The revolutionary Intel 8086 microprocessor was introduced 42 years ago this month so I've been studying its die.1 I came across two 8086 dies with different sizes, which reveal details of how a die shrink works. The concept of a die shrink is that as technology improved, a manufacturer could shrink the silicon die, reducing costs and improving performance. But there's more to it than simply scaling down the whole die. Although the internal circuitry can be directly scaled down,2 external-facing features can't shrink as easily. For instance, the bonding pads need a minimum size so wires can be attached, and the power-distribution traces must be large enough for the current. The result is that Intel scaled the interior of the 8086 without change, but the circuitry and pads around the edge of the chip were redesigned.
The photo below shows an 8086 chip from 1979, and a version with a visibly smaller die from 1986.3 (The ceramic lids have been removed to show the silicon dies inside.) In the updated 8086, the internal circuitry was scaled to about 64% of the original size by length, so it took 40% of the original area. The die as a whole wasn't reduced as much; it was about 54% of the original area. (The chip's package was unchanged, the 40-pin DIP package commonly used for microprocessors of that era.)