Apple Part 2: The No-Nonsense Era Of John Sculley

Information Processing

His Challenge Is To Make The Macintosh Live Up To Its Promise At Last

Sculley: 'I wasn't hired to be Job's Friend. I was hired to run the company'

Deborah C. Wise in Cupertino, Calif., and Geoff Lewis in New York
Business Week

January 27, 1986

Those who know him well say he's rather shy. He's often described as a good listener. But as the events of 1985 proved, Apple President John Sculley can also be tough--even ruthless. When push came to shove last summer, Chairman Steven P. Jobs was no match for the former president of Pepsi Cola. After a sensational contest for the allegiance of Apple Computer Inc.'s directors, Jobs, the intense entrepreneur who founded the company 10 years ago, was gone. So was the Apple he'd formed. Like Jobs, Apple had been creative, quirky, arrogant--sometimes visionary. Now, Sculley is rebuilding Apple in his own image: cool, disciplined, orderly, and driven.

While Sculley may lack Jobs's messianic zeal, his crusade is no less personal. ''I am alone at the top now,'' Sculley declares. His mission: to apply a lifetime of management knowhow to creating order and stability--something he claims Jobs thwarted. ''I'm doing what I was hired to do two years ago,'' Sculley says. Already, he has imposed new controls and pared Apple's bloated operations, reducing its breakeven point from $400 million in revenues per quarter to $325 million. In its first quarter, ended Dec. 27, Apple earnings climbed 23%, to $57 million, or 91 a share, despite a 23% drop in revenues to $534 million. Cash on hand has ballooned to $441 million, igniting speculation--despite Sculley's denials--that Apple might acquire another company. Now comes the hard part.

In just the next year, by Sculley's own reckoning, Apple must tackle a mass of development and marketing problems that have crippled its efforts to sell personal computers to business. If he succeeds, Apple will get a chunk of the business market--the fastest-growing area for personal computers and the ticket to meteoric growth. If Sculley fails, Apple will find itself restricted to the slower-growing education and home markets--a viable player but not a major computer company. He also has a personal stake in what happens: Apple's board has so far declined to give him Jobs's old post as chairman.

The numbers tell Apple's dilemma. Its worldwide market share has skidded from nearly 19% to less than 11% in two years (chart, page 98). And the company doesn't have the products to reverse the trend. Sculley has told investors to expect Apple's 1986 sales only to match last year's $1.9 billion--and count on more cost-cutting to boost profits. Meanwhile, leading makers of business personal computers expect revenues to grow 25% or more, leaving Apple further behind. ''Since we have such a small market share, it isn't an issue,'' Sculley shrugs. Wall Street isn't so sure. The rally that lifted IBM shares to a record 158 left Apple's stock in the low 20s. That's up from 14 last June, but far below the 1983 record of 63.

OPTIONS PACKAGE

Apple's Macintosh computer is both the culprit for all this and the company's hope for the future. It was supposed to pit the company against International Business Machines Corp. in office computers. But Apple has sold only one-fourth of the 2 million Macs it had expected to sell since 1984. The 9-year-old Apple II still contributes 65% of Apple's revenues and most of its profits. A new version of the Macintosh, introduced on Jan. 16, addresses many of the original's shortcomings. But Apple has a long way to go.

Sculley still must bring out software and hardware that will let the Macintosh share information easily with IBM PCs and mainframes--something Apple said it would do a year ago. The company must overcome major technical hurdles before its unique Macintosh architecture can work closely with IBM machines. Sculley is also promising an ''open'' architecture that will make it easier for other manufacturers to attach options to the Macintosh that will make it more useful in business. Analysts expect more product announcements--including a new Apple II--by fall.

Rebuilding credibility is one of the key elements in Sculley's strategy. ''Before, people made promises and took them very lightly,'' says Sculley, his intense, hazel eyes narrowing. ''I don't intend to make statements we can't fulfill.''

It's a tall order. But Sculley, 46, is used to meeting tough goals. While the 30-year-old Jobs dropped out of college and spent his youth experimenting with electronic gizmos, mystical religions, and ''fruitarian'' diets, Sculley proceeded through strict Eastern boarding schools into Brown University and from there to the Wharton School, class of 1963. Although introspective, he propelled himself into leadership roles. Says his younger brother David: ''He wasn't a particularly noteworthy academic at school, but people tended to follow him.'' By age 38 he had become president of PepsiCo Inc.'s Pepsi Cola subsidiary.

Passing up a shot at becoming chairman of the $7.5 billion food conglomerate, Sculley came to Apple in mid-1983 because of the charismatic Jobs. The younger man's vision of how personal computers would change society caught Sculley's fancy. But by early 1985, it was clear that Jobs would not let Sculley run the company. With Apple's first-ever quarterly loss last spring and chronic development delays in Jobs' Macintosh Div., Sculley saw his chance. He asked Apple's directors to remove Jobs from operating responsibility. ''I wasn't hired to be his friend,'' explains Sculley. ''I was hired to run the company.''

'ON THE BUTTON'

But they were friends, and the public breakup was plainly distasteful to Sculley, who spent his early years in the British island of Bermuda and retains a trace of English reserve. ''Nineteen eighty-five was clearly the hardest year I ever had in my business life,'' Sculley reflects from the comfort of the $2 million mock-Tudor mansion he shares with his third wife, Leezy. Despite complex lawsuits between Apple and Jobs, Sculley is trying to put the rancor behind him. ''He was pulled by the personal conflicts,'' says Nanette Buckhout, his longtime assistant. ''Now he's in complete control again. He's the John I knew 12 years ago.''

He hasn't lost any time letting employees know he means business. Starting last spring with a 20% layoff and three plant closings, Sculley has slashed overhead. At an estimated 52% of sales, Apple's gross profit margins are the highest in years. By contrast, Compaq Computer Corp., a chief rival, is expected to report a record 36% margin for the December quarter. To keep a lid on costs, Sculley has introduced new reporting and review procedures.

He has also ordered up a new market forecasting system modeled on ones soft-drink makers use. Each month a panel of dealers is surveyed. ''Traditionally, we've relied on shipment data and external forecasts, and neither has been reliable,'' Sculley says. ''If you look at the losses in this industry, they've all been in inventory.'' Even in the Christmas quarter, when demand is especially hard to gauge, Sculley claims that ''we hit our number right on the button.''

But getting Apple's new products out the door on time will require technical skills for which Sculley's years at Pepsi did not prepare him. After two years at Apple, he can rattle off technical jargon like a veteran. But he concedes that he lacked the expertise last year to realize how badly Macintosh developers would fall behind. ''The people who were advising me told me it was not hard,'' he says. ''I have since learned it was a lot more complicated.''

Sculley now relies on Jean-Louis Gassee, the former head of Apple's successful French subsidiary, to keep product development on track. Gassee swapped the creative-artist atmosphere of Jobs' Macintosh lab for a more conventional product-development department. ''We want to make Apple Computer the best place in the industry for computer scientists to work,'' Sculley says. To lure them, he's spending $15 million for a Cray Research Inc. supercomputer that will speed product development. Sculley figures that the Cray can simulate a new computer's hardware and cut six months off the development cycle. ''If we do that once, it pays for itself,'' he says. Gutted during last summer's upheavals, the engineering department is already being replenished with veterans from Hewlett-Packard, Tandem Computers, Atari, and even IBM.

PRICE CUTS

While the engineers work feverishly on new products, Sculley will be busy trying to wring better performance out of his marketing people. New tactics include a direct-mail campaign. And to crank up Mac sales, Sculley is risking some of his hard-won margin gains with what he calls ''a bold move'' on pricing: cutting the price 20% on the older Mac and pricing the new Macintosh Plus at $2,599. Industry analysts say the lower prices are long overdue.

Apple's main strategy for winning a foothold in the business market remains desktop publishing, a method of doing high-quality printing using a Macintosh computer and an Apple laser printer. The $10,000 combination can create documents with graphics and text that are close to typeset quality. IBM lacks a competitive product.

But even Sculley concedes that the potential size of this market is not known. Nor is Apple sure to retain a distinct advantage for long. Xerox Corp. has traditionally been the leader in larger, copier-based electronic laser printers. In January it brought out a system that will let businesses tie their IBM PCs into Xerox laser printers. ''Desktop publishing is a natural for Xerox, and they've got 4,000 people on the street to push it to major accounts,'' says office automation analyst Amy D. Wohl of Amy D. Wohl & Associates Inc. in Bala Cynwyd, Pa.

Apple's exclusive reliance on dealers to sell its equipment may be a disadvantage when it comes to some large customers--the kind Sculley needs to make Mac a success. ''Long-term, small business is a major market,'' says Sculley. ''But smaller companies won't buy what the big companies reject.'' So, to reach large customers without offending its dealers, Sculley is forging alliances with companies that have direct-sales forces. In January, he announced that minicomputer maker Prime Computer Inc. will be selling Macintoshes--mainly to technical departments of large companies. And Canadian telephone equipment maker Northern Telecom Ltd. has signed a joint-development pact to make specialized Apple products in 1987. Sculley says other deals are in the offing: Apple watchers still anticipate a distribution pact with a major office automation equipment company.

'FOLK HERO'

Even as he is changing Apple's character, Sculley is trying to preserve important connections to its past. For one thing, he asserts, ''we remain the only company in the microcomputer market that is steadfastly committed to being an alternative to IBM.'' He insists that Apple will find ways to make its computers work with IBM's while retaining the Mac's distinctive ''user-friendly'' touch. Sculley is also working hard to keep luminaries such as Alan Kay, the computer scientist whose pioneering work inspired the Macintosh. He has even courted co-founder Stephen G. Wozniak, who quit the company a year ago. ''Woz'' has spoken at Apple meetings recently and has purchased $5 million of Apple stock. ''Apple wants a folk hero,'' says Sculley.

But there's also a new type of hero at Apple. Under Jobs, the recipients of the big accolades--and the big bonuses--were the hackers and enthusiasts, like the team that built the Macintosh. Now, as at Sculley's Pepsi, performance is what counts. For the first time, all Apple employees are eligible for bonuses. ''Implementers aren't considered bozos anymore,'' says Sculley.

But there will also be a penalty for failure. One Pepsi colleague recalls that if workers didn't perform, Sculley would move them out fast: ''He was brutal.'' That earned Sculley a reputation for coldness and the nickname ''R2D2.'' Sculley bristles now at the mention of the midget robot from the movie Star Wars. ''He's demanding but very sensitive,'' says assistant Buckhout in his defense. ''He just doesn't wear his heart on his sleeve.'' As 1987 approaches, it may be the demanding side of Sculley that Apple employees see most.

Graph: UNDER SCULLEY, APPLE'S MARGINS HAVE BEGUN TO JUMP, BUT ITS MARKET SHARE IS STILL SLIPPING