Accounting for the intel pentium chip flaw case solution

Research Associate Lisa Brem prepared this case under the supervision of Professors Gregory S. Miller and V.G. Narayanan. This case draws on material from “The Intel Pentium Chip Controversy (A) and (B), “HBS Nos. 196-091 and 196-092, prepared by Research Associate James Evans under the supervision of Professor V.G. Narayanan. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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V . G . N A R A Y A N A N

Accounting for the Intel Pentium Chip Flaw

What we view as an extremely minor technical problem has taken on a life of its own. —Andrew S. Grove, Chief Executive Officer, Intel Corp.1

In December 1994 IBM stopped shipping personal computers containing the Intel Pentium microprocessor. It supported this action with analysis provided by the IBM Research Division, which indicated that “common spreadsheet programs, recalculating for 15 minutes a day, could produce Pentium-related errors as often as once every 24 days. For a customer with 500 Pentium-based PCs, this could result in as many as 20 mistakes a day....”2

Andrew Grove, Intel’s president and CEO retorted quickly: “[b]ased on the work of our scientists analyzing real world applications, and the experience of millions of users of Pentium processor-based systems, we have no evidence of increased probability of encountering the flaw...You can always contrive situations that force this error. In other words, if you know where a meteor will land, you can go there and get hit.”3

Although Mr. Grove's opinion of the Pentium “bug” was clear, IBM's action forced Intel's top management to address a tough question: Should Intel undertake a broad recall of Pentium Chips?

History

Microprocessing chips are the “brains” of computers sold for both home and business use. Intel was the first, the biggest, and regarded by many as the best microprocessor-maker in the computer industry. Intel's 1993 gross margin of 63% and net margin of 26% were clear indications of the strength of the company (see Exhibit 1 for Intel's recent financial statements). Intel's success was based on constant innovation, huge spending in marketing, production and cycle-time improvement,

1Aaron Zitner, “Consumers get break on computer chip,” The Boston Globe, December 21, 1994, p. 1.

2Bart Ziegler, “IBM, Intel Continue Their Wrangling Over Liability for Pentium Repair Bill,” The Wall Street Journal, December 14, 1994, p .B6.

3[[Intel]] webmaster@www.intel.com, “Tell us what you think!,” Copyright (c) 1994, Intel Corporation. All rights reserved.

For the exclusive use of K. Gilmore, 2017.

This document is authorized for use only by Krystal Gilmore in MBA Financial Accounting Online taught by Susan Kulp, George Washington University from January 2017 to July 2017.

101-072 Accounting for the Intel Pentium Chip Flaw

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and relentless challenging of copycat competitors by “pummeling rivals in court.”4 Intel’s first microprocessors for computers, the 8086 and 8088 (sold in the first IBM personal computer), were followed by its 80186 (used primarily in controllers), 80286, 80386, and 80486 editions, each with markedly more memory and processing speed than the previous generation (see Exhibit 2). By 1993, when the first Pentium was introduced, a number of competitors—including AMD, Cyrix, and NexGen—were already producing clones of Intel’s 486. These competitors were getting faster at cloning Intel's designs, and the 486 clones appeared on the market much faster than the clones of 386 and 286 chips.

The Pentium had been designed with more testing than any previously produced manufactured product.5 “They ran the hell out of all the software they could find,” said Joseph Costello, CEO of a chip-design software maker.6 A full year of testing involving trillions of random mathematical processes was performed to detect any problems with the chip before and soon after it went on the market; a quadrillion more were performed in the year after that. However, the rollout of any new microprocessor was unavoidably risky since chip-testing technology was a generation behind chip- making technology.

In addition to detailed testing, Intel had strategically prepared this new chip for market with the increased trademark protection available to a name, the “Pentium,” rather than using the 80586 moniker. Intel began to steer the market toward this newer, faster chip—and away from competitors’ clones of prior models—by attempting to convince personal and corporate computer users that the 486 was outmoded. With an advertising blitz estimated at $150 million, the company advertised the logo Intel Inside® and the name Pentium in every available type of media. By the end of September 1994, Intel had shipped nearly two million Pentium chips to computer producers (see Exhibit 3).