the growing public reaction. These new findings fuelled the growing concern among non-experts. Mass media outlets have long been capable of whipping up storms of consumer anxiety. Generally, these storms pass quickly. However, with credible revelations these storms can brew and maintain strength for quite some time. In the case of the Pentium flaw, it was the steady stream of credible scientific findings that not only kept the issue on the forefront, but launched it into a state of consumer frenzy. The Alternatives and the Conclusion In review of this case, there are several alternative responses Intel could have selected. * Intel could have immediately disclosed the information about the flawed chip to its customers and then to the public at large and initiated a total recall on all flawed Pentium chips. Strengths: Doing so would have resulted in some positive PR rather than the nightmare that was created by Intel's decision not to inform anyone. This came across as fraudulent and rightly so. This alternative could have generated some increase in customer/consumer loyalty to the Intel company because of the appearance that Intel was not about just making money. It was about protecting the customer/consumer. Weaknesses: The most obvious weakness with this alternative is that Intel would lose millions of dollars. Its market share could also potentially be at risk. The public may now see Intel as a company that provides a less than stellar product, as a result may seek similar products elsewhere. * Intel could have stuck to its original decision to only replace those chips that were being used in occupations where the error would be most likely to occur. It would then continue to re-assure the other end-user that there was no significant risk to them. Strengths: Intel would not have had to take the $475 million dollar hit against its earnings. Weaknesses: Intel's market share would most definitely be diminished. It would potentially lose thousands, if not hundreds of thousands, of potential customers. The PR nightmare could turn out to be just as severe as it turned out to be anyway. * Intel could have initiated a voluntary "no-questions-asked" exchange program immediately upon discovery of the Pentium chip flaw. This alternative is the best alternative. Strengths: Doing so would have resulted in some positive PR rather than the nightmare that was created by Intel's decision not to inform anyone. This came across as fraudulent and rightly so. This alternative could have generated some increase in customer/consumer loyalty to the Intel company because of the appearance that Intel was not about just making money. It was about protecting the customer/consumer. Intel would not have had to take the $475 million dollar hit against its earnings. Weaknesses: Intel market share could still diminish because the customer/consumer may fear that they may buy a flawed product. Justified or not, this same fear could even be extended into future chip generations. Intel would more than likely still lose some of its customers/consumers because they see Intel as a company that provides a less than stellar product. In a period of less than six weeks, Intel watched as its flagship product fell from a position of total market dominance to the butt of many jokes. More importantly, Intel's reputation for integrity in dealing with its customers had been severely damaged, perhaps permanently. Bibliography Aspray, William. "The Intel 4004 microprocessor: what constituted invention" Annals of the History of Computing 19 #3 (1997): 4-15. Garvin, David and Michael Roberto "Change through persuasion" Harvard Business Review Feb 2005 Grove, Andrew S. "Managing Segment Zero" Leader to Leader. 11, Winter 1999 Jackson, Tim. Inside Intel: Andy Grove and the rise of the world's most powerful chip company. New York, N.Y.: Dutton, 1997. Kotter, John P. "Leading Change", Harvard Business School, 1996 Pascale, Richard and Jerry Sternin "Your company's secret change agents" Harvard Business Review May 2005 Pascale, Richard, Mark Millemann and Linda Gioja "Surfing the Edge of Chaos", 2000 Read More