Apple: New Team, New Strategy

Cover Story

Can The Sculley-Spindler Partnership Deliver The Boost That's Needed?

Barbara Buell in Cupertino, Calif. With Jonathan B. Levine in Paris, and Neil Gross in Tokyo
Business Week

October 15, 1990

When Michael H. Spindler found himself thrust into the No. 2 spot at Apple Computer Inc. last January, he knew there would be no time for an executive honeymoon. Apple's market share was dropping fast, investors and customers were griping, and workers, buffeted by continual churning in the executive suite, were demoralized. So when 260 Apple managers gathered last month to hear the company's turnaround plan for 1991, they were eager to learn what Chief Operating Officer Spindler had to say. ''There was a show-me attitude,'' says one attendee.

They were shown. Pacing back and forth on a hotel stage near San Francisco International Airport, Spindler mapped out his strategy. It was not the usual sugarcoated pep talk. Instead, the fast-talking German, with his mop of unruly black hair, rattled off a detailed plan for regaining market share and paring Apple's bloated costs. The audience lapped it up. Later, Apple Chairman and CEO John Sculley warmly congratulated Spindler on his 10th anniversary with the company and gave his latest lieutenant a diamond-studded Apple logo pin. The audience jumped to a standing ovation.

BREATHING ROOM

Now, Spindler just has to convince the world outside of Apple's Cupertino (Calif.) headquarters that his plans can work. And he doesn't have much time. Nearly seven years after its launch, the Macintosh is rapidly losing its edge as the easy-to-use personal computer. The short-term remedy is straightforward: new Macs with lower price tags, more advanced software, and price cuts on older models. If the market responds favorably to the new line, Apple will get the breathing room it needs to pursue a more critical, long-term strategy: a replacement for the Mac. But ''if Apple doesn't recover in 1991, its chances of recovery thereafter become hopelessly small,'' warns Peter J. Rogers, a computer analyst with Robertson, Stephens & Co.

Rapid recovery is by no means a sure thing, given Apple's slide. Its share of the $42.3 billion U. S. personal computer market has plunged from nearly 15% three years ago to an estimated 9% now (chart, page 88 42 ). By last winter, ''U. S. sales were dead in the water,'' admits Sculley. Luckily, European and Pacific Rim sales stayed bright: Apple's international business posted growth rates of 28% in the first half. Even so, when results are in for the fiscal year ended Sept. 30, analysts expect Apple to report an anemic 6% revenue gain, to $5.5 billion. That's a jarring slowdown from 1989's 30% pace. The profit picture is worse. Rick J. Martin, an analyst at Prudential-Bache Securities, projects a puny 2% increase in net earnings, to $465 million. That prospect has helped push Apple stock down to below 30, off 37% from mid-July.

RADICAL CHANGE

Spindler will soon find out if his plan works. On Oct. 15, the company will launch its low-priced Macs: the $999 Mac Classic, the $3,000 Mac LC equipped with a detachable color monitor, and the powerful $3,700 Mac IIsi (table). They will be followed next year by a high-end Macintosh, a new laptop, and a rewrite of the Mac's basic software (page 93 45 )--all intended to win back Apple's technological lead. These projects were in the works long before Spindler arrived in Cupertino, but he's responsible for getting them into production and on the market.

The new Macs represent a radical change--and risk. Although the first Macintosh in 1984 was billed as ''the computer for the rest of us,'' its progeny have become the computers that only well-heeled corporate customers--or die-hard Apple worshipers--can afford. By this spring, Macintoshes cost as much as 36% more than comparable IBM and Compaq machines. That was part of an intentional drive to exact a steep premium for Macintosh's distinctive ''user-friendly'' features. The resulting high gross margins--about 25% greater than those of other PC makers--were needed, Sculley said, to fund the research needed to keep the proprietary Mac ahead of the IBM PC and its clones.

There was, of course, a downside. Apple's original customers--schools and small businesses--found it harder to afford new Macs. And, Sculley now concedes, fewer and fewer new customers were willing to pay the premium to buy their first Macintoshes. At the same time, the whole proprietary approach on which Apple based its high-price strategy was being called into question by so-called open systems. Those computers, based on standardized software, promised low hardware costs and easy interconnections.

By 1989, it was clear that Apple had gone too far. Even Mac fanatics--the intensely loyal customers who eagerly await the next permutation of the Macintosh design--began to question Apple's pricing. And the technological advances that were promised in return for the high prices were slow in coming. In that single year, Apple's slice of the U. S. market dropped by 20%. More alarming, as 1990 dawned, Microsoft Corp. was getting ready to release Windows 3, the IBM PC program that promised to finally match the Mac's big advantages.

UNLIKELY SWITCH

By the time the warning bells went off, Apple's top management was in disarray. A 1988 reorganization had created largely autonomous empires in marketing and product development under two ambitious executives, Allan Z. Loren, president of Apple USA, and Jean-Louis Gassee, president of Apple products. Fighting between the two camps had left both largely out of touch with the market: Loren's pricing and merchandising policies were a flop, and Gassee's products were late and overengineered. In January, Sculley forced the resignation of Loren. In February, Gassee quit after his responsibilities had been pared. Spindler, the star performer who had propelled Apple's European operations to $1.2 billion in annual sales from $467 million in three years, was made COO.

Now, Spindler is set to win back market share. But there's a chance he may be too late. Windows 3 is off to a roaring start: Analysts estimate that 1 million copies have been sold since May. That, say some industry watchers, makes it far harder for Apple to switch IBM PC users to the Mac. ''Nobody who uses a PC will buy a Mac, and nobody who uses a Mac will buy a PC,'' says Philippe Kahn, president of software maker Borland International Inc.

It needn't have been that way. In 1987, Apple was handed what many analysts figure was a once-in-a-lifetime opportunity. OS/2, the operating system with graphics capability introduced by IBM and Microsoft Corp. in 1987 to give IBM personal computers and their clones Mac-like characteristics, was not selling. As far back as 1987, software developers had urged Sculley to quickly produce cheaper Macs to expand the market while the competition was becalmed. ''The Mac is wonderful. But it was too expensive to reach new buyers,'' says J. A. Heidi Roizen, president of software developer T/Maker Co. Rather than seize its chance to grab market share, however, Apple chose to maximize its profits. And management gaffes such as overpaying for memory components and excessive spending often wiped out the benefits of Apple's high margins (chart, page 89 43 ).

Apple may have also overlooked another opportunity. Even though the Mac's features were unique, the company's marketing avoided making direct comparisons with rival machines. Instead, ads emphasize intangibles such as ''the Macintosh advantage'' without detailing what it really is. One marketing consultant says she advised the company long ago to make feature-for-feature comparisons between the Macintosh and the IBM machines. Even with its premium prices, she says, ''Mac still comes out ahead in a lot of things that people really care about, particularly ease of use.'' But Apple marketing executives rejected the idea and insisted on a more nebulous ''image'' campaign.

That's not Spindler's game. ''You can't make style win over substance,'' he says. In a 24-year career in computers and electronics that began in engineering and then moved into sales and marketing, the 47-year-old held jobs at Siemens, Intel, and Digital Equipment before joining Apple Europe. While capable of waxing about the ''vision'' of the Macintosh and the ''mission'' of Apple, Spindler is firmly grounded in reality. An energetic, hard-driving executive--nicknamed ''the Diesel'' by colleagues at DEC--he's the antithesis of New Age, touchy-feely Silicon Valley managers. ''I wish I had half the turbo he has for a mind,'' says Soren Olsson, former vice-president of Apple's Northern Europe operation and Spindler's replacement as the Paris-based head of Apple Europe. ''Give him a white board and pen, and his mind, mouth, hands all work at the same speed.''

Since taking on the COO job, Spindler has been working almost without letup. In the January reorganization, Spindler took over sales, marketing, manufacturing, and corporate communications, while Chairman Sculley turned his attention to research and development (page 92 44 ). Managers are discovering that under Spindler, substantive marketing is in--as are tighter budgets and firm deadlines--and politics are out. Also gone is the arrogant, not-invented-here syndrome: Apple is now talking to Toshiba and Sony about possibly manufacturing an upcoming laptop Macintosh.

'NO PRIMA DONNAS'

With the company facing such formidable challenges, Spindler is also emphasizing teamwork. In a speech to the troops last March, he warned: ''There will be no more prima donnas at Apple.'' That, insiders say, may be the most important change of all. Sculley, the former PepsiCo Inc. marketing impresario, masterminded a remarkable revival after taking over from ousted co-founder Steven P. Jobs in 1985. But in 1988, with the Mac selling well to Corporate America, Sculley took off on a sabbatical. At his Maine vacation home, he thought up a disastrous reorganization plan that delegated day-to-day decision-making to four presidents, each responsible for giant chunks of the company. Oversize ambitions led to clashes--mainly the ones between development chief Gassee and U. S. marketing chief Loren. But similar rivalries echoed throughout the executive suite. By early this year, middle managers were receiving little direction. ''If there was a major failing,'' concedes Sculley, ''it was that the organizaton was confused about where we were going.'' Indeed, an in-house survey of middle managers in May turned up dissatisfaction and mistrust of top brass, says a former employee. ''It was devastating.'' Snorts an executive still at Apple: ''People were calling the management around here 'Pepsi Light.' ''

It didn't take long for Spindler to change that impression. Arriving from Paris in March, he quickly sized up the situation and swung into action. ''He plants his fist and says this is what we're going to do,'' says Burt Cummings, an Apple marketing manager. ''It'sexcellent.''

In June, Spindler tapped 48-year-old Robert Puette, a Hewlett-Packard Co. veteran, to rebuild Apple's troubled domestic sales division. The same month, he reversed a three-year-old plan to spin off Claris Corp., a software subsidiary. The move guaranteed Apple in-house expertise for future development of networking technologies and System 7, the new Mac software. Working with Sculley, Spindler helped patch up a feud with Adobe Systems Inc., maker of the PostScript software that was key to helping the Mac pioneer the desktop publishing market. Gassee had insisted that Apple develop its own printer-control program, a move that would have eliminated royalty payments to Adobe.

SPENDTHRIFT

But Spindler and Sculley have more in mind than undoing Apple's mistakes. They're preparing the company for a new way of life. As lower-priced Macs hit the market, says Prudential-Bache's Martin, gross margins may tumble as low as 45% by 1993, from a peak of 54% in the first nine months of 1990. News of the upcoming low-margin Macs sent Apple's stock to new lows in early October.

So Apple has to rein in its lavish spending. By computer industry standards, Apple has always been a spendthrift. Its salaries are among the highest in Silicon Valley, and its perks, such as workout facilities, are the best. As a result, its selling, general, and administrative expenses are about 30% of reve nues, compared with 24% at Sun Microsystems Inc. For fiscal 1990, analysts estimate, Apple spent a stunning 24% of sales, or $1.4 billion, on sales and marketing costs, compared with 12% at Compaq Computer Corp. ''They haven't been run with the tight financial controls of a Compaq,'' says Martin. Puette, fresh from the tightly managed HP, says he was blown away by Apple's loose controls. ''This is still a teenage company,'' he says. ''It's a $5 billion company with the corporate infrastructure of a $250 million company.''

That, too, is changing. Starting with the 1991 corporate business plan, more stringent controls are in place. And planning has become more of a discipline and less of a fantasy. ''We started our business planning months earlier than we have before,'' says Chris Espinosa, a software marketing manager who has been with Apple since it was founded 14 years ago. And ''there was a level of checking and cross-checking that we've never gone to before,'' adds Guerrino De Luca, a marketing director in Paris.

Puette, who was a running back at Northwestern, is the key player in the 1991 plan. His job is to revive U. S. sales, which have remained dismal despite a series of April price cuts. Puette's first move has been to patch up relations with dealers who fault Apple's lackluster promotional efforts and resent its selling directly to large customers. Apple is slowly phasing out its major-accounts sales force and turning corporate sales over to local dealers. ''This gives usadditional credibility with customers,'' says Steven Asche, director of Apple products at Computerland Corp.As the new head of Apple USA, Puette is also working to revive sales to schools and colleges, a $4.2 billion market in the U. S. In the past few years, longtime leader Apple had paid less attention to the market, creating a huge opportunity for IBM. Now, Apple troops are surveying these customers to see what they want in new software and hardware. To get a better grip on the higher-education market, the company has dispatched groups of employees on ''camping trips'' to universities to pick the brains of students and faculty.

The toughest job in the coming months will be managing the introduction of the new products. ''You have guaranteed cannibalism of the machines just above them,'' says analyst Martin. Already, customers have stopped buying some older models in anticipation of the new Macs, and Apple is likely to cut prices to move inventories. But the company figures that by its second quarter, ending next March, brisk sales of the new models will more than make up the difference. Some analysts say that with recession likely in the U. S., low-priced Macs may be well-timed. ''With capital budgets shrinking, price is an important element,'' says Bruce A. Stephen, director of PC research at International Data Corp. ''It will help keep market share from eroding further.''

NO MORE MICE

Even if they hold market share--or increase it a bit--the new machines are only a transitory solution. For a more permanent revival, Apple needs to ''stay ahead of the power curve'' with new technology, says David Bayer, an analyst with Montgomery Securities. Ultimately, the Sculley-Spindler team has to prepare for the day when the Macintosh will be replaced.

Two approaches are now under study, insiders report. One involves computers using the RISC (reduced instruction-set computing) chips that have already brought enormous power to engineering workstations. Apple is said to have 30 engineers working on a project called Jaguar, using Motorola Corp. RISC technology. At least two years off, Jaguar will include extensive video technology and the ability to connect to TVs and VCRs, Apple employees say. The second project is a computer that can deal with handwritten information, eliminating the need for keyboards and mice.

Neither RISC computers nor handwriting-input computers are unique. And that points up Apple's most basic problem: coming up with another computer revolution on the order of the originalMacintosh is quite unlikely. While Sculley's hush-hush Advanced Technology Group keeps trying for that revolution in the back room, Sculley and Spindler are left with the task of running Apple today. Increasingly, that means doing business just as other computer makers do--adding bits and pieces of hardware and software to make their machines appealing to a wider range of customers.

Now, Sculley's R&D troops are encouraged to work with outside suppliers and adopt off-the-shelf technology when it will help get products out the door on time. That's a 180-degree change from the company's approach to technology under Gassee--and before him, Jobs. Both drove engineers to perfect proprietary Apple technology, even if it meant slower product introductions. Today, ''there's an urgency here,'' says Spindler, who promises new Apple products every quarter in 1991. ''Time to market has to be made shorter.''

BREAK THE RULES

The deal to get a new laptop quickly by having it built by a Japanese subcontractor is the most striking example of how Apple is changing. ''A year ago it would have been impossible to even discuss that, but Michael and John have really opened things up,'' says European Chief Olsson. Now, Apple executives say, no idea is off limits, no rules unbreakable. That includes the possibility of licensing portions of Apple's proprietary operating system to makers of IBM-compatible machines to broaden the Mac market.

Breaking rules is nothing new for Spindler. As president of Apple Europe, he didn't wait for marching orders. He took it upon himself to shake up the status quo by diluting each country manager's responsibilities for setting pricing and other policies. Prior to Spindler, each country had different dealer discounts. Prices varied by as much as 40% across the Continent. Spindler smashed those individual fiefdoms and made Apple Europe's strategy uniform. Now, the company is following Apple Europe's lead as it expands in Asia. In Japan alone, it expects to post $1 billion in sales within the next few years. ''The way Apple is working now at corporate headquarters under Michael is how we've always worked in Europe,'' says Olsson. ''He hates business as usual.''

To say the least, business as usual is not what Apple--or its customers or shareholders--want. By next year's management meeting, the verdict on the Sculley-Spindler team will be in. The two are gambling that by then, they'll both rate another standing ovation.

Photograph: SPINDLER: TRYING TO REPEAT HIS SUCCESS AT APPLE EUROPE ED KASHI Illustration: APPLE'S FALL LINEUP ROB DOYLE/BW Photograph: 'This is still a teenage company. It's a $5 billion company with the corporate infrastructure of a $250 million company' ROBERT PUETTE President, Apple USA PHOTOGRAPH BY ED KASHI Graph: APPLE'S SLIDE Data: Dataquest Inc., BW CHART BY LAUREL DAUNIS/BW Photograph: A year ago, it would have been impossible to discuss a deal for Toshiba or Sony to build a laptop Mac SOREN OLSSON President Apple Europe PHOTOGRAPH BY DESCHAMPS/VU Graph: APPLE'S BUMPY ROAD: THREE YEARS OF UPS AND DOWNS Data: Company Reports, Hambrecht & Quist, Dataquest Inc., BW GRAPHIC BY LAUREL DAUNIS/BW

Cover Story

Barbara Buell in Cupertino, Calif.
Business Week

October 15, 1990

John Sculley says that both he and his company thrive on crisis. ''Apple works best with its back against the wall,'' says the chairman. ''Believe me, my back has been up against the wall.''

That's for sure. Back in 1985, the last time Apple faced a crisis, Sculley had to figure out how to keep the company in one piece following the ouster of co-founder Steven P. Jobs--and how to make the oddball Mac a success. To pull it off, he became a spokesman for the company, criss-crossing the globe to convince corporations to buy Macs. Apple took off. Sales swelled from $1.9 billion in 1985 to $5.3 billion in 1989. Sculley was well rewarded: At $2.2 million, his paycheck is one of the highest among CEOs.

But while Sculley was playing Mr. Outside, his senior executives were running amok. Sculley went through a succession of proteges, creating what one former manager calls an atmosphere of ''executive du jour.'' By early this year, Apple was once more in crisis.

HIDDEN TALENT

So Sculley installed Michael H. Spindler as his new No. 2 and put him in charge of marketing and most other day-to-day operations. Then, the 51-year-old CEO took on the most important inside job: overseeing development of technology to eventually replace the Macintosh. It seemed an odd job for Sculley. The former Pepsi-Cola president had been hired to bring big-league marketing savvy to Apple in 1983. And, despite a lifelong interest in technology and his training as an architect, he had never immersed himself in the nuts and bolts of product development. So his decision caused plenty of eye-rolling within Apple's labs. ''They really didn't want me,'' recalls Sculley. Adds Larry Tesler, vice-president of advanced products: ''There was tremendous skepticism among the engineers. I couldn't imagine how he could manage engineering.''

But Tesler has been surprised by how well the boss has done. Sculley's big contribution has been to make sense of the various projects launched under Jean-Louis Gassee, the former president of Apple Products. He quickly consolidated development units, created a quarterly operations review, and instituted daily 7:30 a.m. meetings with his chief Macintosh engineer. The changes hastened decision-making. Now, ''people don't slow each other down,'' says Tesler.

Sculley's long-term aim is to get new products out the door in 9 months to 12 months, rather than the 18 months to 24 months it now takes. There are signs he is making progress. Just one month short of the Oct. 15 debut of the new Mac LC, and with some manufacturing already under way, Apple quickly reworked the machine's color graphics to meet demands of educational buyers.

Sculley's chief nemesis is what engineers call ''creeping elegance''--the tendency to take a perfectly adequate design and keep adding new bells and whistles until the finished product is late to market. Apple had a perfect example in Gassee's Macintosh Portable--an overpriced, overengineered, overweight disaster.

Managing better is one thing. Technology leadership is another. And some engineers fear that Sculley doesn't have the technical depth required to make sure that the Mac replacement is a significant advance. Sculley says he'll continue to devote 70% of his time to R&D until early 1992. Unless, of course, another crisis comes along.

Photograph: There was plenty of eye-rolling in R&D when Sculley named himself chief technical officer. 'They really didn't want me,' he admits JOHN SCULLEY Chairman and CEO Photograph: SCULLEY: UP AGAINST THE LAB WALL ROBERT HOLMGREN