(FORTUNE Magazine) – THE YEAR isn't even over yet, but John Sculley is already waxing philosophical. ''Nineteen ninety has been the worst year in my business life,'' says the CEO of Apple Computer as he nudges his cherry-red Chevy Blazer onto a Silicon Valley freeway and levels off at a sedate 55 miles per hour. ''But it's also turning out to be one of the best.'' No wonder Sculley, 51, thinks things have been rough. Since January, the 14- year-old Cupertino, California, personal computer company has suffered flagging growth, an embarrassing turnover of top management, stiff competition from IBM-compatible PCs, and rock-bottom employee morale. So what's there for Sculley to crow about? The answer: ''Apple always does its best when its back is to the wall. The world will soon see that Apple is on the offensive again.'' He's serious. Later this month Apple will revamp its popular Macintosh product line, rolling out three new systems priced to undercut similarly equipped IBM compatibles. One of the new machines, a budget model retailing for less than $1,000, made it from drawing board to factory in under nine months, half the usual development time. Another, outfitted with a full-color monitor, will sell for under $2,500, half the price of current color Macs. The new units will hit the market just in time for the Christmas quarter, historically Apple's strongest. Hawking Macs at low prices represents a screeching U-turn in Apple's strategy. Since 1986, in an attempt to shed the company's hobbyist image and tap into the lucrative market for office computers, Sculley had focused on building ever more powerful -- and expensive -- Macs. The line now includes six models, ranging up to the Macintosh II FX, which features fast processing, capacious memory, and lavish color graphics and sells for more than $10,000. This high-end, high-margin approach transformed Apple into one of the fastest- growing and most profitable makers of PCs. Sales swelled from $1.9 billion in 1986 to $5.3 billion in the fiscal year ended September 1989. Profits nearly tripled as well, to $454 million. But last winter the strategy ran out of gas. Unit sales of Macs started to slip, and Apple's worldwide market share declined from 9.5% in 1988 to 7.3%. Revenue growth for fiscal 1990 is expected to sag alarmingly, to below 6%. The company's problem: a dramatic change in the PC industry. Among the IBM compatibles, which account for nearly 90% of the global market, cutthroat prices became the main selling point. At the same time, Apple, which had no cloners to fend off, kept churning out premium Macs. By last Christmas the company seemed totally out of step: A Mac with a color monitor, large memory, and hard disk cost $5,000 -- the price of two comparably equipped IBM clones. Those same business customers who had clamored for more powerful Apple machines now complained that Macs were simply too expensive. Likewise, Apple's original customers -- individuals, schools, and small businesses -- were deserting to the clones. Finally, this year software kingpin Microsoft Corp. unleashed a frontal assault. It released Windows 3.0, a program that gives IBM compatibles a snazzier screen that rivals the famously friendly Mac. Windows machines aren't Mac clones, but they come close enough to make Apple sweat. Sculley has devised a two-pronged counterattack, in which he hopes lower prices and a broader product line will jump-start unit sales. The latter gambit is not unlike his successful scheme at PepsiCo in the early 1970s to package soda pop in eight-packs, instead of six, and 32-ounce bottles, rather than 24. By cutting Apple's notoriously fat and forgiving operating margins, the strategy will profoundly alter the company's way of doing business. If it works, Apple will open up new markets for the aging Macintosh line and buy itself time to discover the breakthrough technologies necessary to remain a PC leader. If it doesn't work, profits will drop precipitously, and Apple, short of cash for research and development, could end up an also-ran in the industry it invented. The emphasis on low-cost Macs is just the outward manifestation of a whirlwind of change. Says senior vice president Albert Eisenstat, 60, who has been at Apple longer than any other top executive: ''The low-cost machines are creating a whole new ball game for Apple. It calls for new disciplines and permanent changes that go to the core of the company.'' While Sculley has always been known for rearranging organizational charts, this time he is tackling Apple's independent, self-indulgent, almost unmanageable corporate culture in earnest. In the past the company has considered that culture one of its most precious assets: Employees truly believed that they were changing the world, not just building computers, and worked hard to achieve that lofty goal. Says Sculley now: ''It's dangerous to have a company defined by religion without a little pragmatism.'' It's as if Sculley, who has led Apple for seven years, has finally put the ghost of iconoclastic co-founder Steven Jobs to rest and is intent on casting the company and its products in his own more down-to-earth image. That's one of the things different about Sculley's most recent attempt to control costs and impose order on Apple's free-wheeling management. His last try, in fall 1988, was a wholesale decentralization. He broke Apple into three sales and marketing divisions covering the U.S., Europe, and the Pacific, and a division to handle product development and manufacturing. To shape up Apple U.S.A., the domestic marketing unit, he turned to Allan Loren, 52, the gruff former information systems chief of Philadelphia insurer Cigna Corp. To oversee the product division, Sculley promoted the quirky Jean-Louis Gassee, who had been an architect of the high-end strategy. The reorganization helped the European and Pacific operations thrive. The other two divisions, however, had problems. Sales in the U.S. slowed as Apple lost ground to IBM and its clones, products bogged down in the lab, and the company began to splinter as marketers and product developers blamed each other. In the last three months of 1989, the company had a poor quarter, with sales flat and profits lagging 11%. Apple wasn't a happy place. IN JANUARY, Loren resigned, thoroughly wrung out. (His marketing moves are still roundly criticized at Apple, but his cost cutting paid off after he left, helping profits grow impressively even as sales remained stalled.) With Loren's departure, Sculley reached again for the organization chart. He brought in Michael Spindler, 48, a respected, longtime Apple executive in Europe, as chief operating officer, a position Sculley had abolished in the 1988 shakeup. ''Diesel'' as the German executive is known to his friends, was an employee favorite. In the previous three years he had masterminded the tripling of Apple's European revenues and was an engineer to boot. Moreover, he had been with Apple since the Jobs days. Thus, he had the credibility to help Sculley clean up some of the mess. Right away the two laid off 400 employees, Apple's first firings in four years. Next they decided to do something about the company's sluggish product development, led by Gassee. The first portable Macintosh, introduced in 1989, was an embarrassment. Two years late, it weighed and cost three times as much as other laptops. Moreover, Sculley and others were frustrated that two low- cost Macs started by Gassee in 1989 were still in the oven, despite increasingly desperate pleas by software developers and Apple's salespeople for cheaper models. In March, Sculley took control of product development himself, pushing aside Gassee, who left the company a few months later. The move was tough for the rank and file to accept. For one thing, Gassee, an irreverent Frenchman who sported a diamond earring, was immensely popular. Many saw him as the keeper of the uncompromising ideals of Steve Jobs. For another, everyone was aware that Sculley, who is an architect by training and a marketer by profession, is no technologist. Ian Diery, president of Apple Pacific, recalls how he reconciled himself to the change: ''I, like a lot of people, wondered whether John was the appropriate person to lead product development. I now see the benefit. Can you imagine how long it would take to bring in a new chief technical officer from outside? We simply didn't have the time, nor was there anybody else inside the company with the stature the job required.'' One who has no qualms about Sculley's leading R&D is Alan Kay, Apple's most famous technology guru. Kay, a charismatic character who helped dream up the concept of personal computers in the 1960s, is one of four Apple Fellows who are paid to brainstorm about future technologies. He is also Sculley's chief mentor in things technical and lately has had a profound influence on the CEO's technology and business strategies. ''John is smarter than your average Silicon Valley CEO,'' says Kay. ''His strongest suit is his natural tendency - toward system thinking -- how disparate technologies will work together in the next wave of computing. Running R&D will give him a better chance to deploy that vision within the company.'' Sculley says he now spends 70% of his time on product development. He immediately accelerated the schedules of Gassee's low-cost Macs and ordered up the budget model that will replace the best-selling Mac SE, which lists for $2,295. Sculley also restructured the product development teams to remedy a problem that has nagged Apple from the beginning: its inability to execute simultaneously the development of more than one major product. Says he: ''We have to prove we can walk and chew gum at the same time.'' In the old setup, engineers reported to the heads of their particular technology units -- disk drives, video circuitry, or system software. For a product to be born, its manager had to get all the technology sachems to agree. In Sculley's new arrangement, engineers report directly to the product's manager.

The CEO also reset priorities for the Advanced Technology Group, the farsighted engineers charged with developing innovations that Apple will build into products later in the decade. He wound up canceling several projects and spinning out another into a company, called General Magic, in which Apple holds a 20% stake. (That company, started by two of the wizards responsible for the original Macintosh, is working on a portable device called a Personal Intelligent Communicator, which combines attributes of PCs, beepers, cellular telephones, and other devices.) A few top engineers quit as a consequence of Sculley's moves, but many who remain say they welcome his clear-cut priorities. Some wags have taken to calling their former boss Jean-Louis Passe. WITH the Apple Products division shaped up, Sculley next had to find a replacement for Loren as head of Apple U.S.A. (The other two divisions, Apple Pacific and Apple Europe, are still growing and prospering.) He approached three former Apple executives, victims of earlier reorganizations. All of them turned him down. So Sculley looked further. He settled on Robert Puette, 48, a burly veteran of Hewlett-Packard, the granddaddy of Silicon Valley companies and an oasis of managerial calm. Puette, a former college football player who says his strengths are ''blocking and tackling kinds of things,'' will oversee the $25 million campaign that will kick off the new Macs. Sculley had still another headache: morale. Employees who were being asked to curtail spending resented the cushy perks offered to top executives, including the signing bonuses awarded to some on the way in and the golden parachutes others enjoyed on the way out. Many employees thought Apple, in its emphasis on expensive, high-performance computers for business, had forsaken the company's original customers -- schools and individuals. In May the company ordered a survey to see just how bad morale was. The results hit the top executives hard. Says Sculley: ''It's not much fun getting a report card that says management is out of touch.'' Adds senior vice president Eisenstat: ''I don't think we got a bum rap. They complained that the company had lost its ability to verbalize a direction the employees could latch on to.'' So Sculley and his staff started working on the vision thing. Recently he and Spindler explained Apple's latest corporate strategy and technological priorities to an annual gathering of 300 top managers from all over the world. Versions of their presentation are currently filtering down to the troops. As Sculley explains it, Apple will continue to produce costly, high-powered machines, but ''the low-cost Mac strategy is the first, most immediate priority.'' Besides making Macs affordable to more customers and more attractive to businesses, he hopes that the anticipated higher unit sales will assuage software developers, who lately had begun shifting programming resources to Windows projects. Windows' allure is compelling -- in the five months since the software was introduced, Microsoft has sold one million copies. In contrast, Macintosh sales for all of 1989 were about 650,000. Even Apple's software subsidiary, Claris, is developing products for Windows. The second priority, says Sculley, is to come up with ''innovative laptop and notebook computers, where we are obviously behind the power curve.'' Indeed, Sculley believes that in a few years portable computers will be as ubiquitous as calculators. Hence, he goes on, sounding like a computer nerd, ''miniaturization and mobility, and the software that makes it all work, are the keys to the next paradigm in computing, and that's where we're concentrating much of our research.'' This concept bears the stamp of Alan Kay, who'd like to see Apple build what he calls ''intimate computers'' -- portable devices the size of a notebook, or even a paperback book, that can read and manipulate handwriting and plug into computer networks. Priority No. 3: pumping up Apple's software prowess. The Mac's operating system software is what gives the machine the distinctive look and ease of use that are its main selling points. The company has been struggling to bring out System 7, a powerful new version of the operating system that will help Apple beat back the challenges of Windows and OS/2, an advanced operating system from IBM. Since Sculley took over R&D, System 7's debut has been postponed twice as programmers iron out bugs. The delays have convinced him that Apple needs to rethink how it manages software development. Making sure the Macintosh has top-notch applications programs -- word processors, database managers, drawing packages, and the like -- is also important to the CEO. Claris, the $90-million-a-year unit that develops and sells such software for Apple's machines, has been a quiet success since its creation three years ago. To sidestep accusations of favoritism from the independent software houses with which Claris competes, Apple had promised to spin it off into a public company. This summer, however, Sculley and Spindler reneged. They believe Apple needs to stay in the applications software business if it wants to remain a prime player in PCs. Finally, Sculley promises a ''kinder, gentler Apple'' in its relations with other computer makers. In the past Apple has stubbornly refused to license much of its technology to others and has been quick to sue companies it feels copied its innovations. A celebrated lawsuit charging Microsoft and Hewlett- Packard with misappropriating Macintosh software (a charge they deny) is still pending. Now, says Sculley, ''we recognize that relationships with other companies are important if Apple wants to be more than a niche player in the PC industry.'' He stops short of predicting that Apple will license its operating system so others can make Apple ''clones,'' but Spindler and other managers say the company won't rule out anything. Interestingly, Apple's new openness toward taking on partners comes just as the PC industry's most influential marriage is showing signs of strain. In September IBM and Microsoft, the two companies that set operating system standards for IBM-compatible PCs, said they would divide, rather than share, responsibility for PC-operating systems. Microsoft will handle Windows and DOS, the current PC-operating system, and IBM will shepherd the next generation OS/2. Apple believes it will benefit from a rift, which might % splinter and weaken the IBM-compatible market. Taken together, Sculley's priorities represent what Eisenstat calls ''a company strategy we can all get our arms around.'' Some of those who have left Apple recently are less charitable; one engineer calls Sculley's technological vision ''simplistic and naive.'' A former executive says the latest refashioning of Apple ''resembles a Greek tragedy'' in which the CEO's hubris is running out of control.

STILL, industry experts are encouraged, although they say Sculley's vision needs further focusing. ''The fundamental question for the long term is whether Apple sees itself as a consumer products company or a business products company,'' says Stewart Alsop, publisher of P.C. Letter, an industry newsletter. ''That's not a question that any other big U.S. computer company has to face.'' If personal computers evolve the way Kay and Sculley expect, they could well become mass-market, consumer electronics products, rather than office equipment. Observes Alsop: ''Apple would have to take a completely different approach to its business.'' This view of the future is hardly unique. Japan's Sony, the king of consumer electronics, also would like to build intimate computers. So would several small American startups, such as GO Corp., which has the backing of IBM. None have the engineering resources or track record of Apple in bringing out trend- setting computers, but Sony has deeper pockets and the startups may be nimbler. Sculley's newest vision has already changed the way managers around Apple talk. Suddenly, instead of spouting New Age bromides that celebrate the ''empowerment of employees,'' executives are tossing around words like pragmatism and accountability. Spindler cautions employees not to mistake ''style for substance, or culture for strategy.'' Puette promises carefully sifted ''nuts-and-bolts marketing messages rather than anything that sounds sexy.'' Yet, for his strategy to work, Sculley must somehow stir the creative passion of Apple's 12,000 employees. Otherwise this reorganization could end up requiring yet another draft two years down the road, leaving the work force more jaded than ever. Sculley, who had the advantage of booming markets and fat profits for his shakeup in 1988, knows that he must get it right this time.

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