John Sculley's Biggest Test

By John Markoff
The New York Times

February 26, 1989

It was a vision and a technology that created Apple Computer Inc., producing products that changed America, profits that made shareholders rich and a unique corporate mythology.

In the last six months, however, the vision seems to have clouded. Questions are now flying about managerial judgment, product decisions and basic strategies at a company that grew from a tiny start-up operation in 1976 into one of America's biggest and most profitable companies. Top managers are fleeing, profits are falling and the Macintosh computer has lost some of its luster. Budget cuts and sagging morale only exacerbate the problem.

The company founded in a garage turned, in 1983, to John Sculley, president of Pepsico Inc. and a master at marketing and management, to help it make the leap from a small technology company to a blue-chip giant. Mr. Sculley succeeded, guiding Apple from $983 million in revenues in 1983 to $4 billion last year. But now the much-heralded computer company is showing troubling signs that it has failed to understand the corporate suite.

''Is the house in order?'' asked Charles R. Wolf, an analyst at the First Boston Corporation, who has watched Apple since its founder, Steven P. Jobs, was in charge. He said he is not convinced that the new organizational structure that Mr. Sculley, now chairman and chief executive, put in place in August will work, or that the latest crew of executives that he brought on is the right one. Worse, he wonders if Apple will be able to defend its ground as easily as it once did.

''The big issue is: Can Apple continue to differentiate itself from the rest of the world?'' he said. ''Moses went to the mountain for the Ten Commandments, Steve Jobs went to the mountain and came back with the Macintosh. But can John Sculley go to the mountain and come back with something unique?''

That question goes to the heart of the risks now being taken at Apple by Mr. Sculley. Although Mr. Jobs is no longer with Apple, Mr. Sculley is still struggling to step out of the shadow of his charismatic predecessor, who led the development of the wildly successful Macintosh. If Mr. Sculley succeeds with the new plan he has developed for Apple, he will win a spot at the company - and in management textbooks - that is as sacrosanct as the one still held by Mr. Jobs. If he loses, however, Apple could fall from grace as the industry's innovator, taking Mr. Sculley with it.

Until recently, his track record was strong. Apple's net income has more than doubled in the last three years, its market share has grown steadily and its credit rating is strong.

But two related decisions in the last six months have prompted what even Mr. Sculley calls a crisis at the company. First, Apple bet heavily that a shortage in memory chips, a personal computer's most common component, would continue. It did not. Then in September, just before the critical Christmas buying season, it ordered sharp price increases for its Macintosh, only to be forced to lower them when customers opted for the least expensive Apple products and fitted them with non-Apple memory chips and disk drives. Apple's memory chips - which had been stockpiled to avoid the expected shortage - languished in the storeroom when customers went elsewhere, and an overstocked, costly inventory resulted.

Company executives who participated in the pricing decision now acknowledge that cockiness propelled it. Two years of flawless performance had taken a toll on judgment, they say, and several said they were humbled by the experience.

''It's given us the chance to do some soul-searching, to say: 'What do we want to do with this company?' '' said Mr. Sculley.

Both decisions, Apple executives say, will hurt the bottom line in the coming quarter. And analysts and industry executives say any decline in profits only raises questions about the repeated reorganizations that Mr. Sculley has imposed on the company since August and that seem to have led to five high-level resignations.

''It's not that each departure concerns me, but when you add them all together, I'm worried,'' said Richard Shaffer, publisher of Technologic, a computer industry newsletter.

Further, although 1989 is shaping up as a strong product year for Apple, the company has tried to seduce customers with visions of innovative products that will not be on the shelves for decades. The gap between the vision and the reality of the existing products may hurt Apple by creating a credibility gap, some analysts suggest. Apple employees say the turmoil has been particularly intense in Apple's key marketing group, which has been shaken by several reorganizations and executive departures.

In their defense, Apple executives say the events of the past six months are the inevitable cost of managing phenomenal growth. Apple's sales have more than doubled, from $1.9 billion in 1985 to an expected $5 billion by year-end. Mr. Sculley calls the setbacks temporary.

''This company is not out of control,'' he said on Friday. ''The personal computer industry has a very short memory. They seem to have forgotten how well Apple has done during the past two years. By the end of this year, we will have a lot of new products in place and that will make a huge differnce in the way people look at Apple.''

Mr. Sculley, who Apple's president until Mr. Jobs left almost four years ago after losing a power struggle, has his own vision about how Apple should be run in the 1990's. If his plan works, Apple will be a $10 billion company in the early 1990's. But he has tried to prepare Apple for that growth with a series of reorganizations that have rocked the company.

Last August, he replaced the company's traditional top-down edifice with a streamlined one designed to bring Apple closer to customers and to cut layers of management, which he called a barrier to quick decisionmaking and innovation.

But at the time, many in the industry wondered why Mr. Sculley was tampering with a system that seemed to work so well. Others suspected that a power struggle among his lieutenants lay behind the changes. And some now say the troubles just accentuate the flaws in the reorganization that was intended to prevent just such occurrences.

Analysts, customers and employees are beginning to worry that Mr. Sculley's vision may be right for the future, but that he may not be paying enough attention to present needs. Some speculate that Apple's recent wounds may have been self-inflicted by an Apple that neglected business fundamentals. The mistakes are doubly embarrassing. They tarnished Apple's carefully cultivated image as a company removed from the ups and downs of the personal computer industry. Worse, they have left the impression, at least for now, of a wobbly hand on the rudder. Outsiders who are Apple loyalists say the most serious damage may be that Apple may have unintentionally rubbed some of the magic off the Macintosh.

''The Macintosh had been an emotional purchasing decision,'' said Bruce Davis, president of Mediagenic Inc., a Menlo Park, Calif., software publisher. ''By raising the price they forced people to rationalize their purchase decision. When people do that they find there are alternatives that are attractive.''

For his part, Mr. Sculley shows no signs that he has lost confidence in his decision to tear Apple out of its treasured corporate mold.

As he is portrayed by Frank Rose in ''West of Eden: The End of Innocence at Apple Computer,'' to be published in March, Mr. Sculley tinkers with corporate organization charts with the same obsession that drives his engineers to make computers.

But Mr. Sculley still struggles with Apple's legacy, Mr. Rose said. The company is so deeply steeped in Silicon Valley mythology - it was founded in a garage by Mr. Jobs and Steven Wozniak, both college dropouts - that it has proved difficult for Mr. Sculley to acknowledge the obvious fact that Apple is now one of the nation's largest corporations.

''At the old Apple there was a certain naivete,'' said Mr. Rose. ''People felt they were on a crusade, they were all in it together. That spirit is pretty much gone at Apple today. What you have now is a lot of people staking out their own territory. This is much more in the Pepsi mold, in terms of corporate culture and, in general, more like an East Coast way of life.''

Mr. Sculley disputes this view of Apple. As he describes it, Apple is now a hybrid corporate entity, radically different from the petrified monoliths that typify the nation's corporate power elite.

He likes to describe the rise of a new class of information-age companies that will populate the world in the 1990's. Such companies, he says, will have flat organizational structures, like the one now in place at Apple. Despite a huge influx of M.B.A.'s since he took control, the new Apple does not stack them one on top of another to manage each other, as most other companies do. The goal, as yet unattained, is to have no more than five levels between Mr. Sculley and Apple's most junior professional worker.

To integrate some of Apple's innovative, pioneering spirit into the new organization, 18 months ago the company adopted a strategy, called ''New Enterprise,'' to create the decentralized Apple of the 1990's.

About 600 middle managers produced the August reorganization intended to move Apple closer to Mr. Sculley's model for a 21st-century corporation: one in which highly autonomous small groups work together closely via electronic computer and video communications systems.

''With New Enterprise we recognized that we needed to become much more of a customer-oriented organization,'' said Kevin Sullivan, Apple's senior vice president for human resources. ''People love the Macintosh and they admire our image, but their interaction with Apple as a company was not always good.''

Yet despite Mr. Sculley's vision, the August reorganization also represents more fundamental political realities, which for a handful of top executives means jockeying for position as Mr. Sculley's successor.

When Mr. Sculley first arrived, Apple was run largely by executives highly skilled in the semiconductor industry. He began replacing them with marketing experts like himself. But in recent years, as Apple began looking more to the business marketplace than to consumers, he has been turning to computer-industry veterans more in touch with large-systems companies like Digital and I.B.M.

The most quickly rising executive at the new Apple has been Allan Z. Loren, a former insurance company executive who came to Apple in 1987 to run the company's computer systems. He was instrumental in devising New Enterprise and apparently has got Mr. Sculley's ear with talk of using information systems as a strategic weapon.

In the August restructuring, Mr. Loren was made president of Apple USA, the domestic marketing and sales organization, bypassing Charles M. Bosenberg, who resigned in January to move to the MIPS Computer Company, and Delbert W. Yocam, who became head of the newly formed Apple Pacific division and then announced that he would resign later this year.

But Mr. Loren's rival remains Jean-Louis Gassee, a flamboyant Frenchman originally picked by Mr. Jobs, who now heads product development. Mr. Gassee may have an advantage because he is close to the company's technical wizards, who remain the soul of the company.

And this year will give Mr. Gassee's team center stage again. After several years without major product introductions, Apple is entering a new product cycle. In January a souped-up version of the Macintosh SE, the direct descendant of the original Macintosh, was introduced. In March, Apple plans to bring out a second successor to the Macintosh II, to be called the Macintosh IIcx, a computer that is scaled down in size, but will likely become the company's most powerful machine.

In June, several Apple employees say, the company will introduce its long-awaited portable Macintosh. And Apple is preparing a low-cost Macintosh that will be more accessible to home and education markets, and may have a color display.

The new products are certain to give Apple a strong push in 1989, but they are not likely to calm critics who say the company has shied away from any bold departure beyond the original Macintosh technology. Without a dramatic breakthrough soon, many industry executives and analysts say, Apple is in danger of losing its perceived technology lead in the personal computer industry.

Another threat comes from the very man who founded it. Mr. Jobs, now chairman of an educational computer company called Next Inc. in Palo Alto, Calif., introduced a computer for the university market last fall that is widely acknowledged for its innovative technology. And in April, another company, Sun Microsystems Inc., of Mountain View, Calif., plans to offer a low-cost machine that analysts say will cut into the sales at the high end of Apple's personal computer market. Both developments are stealing some of Apple's high-technology luster. Worse, I.B.M. and all of its clones are now closing in on Apple after lagging for years. New computers based on Intel's 80386 chip - which uses Microsoft's and I.B.M.'s new graphics software, called Presentation Manager - begin to match many of Apple's features, and I.B.M.'s OS/2 operating system has features that Apple has still not introduced.

Mr. Sculley insists the new competition will not touch Apple. ''It takes about twice as much memory with an OS/2 computer to have the same functionality as a Macintosh,'' he said. And he says that when the competition does offer Apple's features, the traditional premium that Apple has sold at will be reversed, giving Apple a price advantage in the next generation of machines.

Regardless of the outcome of its current crisis, analysts give Mr. Sculley credit for the turnaround he has performed since 1986. Besides laying the groundwork for future growth, he has successfully changed the popular perception of Apple.

''Sculley's major contribution to Apple has been changing the perception of Apple from a consumer education company to a business computer company,'' said Guy Kawasaki, a former Apple executive now president of Acius Inc., a software publisher. FOR his part Mr. Sculley believes that he is on his way to creating a new kind of corporation, one blending the creative energies of a Silicon Valley start-up with the size and power of a major corporation. He acknowledges that Apple must struggle to avoid bureaucratic tendencies, but insists that the new Apple is creative and has the ability to create another revolution in its industry.

He has not backed away from any of his visions. He downplays the importance of sheer size, but calls rapid growth a key element of his new corporate model. He has doubled Apple's size and insists everything is in place to do it again. ''We've made mistakes,'' he said. ''But far more important are our successes. By the end of the 1990's, Apple will be a $30 billion company. It's just a question of doing the math.''

At a Glance

Apple Computer

All dollar amounts in thousands, except per share data.

GRAPHIC: Photo of John Sculley, Apple's chief. (NYT/Marty Katz); chart of changes in key personnel at Apple Computer since June 1988 (Source; Apple Computer) (pg. 1); chart comparing Apple Computer's corporate structure in 1989 and in early 1988 (NYT) (pg. 26)

Copyright 1989 The New York Times Company