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Apple Computer’s Risky Revolution (Fortune, 1989)

May 8, 1989, 7:00 PM UTC
Photo: Laurence Labat—Sygma/Corbis

An era is ending. Almost from the day Steve Wozniak and Steve Jobs began tinkering in a California garage 14 years ago, Apple Computer has been a deliberately provocative company, eager—and ofttimes able—to galvanize the computer business with dazzling new products. But there was always more to Apple (AAPL) than its hardware. Like Cracker Jack, it threw something extra into every box. With its computers came a sassy California mystique that enveloped customers and employees alike.

Those days are over. Bombshells are passe, and California cool is on the way out. Chairman John Sculley, 50, who succeeded Jobs as chief executive in 1985, is leading the company through, in his words, a “significant transition” that will change how Apple sees the world and how the world sees Apple. “This,” says Sculley, “has always been a right-brained company that flitted from idea to idea.” Now he aims to impose some left-brained order.

New products will be less revolutionary and more evolutionary; some people might even call them dull. Sculley’s latest reorganization—the third big one in six years—is aimed at transforming Apple into an outfit that plays as well in Peoria as it does in Pasadena. “As we move from countercultural to mainstream, all that California stuff doesn’t mean as much,” says Kevin Sullivan, a senior vice president. “My 81-year-old mother shouldn’t have to like surfing before she can consider using a Macintosh.”

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Sculley’s efforts have created enormous upheaval. “No company I know of has such chaos in the executive suite,” says a former Apple executive. Last fall Sculley appointed two men with vastly different personalities to top jobs—a move that personifies the internal turmoil and has shaken Apple to its core. Jean-Louis Gassée, 44, a colorful Frenchman who wears a diamond in his left ear, symbolizes all the old-style sass. By contrast, Allan Z. Loren, 51, a former insurance executive born and bred in New York City, is a beefy and abrasive newcomer, with a background in—horror of horrors!—mainframe computers. Though the company denies it, people close to Apple say the two men are waging a struggle for second-in-command. Says the formerApple executive: “On an unprecedented scale, a grab for power is under way; one of them will be gone or in a different position in six months.”

Loren came to Cupertino in 1987 from Philadelphia, where he had spent most of a 16-year career at Cigna managing mainframe computer operations. Sculley hired him to develop a new in-house computer and communications network. Loren had not yet completed that job when Sculley promoted him to run Apple USA. He quickly earned a reputation for unnerving marketing executives; on one occasion he ripped up their reports at a staff meeting. In September he canceled the annual sales meeting in Orlando, Florida, pummeling morale and infuriating families who traditionally tagged along on these outings. Even Loren’s hobbies seem out of kilter with Apple’s blue jeans and backpack culture: He likes to spend weekends touring in a motor home.

Loren’s foil, Gassée, manages R&D, new-product development, and manufacturing. Slender and irreverent, he favors black leather jackets and does not disguise his disdain for Wall Street analysts, whom he calls “anal-ysts.” For four years he ran Apple’s operations in France, where he charmed the Paris arts and music set into embracing the Macintosh, helping to make Apple wildly successful in Europe. When Steve Jobs left in 1985, Sculley put Gassée in charge of developing new products.

The juxtaposition of Loren and Gassée has Silicon Valley confused. “Employees, software developers, customers—everybody wonders what this says about the Apple culture,” says Stewart Alsop, editor of PC Letter, a popular industry newsletter. “On the one hand you’ve got this guy who pounds the table and says, ‘Spend less.’ Then you’ve got a Frenchman with an earring who talks in philosophical generalities.”

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Sculley claims he knew exactly what he was doing when he promoted Loren. “Allan scared the hell out of people, and I’m thrilled,” he says. “I knew a tough guy from the East Coast demanding implementation would be unpopular. I told him that before he took the job.” If Loren’s style doesn’t get in the way of his ambitions, he could accomplish a lot. “The first thing Allan started doing when he arrived was to ask where our business was going,” says Peter Solvik, an Apple executive. “Everybody’s response was ‘Hmm. Good question.'”

Loren persuaded the company to focus on a few areas, such as education, publishing, communications and electronic mail, and software programming. Says Sculley: “Last summer you would have gotten 50 ideas on what Apple should be doing in the 1990s. Now we’re concentrating on a half dozen.”

For all the differences between Loren and Gassée, they agree on the kind of company they want Apple to be. There are no paralyzing debates over what products or technologies to introduce or how an Apple computer should function. The company’s strategy has changed from five years ago when, as Gassée puts it, “Steve Jobs got stuck on one product—not on a business.” The product was the Macintosh, which set a new standard for computer friendliness. The emphasis now is on developing a comprehensive line of compatible computers that work well with those made by other manufacturers.

Over the years Apple has made important but incremental improvements on existing machines: opening the Macintosh to alterations so customers can insert special chips for special uses and adding such features as color and faster microprocessors. A portable Mac is due out this year. In response to critics who say Apple’s products are “obvious,” Gassée offers a Gallic shrug. “That’s good,” he says. “People don’t buy products that are arcane.”

The realization that big changes were needed at Apple dawned on Sculley after he returned from a nine-week sabbatical last summer. “The technical people didn’t respect the marketing department,” he says. “The marketing department was disorganized, and there was little possibility that we could afford all the projects it was working on.” So even though his second shakeup was not yet complete, Sculley tore up the organization chart again and promoted Loren and Gassée. Apple employees reacted to uncertainty the way employees at all companies do, agonizing about the loss of their familiar environment. “This place has none of the buoyancy of a few years ago,” says one. “I dread coming to work.”

The turmoil has been made worse by a big decline in last quarter’s earnings—the result of mistakes that began over the summer when supplies of memory chips called DRAMs began running low. Rather than cut production of Macs, Apple bought chips on the spot market, paying up to twice the norm. The shortage began to ease in October, and chip prices eventually declined. But instead of swallowing its higher costs, Apple increased what it charged for Macs by as much as $800—an unusual move in an era when computers are getting cheaper. Customers went on strike.

Apple compounded its problems by leading Wall Street to believe earnings would come to about 65 cents a share, slightly more than last year, for the quarter that was to end in March. But on January 27, it announced that they would be closer to 35 cents. The stock market reacted violently. Nearly 10% of all Apple shares were sold that day—the biggest one-day sell-off in Nasdaq history—and the total market value of Apple fell 10%, or $671 million. “No one was minding the store,” says a computer industry analyst. “None of this would have happened with good day-to-day management. It makes you wonder if Sculley is really on top of things.”

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Tall, thin, and wide-eyed, Sculley never looks truly relaxed, despite the plaid shirts and khakis he wears around the office. Nowadays he appears downright gaunt and grim. “Last summer we could do no wrong,” he says. “Now Apple-bashing is in.” Sculley can cite plenty of statistics to counter his critics. Since he arrived from Pepsi in 1983, annual revenues have quadrupled to over $4 billion and profits have quintupled to $420 million; he says he’ll be running a $10-billion-a-year company in the 1990s. Apple’s 40% return on stockholders’ equity in 1988 was nearly three times IBM’s. And Sculley has transformed the Macintosh from an underpowered toy used mostly by computer hobbyists to a powerful machine sprinkled throughout the corporate world.

But lately IBM has been getting inspiration from Apple. Big Blue and Microsoft, one of the nation’s largest software companies, are working to give IBM’s new PS/2 line of personal computers the same engaging and easy-to-use graphics that have been the Mac’s biggest selling point. “What Apple has to answer is why a computer buyer who sees a Macintosh and an IBM side by side would choose a Mac,” says Ed Esber, chairman of Ashton-Tate, a big database software company. Steve Jobs’s new company, Next Inc., and Sun Microsystems, makers of powerful desktop computers known as workstations, have also encroached on Apple with impressive graphics and blazing speed.

To thrive in this market, Apple must pull off a delicate balancing act. It has to persuade corporations that its machines can fit into networks dominated by other vendors and that it won’t suddenly bring out a new product that renders its old line obsolete. At the same time, it must convince customers that the Mac and its successor products can significantly outperform anything IBM has to offer. Says a former Apple executive: “There’s no place for a $10 billion company selling the same thing as IBM.”

Pinning Apple down on just how it can distinguish itself from IBM is maddeningly difficult. Sculley and others talk at considerable but unilluminating length about “changing the world by empowering individuals.” What this boils down to, apparently, is that Apple will concentrate on making the Mac easy to use, insisting on consistent, intuitively obvious commands throughout all models and on thousands of different software packages that are a pleasure for even a neophyte to run. Microsoft has built a half dozen ways of communicating with a mainframe into IBM’s new desktop machines, says Apple, but it has not emphasized consistency and ease of use. The result, Sculley says, is that anyone trying the two machines will come away with the uniquely pleasant “Macintosh experience” only from using the genuine article.

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Several computer analysts say the Mac is indeed easier than IBM’s new PS/2s. “I try to be objective, but the IBM commands are unfamiliar and not intuitive,” says Roger McNamee, a computer analyst with the T. Rowe Price investment house in Baltimore. “The PS/2 is not as easy to use as a Macintosh.” Sculley is confident he can sell the Macintosh experience. “It’s intangible, but I’ve been selling intangibles all my life,” he says. “I created the Pepsi generation.”

Apple’s best potential customers, however, are systems managers at large corporations and government institutions—people the company has bypassed for years, since they tended to spurn its wares as underpowered or unfamiliar. The sales staff pitched the Macintosh to ordinary individuals in corporations, rather than to the professional systems types, touting the computer’s graphics or its usefulness in desktop publishing. That “Trojan horse” strategy for sneaking into IBM’s stronghold was enormously successful, but to keep growing, Apple must now do more. As Loren puts it, “We need to get the Mac into ‘mission critical’ applications.”

Loren has a better feel than most Apple executives for how to move Macs into the mainstream. People at Cigna say his quick grasp of complex business and strategic issues in the insurance industry helped give the company important competitive advantages. “What made him unique,” says Hank Lebed, a former Cigna president, “was his ability to relate technology to the overall goal of the business.” At Loren’s direction, Cigna put computer terminals in the offices of independent insurance agents, which encouraged the agents to write more Cigna policies and reduced paperwork and data entry chores for Cigna workers. Loren also hooked risk analysts at Ford Motor and other big companies to Cigna terminals that helped them calculate which risks should be self-insured and which handled by outside companies. The strategy created good will with customers and encouraged them to keep coming back to Cigna.

The way Apple does business with big companies has already begun to change under Loren. Says Max Hopper, head of information systems at American Airlines: “He understands our needs because he used to be on the other side of the fence.” Hopper estimates that Apple spent $500,000 reworking Macintosh software so the Mac could function as a terminal for American’s huge Sabre ticket reservation system. Putting the Mac into all 15,000 travel agencies that use Sabre would be too expensive, says Hopper, “but we may offer it as an option to agents who want it.”

Loren seems off to a good start with some customers who count. But can Apple really sell $10 billion a year of right-brained empowerment? Some computer analysts wonder. Says John Dean, with Montgomery Securities in San Francisco: “I worry that Apple will fall victim to what I call the Volkswagen syndrome. Volkswagen was a daring company that shook up the auto industry by introducing something dramatically different. But then it got cautious—started making incremental improvements in little things like taillights and windshield-wiper blades—and faded into history.”

Despite all the recent fuss, Sculley seems to have developed a sober strategy. What won’t be known for a while is whether Apple’s success still hangs on its ability to create dramatic new products—and whether Sculley has tinkered too much with the soul of the machine that makes them.

Reporter Associate: Patricia A. Langan

A version of this article was originally published in the May 8, 1989 issue of Fortune.