Intel in 1994 was a $10 billion-plus producer of computer chips, the largest in the world. We were twenty-six years old and in that period of time we had pioneered two of the most important building blocks of modem technology, memory chips and microprocessors. In 1994, most of our business revolved around microprocessors and it revolved very well indeed, growing at around 30 percent per year.
Nineteen ninety-four was a very special year for us in another way. It was the year in which we were ramping our latest-generation microprocessor, the Pentium processor, into full-scale production. This was a very major undertaking involving hundreds of our direct customers, i.e., computer manufacturers, some of whom enthusiastically endorsed the new technology and some of whom didn’t. We were fully committed to it, so we were heavily advertising the product to get the attention of computer buyers. Internally, we geared up manufacturing plants at four different sites around the world.
But several weeks before Thanksgiving, some of our employees had found a string of comments on the Internet forum where people interested in Intel products congregate. The comments were under headings like “Bug in the Pentium FPU.” (FPU stands for floating point unit, the part of thechip that does the heavy-duty math.) They were triggered by the observation of a math professor that something wasn’t quite right with the mathematical capabilities of the Pentium chip.
We were already familiar with this problem, having encountered it several months earlier. It was due to a minor design error on the chip, which caused a rounding error in division once every 9 billion times. At first, we were very concerned about this, so we mounted a major study to try to understand what once every 9 billion divisions would mean. We found the results reassuring. For instance, they meant that an average spreadsheet user would run into the problem only once every 27,000 years of spreadsheet use. This is a long time, much longer than it would take for other types of problems which are always encountered in semiconductors to trip up a chip. So while we created and tested ways to correct the defect, we went about our business.
Meanwhile, this Internet discussion came to the attention of the trade press and was described throughly and accurately in a front-page article in one of the trade weeklies. The next next week it was picked up as a smaller item in other trade papers. And that seemed to be it, until that Tuesday morning before Thanksgiving.
That’s when CNN showed up, all fired up, and they produced a very unpleasant piece, which aired the next day.
In the days after that, every major newspaper started reporting on the story with headlines ranging from “Flaw Undermines Accuracy of Pentium Chips” to “The Pentium Proposition: To Buy or Not to Buy.” Television reporters camped outside our headquarters. The Internet message traffic skyrocketed. It seemed that everyone in the United States keyed into this, followed shortly by countries around the world.
Users started to call us asking for replacement chips. Our replacement policy was based on our assessment of the problem. People whose use pattern suggested that they might do a lot of divisions got their chips replaced. Other users we tried to reassure by walking them through our studies and our analyses, offering to send them a white paper that we wrote on this subject. After the first week or so, this dual approach seemed to be working reasonably well; all tangible indicators from computer sales to replacement requests howed that we were managing to work our way through this problem.
Then came Monday, December 12. I walked into my office at eight o’clock that morning and in the little clip where my assistant leaves phone messages there was a folded computer printout. It was a wire service report something to this effect: IBM stops shipments of all Pentium-based computers.
All hell broke loose again. IBM’s action was significant because, well, they are IBM. Although in recent years IBM has not been the power they once were in the PC business, they did originate the “IBM PC,” and by choosing to base it on Intel’s technology, they made Intel’s microprocessors pre-eminent.
The phones started ringing furiously from all quarters. The call volume to our hotline skyrocketed. Our other customers wanted to know what was going on. And their tone, which had been quite constructive the week before, became confused and anxious. We were back on the defensive again in a major way. Our people, while they were busting their butts, were also perturbed and even scared. When they went home, our employees had to face their friends and their families, who gave them strange looks, sort of accusing. And they were hearing deprecating jokes like “What do you get when you cross a mathematician with a Pentium? A mad scientist.”
I wasn’t having a wonderful time, either. I’ve been around this industry for thirty years and at Intel since its inception, and I have survived some very difficult business situations, but this was different. It was much harsher than the others. In fact, it was unlike any of the others at every step. It was unfamiliar and rough territory. I worked hard during the day, but when I headed home I got instantly depressed. I felt we were under siege under unrelenting bombardment. Why was this happening?!
After a number of days of struggling against the tide of public opinion, of dealing with the phone calls and the abusive editorials, it became dear that we had to make a major change.
The next Monday, December 19, we changed our policy completely. We decided to replace anybody’s part who wanted it replaced, whether they were doing statistical analysis or playing computer games. This was no minor decision. We had shipped millions of these chips by now and none of us could even guess how many of them would come back, maybe just a few, or maybe all of them.
In a matter of days, we built up a major organization practically from scratch to answer the flood of phone calls. We had not been in the consumer business in any big way before, so dealing with consumer questions was not something we had ever had to do.
Our staffing first came from volunteers, from people who worked in different areas of Intel: designers, marketing people, software engineers. They all dropped what they were doing, sat at makeshift desks, answered phones and took down names and addresses. We began to systematically oversee the business of replacing people’s chips by the hundreds of thousands. We developed a logistics system to track these hundreds of thousands of chips coming and going. We created a service network to handle the physical replacement. And we accelerated conversion to a manufacturing process, canceling the usual Christmas shutdown in our factories, and pulling the old material off the line and junking it all.
Ultimately, we took a huge write-off to the tune of $475 million. The write-off consisted of the estimates of the replacement parts plus the value of the materials we pulled off the line. It was the equivalent of half a year’s R&D budget.
What happened here? Something big, something different, something unexpected.
A year or so later, as I reflect on it, I see two big long-term forces doing their work on us, creating the conditions in which a tiny flaw in a microprocessor’s floating point unit could mushroom into half a billion dollars’ worth of damage.
The first involved our attempting to change how our products were perceived. A few years back, we had introduced a major marketing campaign, the “Intel Inside” program. It was the biggest campaign the industry had ever seen, up there with big-time consumer merchandising campaigns. Its aim was to suggest that the microprocessor that’s inside a computer is the computer.
We aimed our campaign at driving this point home to a wider consumer base and to future computer buyers. We created a distinctive logo and we worked with manufacturers who used our microprocessor to display this logo in their advertising, often with a sticker on the actual computer. Hundreds of manufacturers, domestic and international, participated
The second fundamental factor in creating the conditions for the maelstrom was our sheer size. Over the years, we had become the world’s largest semiconductor manufacturer. We surpassed the large United States producers, companies we used to consider mammoth and gigantic compared to us just a few years ago, and we surpassed the major Japanese producers who just ten years ago had threatened to put us out of business. And we were still growing fast–faster than most large companies. We had also become bigger than most of our customers, companies that I remembered from our earlier years at Intel to be monumentally large corporations. Like a kid who suddenly looks down at his father, our sizes reversed.
THIS ALL HAPPENED RELATIVELY in the past decade. And although the recognition of our size fleetingly touched us here and there, largely through the respect we got from other companies in our business, it was hardly something any of us dwelled on. It crept up on us; it just happened.
And now we were dealing with a different and not nearly as pleasant consequence of our huge size and our strong identity. We had become gigantic in the eyes of computer buyers. Unfortunately, it took a blowup to make us realize this.
New rules prevailed now and they were powerful enough to force us into actions that cost us nearly half a billion dollars.
And we were not alone. In the three months following the Pentium floating point incident, Microsoft’s new operating system, Windows 95, was delayed; Apple delayed the release of their new software, Copland; long-standing bugs in both the Windows calculator and Word for Macintosh were highlighted with substantial publicity in trade newspapers; and difficulties associated with Disney’s Lion King CD-ROM game and Intuit’s tax programs all became subjects of daily newspaper coverage.
But I don’t think this kind of change is solely a high-tech phenomenon. Examples from industries of all different kinds stare at me from daily newspapers. All the turbulent actions of investments, takeovers and write-offs in the media and telecommunications companies, as well as in banking and health care, seem to point to idustries in which “something has changed.”
But most CEOs are in the center of a for-titled palace, and news from the outside has to percolate through layers of people from the periphery where the action is. For example, I was one of the last to understand the implications of the Pentium crisis. It took a barrage of relentless criticism to make me realize that something had changed and that we needed to adapt to the new environment. We could change our ways and embrace the fact that we had become a household name and a consumer giant, or we could keep our old ways and not only miss an opportunity to nurture new customer relationships but also suffer damage to our reputation and well-being.
The lesson is, we all need to expose ourselves to the winds of change. We need to expose ourselves to our customers, both the ones who are staying with us as well as those that we may lose by sticking to the past. We need to expose ourselves to lower-level employees, who, when encouraged, will tell us a lot that we need to know. We must invite comments even from people whose job it is to constantly evaluate and critique us, such as journalists and members of the financial community. As we throw ourselves into raw action, our senses and instincts will rapidly be honed again.
