(FORTUNE Magazine) – At 43, John Sculley was among the hottest of hotshots at PepsiCo. President of the Pepsi-Cola division, he was a marketing wizard with a good chance of heading the parent company. Then in 1983 Apple Computer co-founder Steven Jobs asked him a now famous question: ''Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?'' Two weeks later Sculley astonished colleagues by resigning to become president and CEO of Apple. Two years later he astonished the business world by stripping Jobs of all operating authority. When Sculley joined Apple, Jobs became chairman of the company and executive vice president in charge of the Macintosh division, overseeing the company's new product line. The Mac was launched successfully in early 1984, but a year later no one seemed to have a clear idea of how to create the next-generation Macintosh, and sales were languishing. The company had just renamed its unpopular Lisa model the Macintosh XL, but because someone in Jobs's division neglected, perhaps deliberately, to order parts for the machine, Apple was embarrassingly forced to discontinue it three months later. Apple suffered its first quarterly loss, $17 million, since going public five years earlier. In a new book written with journalist John A. Byrne, Odyssey: Pepsi to Apple (Harper & Row, $21.95), Sculley reflects on how to manage creativity and describes those tumultuous days -- including, for the first time, his inside account of how and why he broke with the man who had hired him.

I HAD BEEN losing confidence in Steve's ability to manage the Mac division. The XL fiasco only heightened my concern. The Macintosh division was no longer a product development group; it now was a large, complex business with hundreds of employees. I could recall Steve's earlier insistence on never allowing the Macintosh group to go over 100 people, the threshold where he would lose the camaraderie needed to get the most from people. He wanted to be on the front lines, involved in every decision. He never wanted to become an administrator or a manager. ^ Yet that is exactly what happened. A move that had initially seemed logical in consolidating the company's operations was now clearly a mistake. I had given Steve greater power than he had ever had and I had created a monster. There was nothing else to do: I had to remove Steve as general manager of the Macintosh division. It was a painful decision because I knew the cost was high. Steve would pay the price of a job that he liked; I would pay the price of our friendship because I knew it could never survive this. For days I racked my mind for an alternative. But I knew I wasn't doing what I was hired to do. My responsibility was to the shareholders, the board, and the employees. I had to separate my personal interests from the interests of the corporation. I went to see Steve to tell him what I had decided. He still was in a funk over why people weren't buying the Macintosh. I told him I planned to bring the issues between us out in the open with the board at the next meeting. ''There is no one who admires your brilliance and vision more than I do,'' I said. ''I changed my entire life to come and work with you, Steve. But this is really not going to work. You've either got to get a lot better, or we're going to have to make some changes. Over the past two years we have developed a great friendship with each other, but I have lost confidence in your ability to run the Macintosh division.'' Steve appeared stunned. ''Well, you've got to spend more time with me,'' he demanded. True, we weren't spending nearly as much time together as we used to. But there wasn't as much time left. I was being pulled in every direction. I WANT YOU to know I'm going to bring this up with the board, and I'm going to recommend that you step down from your operating job of running the Macintosh division. And I want you to know that ahead of time.'' ''I don't believe you're going to do that,'' he said. ''Yes, I am. I think you should focus your time as chairman on new technologies and new products that we should look at in the future. We need to reorganize the Macintosh division.'' Steve was incensed and outraged. He jumped up from his seat and began pacing the floor, his eyes focusing in a piercing and defiant stare. ''If you do that, you're going to destroy this company!'' he said angrily. ''I'm the only one who understands enough around here about manufacturing and operations, and I don't think you understand these things yet. | ''You're too far removed from the actual day in, day out operations, and if I'm not overseeing this, we're not going to get any new products out and we're not going to succeed!'' A violent disagreement erupted. Steve and I had never spoken to each other that way. All of a sudden, we found ourselves battling. Convinced I had lobbied the board ahead of time, he felt I had betrayed him. I hadn't. But it was all-out war because this was his company. He had brought me to Apple, and now I was telling him to step down from operating the division that made the product he created. I heard rumblings from other people that he had lost confidence in me, too. He was convinced that I was as much a part of the problem as anything. The fact was, we both were part of the problem. I don't think he believed I would go to the board with it. But I felt I had to. At the April 10 meeting, I told our directors they had a choice: ''I'm asking Steve to step down and you can back me on it and then I take responsibility for running the company, or we can do nothing and you're going to have to find yourselves a new CEO. We've got enough problems and we've got to solve them right now.'' I was totally prepared to deliver on my offer to resign. I had come to Apple thinking that I would stay five years, help nurture Steve as a manager, and then quit. I had no idea of exactly what I would do after that, but I thought at that point I wouldn't have many financial worries, given what I hoped Apple's stock options would be worth. Maybe, I thought, I would just go out and start a company of my own. If I walked out on Apple now, the scenario would be quite different. But I could deal with it. I explained to the board that it had become too difficult to effectively run the company with Steve in dual roles as chairman and Macintosh general manager. Steve had to accept me as the sole chief executive. I wanted him to remain as chairman and be a major contributor as a product innovator who could help develop our ideas and strategies. My solution was to work out an orderly transition with Steve so Apple could benefit from his product insights, while we would pick the strongest candidate to succeed him as general manager.

The board meeting lasted from 6 P.M. until 9:30 P.M. and resumed the following day at 9 A.M. It didn't end until after 3:30 P.M. At one point, the board met only with me; at another, it met privately with Steve. The upshot was that the board unanimously decided that we should ask Steve to step down as executive vice president and continue as chairman. It left me with the authority to implement the change. I thought it should be done gradually. Steve was stunned and visibly beaten. He couldn't believe it. Six weeks later, with Steve still holding both jobs, I was having dinner at the home of Al Eisenstat, Apple's general counsel, when Macintosh's new marketing director, Jean-Louis Gassee, pulled me aside in the living room. He appeared less playful than usual. Jean-Louis has a flair for flamboyance and for fun, but this time he was deadly serious and direct. He suggested I cancel a trip to China. Months earlier, I had made a commitment to meet the vice premier of China to talk about Apple computers in education. With some 980,000 schools and 200 million students, it is a huge potential market. The trip was important to lay the groundwork for what would certainly be a long-term opportunity. ''John,'' he warned, ''you should be aware that there are real forces trying to throw you out of the company.'' ''What do you mean?'' I asked. ''I'd rather not go into all the details, but it would be my advice to you not to go to China tomorrow. You should stay here.'' Pressed, he maintained that Steve, obviously unhappy over the likely loss of his operating role, was planning to overthrow me while I was away in China. He had ostensibly been testing his standing in talks with some managers and members of the executive staff. I was startled. If Steve wanted to mount a serious challenge to my leadership, he could have at least come to me first -- as I had first gone to Steve to openly inform him in advance that I was going to seek the board's support for his removal as head of the Macintosh divison. Steve obviously had been bitter ever since the April board meeting. We still had a cordial, if not close, relationship with each other, but we held different opinions on the direction of the company, and Steve had already made it clear to me that he was the one who could manage Apple out of its troubles. BUT I HAD come from a world where trust was everything. No one would have ever done anything at PepsiCo to undermine Donald Kendall. That wasn't even a remote possibility. At Pepsi we competed vigorously with one another, but we did so on the basis of trust. We competed openly and honestly. The board, moreover, was also upset with me because it felt I had been given a clear mandate to remove Steve at the April meeting, and various board members wanted to know why he hadn't yet been removed. One wanted Steve out of operations completely and immediately. He urged that if Steve refused to step down, we have him physically removed from the building. I had believed I could gradually move Steve out of operations and into advanced product development. Now things were getting out of hand. As much as I respected and admired Jean-Louis, I didn't want to believe he could be right. I thought up any excuse for why it couldn't be true -- his own rivalry with Steve over control of the Mac division, the tension we'd all lived through lately, the late hour, the wine. Anything. When my wife, Leezy, and I returned home, I told her about the conversation. ''I'm really uncomfortable getting on this plane and going to China tomorrow,'' I said. ''My instincts run the same way, John,'' she said. ''You don't belong on the other side of the world where no one can reach you. And what if the board wanted to talk to you immediately or if the executive staff wanted to get in touch with you?'' ''That's what I was thinking. How would they reach me? I'd be totally out of touch.'' The next morning I canceled the trip. I decided to confront Steve with the allegation in front of the executive staff. I felt it would be impossible for me to lead the company as chief executive if I didn't have the support of both the staff and the board of directors.

Everyone had already assembled in the boardroom for a 9 A.M. session of the executive staff. Steve arrived late. When he sat down, I nervously glanced around the table to measure the pulse of the meeting. But I didn't hesitate to bring the issue up. ''Steve,'' I said, ''we're not going to follow the normal agenda this morning because there is a major issue which has to be settled, and I think the whole executive staff ought to be included in it. It's come to my attention that you'd like to throw me out of the company, and I'd like to ask you if that's true.'' The executive staff wasn't shocked by the news. Steve had, by now, approached nearly all of them to gain a sign of their support of him. But they seemed stunned that I would spark an open confrontation with him. An uneasy moment of frozen silence passed as Steve looked down and then finally up at me, meeting my eyes with an intense glare. ''I think you're bad for Apple, and I think you're the wrong person to run this company,'' he said slowly, almost quietly, in a tense but controlled % voice. ''You really should leave this company. I'm more worried about Apple than I have ever been. I'm afraid of you. You don't know how to operate and never have. JOHN,'' STEVE WENT ON, getting more wound up, ''you manage by monologue! You have no understanding of the product development process. You don't know how manufacturing works. You're not close to the company. The middle managers don't respect you. In the first year you helped build the company, but in the second you hurt the company.'' I felt sick to my stomach. Steve had originally felt I should be involved in virtually every detail of the operations, but I had told him he was wrong. It wasn't necessary or desirable for the chief executive to know every detail of the company. That is the job of individual managers running a good organization. ''It's pretty clear that we have a major point of difference,'' I snapped. ''You can't be involved in all details.'' ''I wanted you here to help me grow, and you've been ineffective in helping me.'' I couldn't believe what I was hearing. Neither could many of the executive staff members around the table. They were a ring of perplexed, sullen faces. I suddenly didn't know if most of them were behind me or Steve, but at this moment it didn't seem to make a difference. ''I made a mistake in treating you with high esteem,'' I stammered. ''I don't trust you, and I won't tolerate a lack of trust.'' I hadn't stuttered for more than 20 years, yet I could feel myself briefly losing my composure, falling back into my childhood stammer. ''If I left, who would run the company?'' I asked in a challenging voice. ''I think I could run the company,'' Steve said seriously. ''I think I understand the things that need to be done.'' ''Well,'' I said, ''I certainly can't run the company if I don't have the support of the board and the executive staff. I'd like to go around the room and just ask each of the staff members how they feel about what you've just said. Because if they agree with you, it would be very hard for me to run the company.'' I went around the table as each member of the executive staff gave his opinion. All said they weren't pleased with how things were going, but indicated they were putting their support behind me. Still, everyone had affectionate feelings for Steve and spoke of the tremendous contributions he had made to Apple and the industry. Bill Campbell, our sales chief, said Steve was the heart of the company. ( ''Steve needs to have a role and be part of the company,'' he said. I LOVE STEVE,'' said Del Yocam, who ran the Apple II division. ''I respect you, John.'' He made it clear that love wasn't enough anymore, that we had to have leadership that could be respected. They were not ready to support Steve's proposal that I leave the company. ''Well, I guess I know where things stand,'' Steve said quietly, his eyes glistening with emotion. He bolted from the room, and we abruptly ended the meeting. No one followed Steve out to comfort him. I felt drained. I wondered if I really belonged at Apple.

Reeling from the day's events and shaken by Apple's poor prospects -- the stock, which had once traded at $32, was around $7 -- Sculley decided to resign. He told his wife and Al Eisenstat, both of whom urged him to reconsider. Next morning, feeling ''surprisingly strong,'' he changed his mind. (The stock, by the way, has since recovered to a recent price of $50 a share.) No sooner had I summoned the strength to reverse my day-old decision to quit when Steve called. He wanted to rendezvous for a walk in the hills at Stanford University. We had met there often, to walk and talk in confidence. This meeting, of course, would be different. Shortly after three in the afternoon the following day, we met in the hills and walked for several hours, talking about how we were going to resolve the issue. Steve argued again and again that he should have an operational role at Apple. I insisted it wouldn't work out. But Steve had the ability to totally forget anything that had occurred. He lacked the support of both the board of directors and the executive staff, yet he was bold enough to propose that I relinquish control of the company. ''Why don't you become chairman and I'll become president and chief executive officer?'' he said, almost matter-of-factly. ''Steve, that doesn't make any sense,'' I said. ''I wasn't hired to come and just be a figurehead, and the company doesn't need that. If I shouldn't be the chief executive officer, then we should find another one. But just creating a job for me doesn't make much sense.'' ''Well, that's how I feel,'' he said. ''I don't want to be a figurehead. I just don't want to be a chairman who's going off and working on long-range projects or thinking of new visions and things like that.'' ''I know you don't,'' I said. Steve wanted to prove that he could manage something successfully. He honestly felt he was better equipped to bring Apple out of its doldrums, and he believed that his moving back into product development would be a sign to everyone inside and outside the company that he had failed as a manager. ''Isn't there some way we could divide the things up, and you can work on the marketing side of the business and I can work on the product side, and we could find a way to sort of run them like two separate operations?'' Steve asked. ''I honestly don't know how that would work. My sense is that Apple's got to pull together as one company. We can't structure it into two companies.'' Splitting up the company along functional lines without a clear leader wouldn't help anyone. ''We've got a real crisis on our hands, and this is not the time to experiment. One person has got to run the company, and I've got the support and you don't.'' It was an agonizing meeting. When I told some members of the executive staff about it, they were surprised it even occurred. Why did I let myself in for a pointless, trying scene? Maybe it was a chance to reconcile our crumbling friendship; maybe it was the sheer force of Steve's personality drawing me back to him. We had become such close compatriots partly because there was no sense of competition between us. When I joined Apple, I had come to terms with what I was going to be in life. I believed that the blithe spirit in fading jeans and Velcro sneakers was one of the important figures in our country during this century. I was going to help him succeed. I never imagined that I would run the company by myself someday. Now that was the reality and our friendship was over. AS SOON AS I arrived at work on Monday morning, I called together the executive staff. They weren't open to giving Steve a major role in the company. ''John,'' one said, ''we've gone through too much on this. The company's being ripped apart. You have our support, but we expect you to show strong leadership, and you cannot let Steve back in operations.'' The issue settled, I resigned myself to the more important task of bringing Apple back. Later in the week I phoned Steve to tell him, finally and again, that there didn't seem to be any solution that made sense for him in an operating role. ''Well,'' he said meekly, obviously hurt, ''I guess that's it.'' ''I'm sorry, Steve,'' I said. ''I guess it is.'' ''Okay.'' , It was a brief conversation, an abrupt end to our relationship. On May 31, 1985, I signed the paperwork removing him as executive vice president.

Jobs remained chairman for another 15 weeks. Then he resigned, telling the board, ''I've been thinking a lot and it's time for me to get on with my life. It's obvious that I've got to do something. I'm 30 years old.'' He formed Next Inc., which plans to make computers for use in higher education. Sculley still admires Jobs deeply, especially for his ability to lead creative people. One of Sculley's principal tasks at Apple -- as it had been one of Jobs's -- is encouraging and managing the creativity of executives, engineers, designers, and programmers. WANTED: Impresario to orchestrate a workshop of wizards. You're not likely to see an advertisement like that in the Wall Street Journal. Yet when I walked through the Macintosh building with Steve, it became clear that he wasn't just another general manager bringing a visitor along to meet another group of employees. He and many of Apple's leaders weren't managers at all; they were impresarios. It is an important metaphor for inspiring creativity. Not unlike the director of an opera company, the impresario must cleverly deal with the creative temperaments of artists. At times he may coach because he knows that creativity is a learning process, not a management process. Other times he may scold because he knows that creativity requires a demanding commitment of self. The impresario must be alternately tough and admiring toward his people. In art, he ensures that the setting and stage are conducive to the production of a masterpiece. His gift is to merge powerful ideas with the performances of his artists. At Apple, we bring together a company of artists; we build the infrastructure of set designers, stagehands, and a supporting cast; and we applaud the performances of our cast members, who oftentimes emerge as stars on their own. This is the difference between inspiring the growing numbers of ''knowledge workers'' in our economy and simply motivating people. Virtually all our models of motivation derive from industrial and postindustrial labor. Getting people to reach beyond their best abilities is knowing how to manage creativity. Business literature reveals almost nothing about how to manage creativity. Nor does any other literature. For example, stories about Harold Ross, founding editor of the New Yorker and one of the greatest managers of creativity, go into detail about how much he drank, whom he fought with, why he cursed writers -- but nothing about how he got even the ordinary people under him to do extraordinary things. The traditional management gospel only thwarts us in trying to understand creativity. Management and creativity might even be considered antithetical states. While management demands consensus, control, certainty, and the status quo, creativity thrives on the opposite -- instinct, uncertainty, freedom, and iconoclasm. The traditional corporation has largely been left-brained, systematized, and quantified. The entrepreneurial model often errs on the other side. It's too loose and iconoclastic, so that when the company meets success, its managers find it difficult to control the accompanying growth without abandoning the very characteristics that led to success. Yet, to nurture the creative impulse of any organization, there needs to be some reconciliation of the two states. Apple Computer, obviously, starts with an advantage. It has no aging plants, no older work force, and no unions. Many came to Apple precisely because they wanted to work in a different kind of company. So I largely work with people who already are motivated by the company's mission to bring the power of computing to individuals. The task is to get them to work at the highest levels of creativity, not just productivity. The Macintosh team, for example, was a young group of disparate individuals going all-out to create a product that they believed would change the world. To get each artist to exceed his or her abilities, Steve would go to any length. He wouldn't hesitate to ridicule poor performance publicly within the group, yet he was a master at celebrating milestone accomplishments with his team. A little recognition went a long way toward keeping a worn-out engineer not only working but passionate about his work. He cared, too, about the environment. The Mac building's theme was great art and great artists. Its rooms were named after Picasso, Matisse, Rembrandt, and other creative luminaries. It transformed a building into a creative incubator because all these differences became symbols that Apple was dramatically different from old-line industrial corporations. There are no six easy steps to anything in management or art. But there are general principles through which the impresario works to reach a higher state of creativity within an organization. These help define the corporation's ; identity and architecture as well.

-- The safer you can make a situation, the higher you can raise the challenge. So says Tim Gallwey, author of The Inner Game of Tennis, and he's right. Apple impresarios try to remove all hierarchical obstacles, but they ensure that the resources are there when needed, and they help to build support for the work being done. The impresario makes things safe, which allows artists to do their work without having to deal with the structure of production. And we don't want people to worry about hitting a wrong note in trying to play an extremely difficult piece of music. But the piece has to be difficult. If you reduce the risk without raising the level of effort, you get high arrogance and complacency. -- Don't give people goals; tell them which way to go. We want people to reach ideas they haven't dreamed of yet. Unlike most corporations, we don't so much try to define our identity; we try to make it recognizable -- not too concrete. So we talk endlessly -- and aphoristically -- about what we do: ''We build people, not computers'' or ''The best way to predict the future is to invent it.'' Most corporate planners decide where the company should go in the next year or two by peering into the company's past and making judgments and extrapolations based on their experiences. We ask ourselves, What will 1992 be like? We create in our minds a portrait of the economy, our industry, and our company. Then we move back into the present, envisioning what we have to do to get to the future. We remind ourselves that our products make a difference in customers' lives; whenever that happens we can be truly proud. So we say, ''We help people grow,'' which refers to ourselves and our customers. The impresario must ensure that such goals and their nuances are thoroughly understood. -- Encourage contrarian thinking. While an impresario must provide a sense of discipline, you always need some low level of dissent. There should be a level of tension between discipline and anarchy. I would worry if there weren't always a little bit of anarchy in the organization. It's like arsenic: A little is medicinal, but a lot can kill you. You want to impart medicinal levels of anarchy within an organization so that people feel they are free enough to express opinions without worrying about the implications. As an impresario, I encourage and elicit contrarian views and contrasts. We want people to be able to see more than they ordinarily might. Psychologist Jerome Bruner has said that contrasting viewpoints are far better than absolute judgments, yet many corporate leaders today overly venerate decision- making and reward judgments. I find the process of reaching a decision more valuable than the results. It's important to place tension between points of view to extract the best from people. Dissent stimulates discussion, prompting others to make more perceptive observations. And it ultimately influences decision-making for the better. -- Build a work environment to extend not just people's aspirations but also their sensibilities. Creative people require the tools and environment that foster their success. Above all, they require an atmosphere conducive to fun and to thinking in nonstandard ways. The work environment needs to be informal and relaxed; it needs to remove the symbols of management, which in the traditional company means the uniform of the business suit, the closed-in offices, the overabundance of titles, the executive perks. We try to remove all those symbols, creating an egalitarian environment, because we don't believe there is a difference between the contribution of a single artist and that of an orchestrator. But we go beyond this. Managing creativity has nothing to do with people sitting around a square table brainstorming. The atmosphere is too rigid. We almost never do anything important in any of our offices -- that's where we're constrained into rational, rigid thinking. When your consciousness is occupied in relaxation, your unconscious mind -- the seat of creativity -- is freed to act. In some Apple buildings each floor is outfitted with a red-topped popcorn cart, so everyone at Apple can even sniff how different we are. It's another symbol to remind us that Apple is not a traditional corporation, so it doesn't think in traditional ways. And at the end of each workweek on Friday, the company sponsors beer busts in every building. It's not that employees are into drinking beer; it's a weekly gathering point where people can informally exchange discoveries with each other, a way for a large company to become smaller. Almost every building has its own theme, so meeting and conference rooms aren't identified by cold, impersonal numbers. Instead, they are named by employees who decide on the theme of their building. In our ''Land of Oz'' building, the conference rooms are named Dorothy and Toto. Our Management Information Systems Group has meeting rooms with names such as Greed, Envy, Sloth, Lust, and the remaining deadly sins. It's not accidental that many of these are the symbols of childhood (popcorn included). William Blake believed that in growing up, people can move from states of innocence to experience, and then if they're fortunate to ''higher innocence'' -- the most creative state of all. If a traditional corporation did the same, would it work? Probably not. Because these elements of the new architecture only affirm the vision of the company and how it differs from other corporate models.

-- Build emotion into the system. Defensiveness is the bane of all passion- filled creative work. We keep defenses down in several ways. One way is by thinking about problems differently -- not as negatives, for example. We are thinking of giving people medals for problem finding, not just problem solving. Our world moves so fast that new problems are being created all the time. The people who find them have tremendous powers of creative observation. We also deflect defensiveness by our large and public system of rewards, which includes cash and stock option bonuses, individual research budgets, extra time off, even all-expense-paid skiing trips. There are special bonuses, separate from merit raises and base salary plans, that put thousands of dollars in individuals' hands within two to three weeks of authorization by their manager-impresarios. -- Encourage accountability over responsibility. We don't give creative people traditional responsibilities, like being at the office every day from 8 to 5, or check on them for efficiency and punctuality. Instead, they are made accountable for the results of their work. People are given the flexibility to perform a lot of work at home. Indeed, some spend only a day or two a week at the office. Just as academia offers its people the freedom to structure their own time, we do the same, and yet people work incredibly hard. The impresario must have a clear grasp of what it is we are all here to do. His artists need both the freedom and the discipline to let their creative ideas take us on incredible unexplored journeys. Someday, maybe we'll see more companies searching not for managers and employees, but for impresarios and wizards. If we fall into the trap of adopting clever cliches about how to manage better, we will end up a second-rate country in the next century. If we are unable to tap the creativity of our people, we will fail. If we lack the ability to envision bright ideas as the truest source of power, we may watch from the sidelines as other nations lead the way.