It was the hardest thing he'd ever had to do. Not just stripping his friend and sponsor, Steve Jobs, of any operating role in the company Jobs had cofounded. But then laying off 20% of the work force and reorienting the company's single-minded focus from products to markets. In the middle of what became a very public crisis at Apple Computer Inc., John Sculley, as much the gentle philosopher as the tough-minded CEO, found himself reading about theoretical physics -- about the breakdown of the Newtonian system and the role of chaos in producing new and higher orders. If it happened in physics, he asked, why couldn't it happen in business?

Since then, Sculley's mission has been to make a new order at Apple by proving that corporate controls and creativity can coexist at the Cupertino, Calif., campus. Veterans of the Jobs era still occupy many of the top positions, and in the two years since Jobs's departure, they have managed to help the company regain its footing in the all-important business market with the advent of desktop publishing and the introduction of a more powerful and flexible Macintosh II. Profits have doubled, and the price of Apple stock has soared more than 500%.

Sculley's fascination with technology dates to his comfortable childhood in suburban New York City, where as a precocious 14-year-old tinkerer he just missed winning the patent for a new color television tube that later became the basis for the Sony Trinitron. At various times, he set out toward careers in architecture and advertising before landing at PepsiCo, where a series of marketing successes (remember the Pepsi Challenge?) led him to the presidency of the soft-drink division. There he might have spent the rest of his life "selling sugared water to children" if a charismatic Steve Jobs hadn't offered him a million-dollar salary and the chance to "change the world."

This month Sculley breaks his silence about the painful end of his friendship and collaboration with Steve Jobs in an autobiography, to be published by Harper & Row. But far more interesting than any criticism he has for Jobs are the frank admissions of his own mistakes during the crucial transition. Sculley talked about those, and about the inevitable conflicts that arise when entrepreneurs try to professionalize their company's management, with editor Steven Pearlstein and writer Lucien Rhodes.

INC.: When you first took the job at Apple, how did you think things would turn out between you and Steve Jobs?

SCULLEY: Steve was founder, chairman, and largest shareholder of Apple, and at the time was in charge of building one of the most exciting products in the company -- the Mac. And he was only 28 years old. So I felt from the very beginning that it would be naive to assume that he wasn't going to want to run his own company at some point. I viewed my role when I came in really as a coach to a brilliant young founder, someone who would help him develop the skills he was going to need maybe five or six years later. Even though I held the title of CEO, I knew it was a shared leadership title with the founder.

INC.: In hindsight, that must look like a badly flawed calculation.

SCULLEY: Well, remember, the overriding consideration in my mind when I came to Apple was that I genuinely liked Steve and was impressed with his ideas and his company. I felt that he was doing things that were going to change the world, in much the same way that Henry Ford and Thomas Edison had done, and I was inspired and excited about the chance to work with him. I knew there were high risks involved, but I was prepared to accept them -- both because of the strength of our friendship and because of my willingness to step aside as soon as he and the board felt he was ready to take over the running of the company. But that was wrong. In hindsight, I can't imagine the circumstances under which it could have worked.

INC.: It happens all the time: a founder realizes a company has become too large for him to manage, and decides to take the chairman's role and bring in a CEO. Knowing what you know now, do you think that it can ever work?

SCULLEY: No, I don't think it's possible, because if a chairman is a founder, it's very different from a figurehead. A founder has a certain status that goes beyond any other title you may give him, and the founder will inevitably want to make the big decisions. The real choice is for a founder either to learn to grow and change as CEO as the company grows and changes, or to step aside. Anything short of that is not going to work. I don't think a founder can bring in a CEO under him and say, "Just pretend I'm not here." It's not in the nature of the entrepreneur.

INC.: How do you mean?

SCULLEY: Because successful entrepreneurs are almost always convinced of their own invincibility, while successful leaders of high-growth companies have got to admit their vulnerabilities. And that's the catch-22. In my experience, the hardest part of dealing with entrepreneurs is getting them to recognize their own weaknesses. Sometimes they will say they are weak in certain areas, and then try to jury-rig an organizational concept to compensate for those weaknesses. But they really don't mean it -- they don't believe it.

INC.: Before there was the falling out with Jobs, there was a much publicized honeymoon. To the world, you were the "dynamic duo." Looking back, was there some way you could have preserved that successful collaboration?

SCULLEY: Our first year together really was incredible. We had gotten through a few small crises, and the working relationship between Steve and me was going as well as either one of us could ever have wished. In fact, after the first year, Steve decided to hold a surprise first-anniversary party for me with the entire board of directors and the executive staff and all their spouses. And Steve presented me with what I'd guess you'd call a montage with various memorabilia showing the chronology of my transition from Pepsi to Apple. In accepting it, I said the reason that I was so happy and why I felt Apple was working as well as it was was because Apple had one leader -- Steve and me. He brought the technology and the product vision, and I brought the marketing and the management experience. And it wasn't until later on, when we got into trouble, that I started to realize that what had appeared to be a strength was actually the beginnings of a potentially serious problem for Apple. We were so busy trying to make decisions between ourselves that we were cutting off the rest of the organization from the process. We were running a top-down organization, and people were beginning to resent it.

INC.: Was there some incident that brought that home to you?

SCULLEY: I think it was in the fall of 1984, at a planning meeting with middle managers and the executive staff. By that time, things had been going so well that I'd given Steve the title of executive vice-president, and he had become very vocal about things -- not just about the Macintosh division, which he headed, or new technologies, which he understood far better than I did, but about almost everything that went on at Apple. And I remember at this meeting Steve made a pitch that some of the different divisions of Apple -- the sales organization, the finance section, and so forth -- be run as if they were separate companies, so that each could take on the feel of a small business. It was an interesting idea, but nobody else was really buying it. As we were leaving the room after a rather heated discussion, I heard somebody whisper to a colleague, "Why doesn't Sculley shut him up?" And for the first time, I began thinking to myself that I had made a mistake. Steve was no longer content to be Steve Jobs the product visionary; he wanted to be Steve Jobs the manager.

INC.: Which was precisely not what people had in mind when they hired you.

SCULLEY: In fact, a few months later, when the board of directors was reviewing my own performance, they expressed the same concern: that I was sharing too much of the power with Steve and not running the corporation myself.

INC.: They were concerned that things had reverted back to the way they were before you came?

SCULLEY: No, they were worried that things were even worse. When I arrived, one of the original founders, Mike Markkula, was filling in as CEO, and he was making most of the business decisions. Steve was leading what was then a small project of fewer than 100 people -- the Mac -- without any profit-and-loss responsibility. And he was only one of several of the company's resident technologists.

After I came, I kept handing Steve more and more authority. By the time of the final blowup, he was in a significant operating role, with more than 1,000 people reporting to him. He was the company's public spokesman and its undisputed resident technologist. I was supposed to be the CEO. Yet I was sandwiched between a visionary chairman above me and an operating executive below me overseeing the most critical parts of the company. And they were one and the same person! It created a nearly impossible situation.

INC.: When you finally did get control, and Jobs was out, one of the first decisions you made after reorganizing the company was to "open up" the Macintosh computer. And it always seemed to me that that was an appropriate technical metaphor for what was going on at the corporate level.

SCULLEY: The Macintosh was as much a personification of Steve Jobs as it was of Apple. It represented a very focused vision of how Steve saw the world. And just as Henry Ford felt when he created the Model T, that he was creating more than simply a product, Steve felt that with the Macintosh he would change the way people would view the computer. He didn't see the need for anyone to be able to modify the machine -- you could order it in any color, just as long as it was black, to use the Ford analogy. And what it meant was that, as Apple began to compete in a marketplace where there were lots of alternative products from competitors that offered a wide range of openness, the Macintosh became more an more isolated, because it still focused on the internal vision of the founder rather than on the needs of the customers. And it was becoming clear that our customers wanted more computing power, more memory, more disk capacity, and they wanted more flexibility in terms of connecting the Macintosh to other computers.

INC.: In fact, one criticism of Apple at the time was that it was too cocky -- that Apple was not interested in what customers wanted, and that Jobs would rather not sell a computer than sell one that might hook into a network, say, with an IBM.

SCULLEY: That's a little unfair. You have to remember that Apple had become an extraordinarily successful company by going against the conventional wisdom -- that it was successful just because it had followed its own instincts rather than listening to the market. That product-driven strategy worked well as long as there wasn't much competition and Apple was, in effect, creating the industry. But once customers began to have real choices, it became very difficult for the people at Apple, because they had created such a success at the beginning by simply driving for the best possible products, by pushing the technology. Now, they were discovering that those things weren't as significant. And it really took a crisis for that point to come home.

INC.: And that crisis was . . .?

SCULLEY: . . . The entire personal-computer industry going into a recession during 1985. We found ourselves with a huge amount of inventory and gross margins that were being badly squeezed. And suddenly, the entire focus of the organization went from "How fast can we build them?" to "How quickly can we bring down inventories and control expenses?" The whole orientation of management shifted in a matter of months.

INC.: And, from what we've read, it was not a change Jobs was willing to make.

SCULLEY: Again, it is that phenomenon of the founder having to be invincible -- the founder cannot fail. And that becomes a real liability when a company gets into trouble. Because the question in that case isn't "How quickly can we change?" It becomes "How quickly can we convince the founder that we ought to change at all?"

INC.: Obviously, you had misread the market, as had practically every other company in the industry. How come?

SCULLEY: One reason was that the socalled home market proved to be a figment of everyone's imagination. People weren't about to buy a $2,000 computer to play a video game, balance a checkbook, or file recipes. People might use computers at home -- for school, if they were kids, or for business, if they were adults. But these were "power uses" that required a different kind of marketing from the standard consumer item.

INC.: And yet you were the soft-drink guy who had been brought into Apple with the express purpose of making Apple a great consumer marketing company -- one person, one computer, and all of that.

SCULLEY: That represented a terrible miscalculation, and one in which I was an active player. What we had to learn was that computer companies are only superficially like consumer-product companies.

INC.: And what turned out to be the crucial differences?

SCULLEY: The most important difference was in where you spent your money. When I started at Apple, my theory was to price our computers at a premium and plow some of that back into advertising in order to build market share, which is what you do at a company like Pepsi. Because we were growing so fast, I was able to raise our ad budget from $12 million to $100 million in that first year. But we didn't worry about increasing the R&D budget because we were already spending $40 million a year, and I thought that was plenty. In fact, robbing research to pay for advertising turned out to be a big, big mistake. Here we were, a new-products company in a new-products industry, and we could only turn out a new product every year or two -- and then only by burning out our people.

INC.: These various mistakes led to a rather painful year or two for Apple -- the departure of Steve Jobs, the layoffs, a big drop in the stock price, and lots of bad press. Do you have any wisdom about managing through a crisis like that?

SCULLEY: Other than "Don't panic"?

INC.: Yeah.

SCULLEY: Well, I found it most useful to be able to fall back on things that I already understood, to define problems in such a way that would let me use solutions that I already had some experience with. There are many times when you can make a mistake and still get a second chance, but crises aren't one of them.

In this particular crisis at Apple, I had to move quickly to get control of the entire company. At the time, the company was organized along product lines, with the Mac division and the Apple II division acting almost as separate companies, responsible for their own research, development, manufacturing, sales. It wasn't working. So I reorganized the company along functional lines because I had learned at Pepsi that it was at least one good way of giving me immediate control over a very serious situation.

INC.: So in a crisis, go with what you know.

SCULLEY: Yes, but don't necessarily be timid. Too many people tend to play it safe when they get into a crisis, but I think the safest thing is actually to take the biggest risks and make fundamental changes once you feel you understand what the dynamics of the situation are.

In the case of Apple, my understanding of the business fundamentally changed. Early on, I thought we should go for maximum growth to reach as large a critical mass as we could, and worry about profit margins after we established our dominant position in the personal-computer industry. But what I soon realized was that the business market was a better one for us than the home market, because in a business market we had a chance of getting the high gross margins that would pay for R&D. That business market was considered very, very high-risk waters for Apple, because up to that point we had not done it successfully. But on the other hand, it was an even higher risk to keep going after the consumer market.

INC.: So in a crisis, don't tinker with the margins.

SCULLEY: Because if you do, you may never get out of the crisis. And actually, crises are the best opportunity that an executive has to be able to make changes. The organization will more readily support change when you're in a crisis.

INC.: The popular image of John Sculley is that he is the professional manager from the Corporate East. Is that a fair assessment?

SCULLEY: I guess I always bristle when anyone calls me a professional manager. My sense of a professional manager is someone who is uninterested in what business it is that he is managing, but applies a set of skills -- administrative skills, marketing skills, manufacturing skills -- to whatever product he is working on, without any passion about the company or any dreams about what impact it might have on the world. It's a very sanitized view of what running a business is all about -- and not one I admire.

INC.: But how do you deal with that? You don't think of yourself as a professional manager, as you've defined it. Yet outside the company, and, I suspect, among some within the company, you are portrayed as the guy who threw Steve Jobs out and brought corporate order to Apple. You were the killer of dreams, the enemy of creativity. What kind of toll did that take on you?

SCULLEY: I'd be less than honest to say it doesn't really hurt to read that you're the one who's tearing the heart out of Apple, destroying Camelot. But you just have to keep saying to yourself that the only way they'll stop saying it is to prove them wrong -- in my case, to show that Apple is still the company that has dreams and is innovative and can change the world. I've had to try hard not to let the criticism demoralize me so that I lose my self-confidence. But I also have to make sure that I don't have a closed mind and turn off what those people are saying. We learned that closed computers don't work; neither do closed minds.

INC.: So the real danger is that you'll build a shield around yourself.

SCULLEY: And you can't do that. You have to listen. I can remember times when people would criticize me, and they would say things that hurt, but at the same time, good ideas might come out of it. So you have to learn how to separate the criticism that hurts from the criticism that is constructive -- and often they come from the same people in the same conversations.

INC.: You're sitting atop a troubled company. You've just ushered the founder out the door. How do you communicate to large numbers of people that you are not, in fact, the bad guy?

SCULLEY: I wasn't really focused on popularity. What I had to do was convince people that we were in a crisis, and that we weren't going to get out of it unless we pulled together. There were some decisions that were going to have to be made quickly from the top -- and those were the relatively easy ones for someone coming from a big corporation: cutting expenses, putting controls in place. The thing that was going to be more difficult was finding a new direction for the company that people at Apple would continue to feel excited about. How were we going to hold onto the roots of Apple? And there were no shortcuts to that. It couldn't come from a business plan. It had to come, really, from the soul of the company.

INC.: And how did tap into that soul?

SCULLEY: The only way I knew how, which was to get groups of managers together and sit down and talk it through with them. We went over the mistakes and the successes. And then we tried to figure out what things were really important to us. It meant sitting down with many, many people. And it was something that we had to do under the fire of competition, with the media writing about us and reporting on us as though we were living through a soap opera. It was a stressful time.

INC.: You seem to be suggesting a role for the CEO that is much more focused on internal communications. Is that a part of the job that you think most managers underestimate?

SCULLEY: Absolutely. In the traditional second-wave corporation -- the world I came from -- stability is a characteristic that people most admire, and so the way information and ideas move through the organization is highly structured. The CEO is essentially at the end of a process of elimination designed to create consensus. But in a third-wave company like Apple, in a fast-growth industry, stability is really a sign of vulnerability. Third-wave companies have to be built around flexibility, and dissent is something that has to be cultivated, not stifled. That means that there is nothing more important than good internal communications.

INC.: Second wave, third wave -- is it the structure of a company, the culture, or the industry that determines whether a company is one or the other?

SCULLEY: It is some of all of those. But it also has to do with the kinds of people who are attracted to work at the company. At a place like Apple, the talent pool tends to be relatively young. They're not signing up for an impressive title, a lifetime career, a good pension -- those are second-wave hallmarks. In the third wave, employees are looking for adventure, and their goal is to be able to make a difference at the company. To do that -- to feel part of that -- they have to know where the company is going and what management is trying to do. And that also puts a heavy emphasis on communications.

INC.: In many instances, a company will set out to establish some better lines of communication, and then that's quickly forgotten. Is there some way to formalize the kind of internal networking you are talking about?

SCULLEY: All companies, even second-wave companies, have informal networks. In a third-wave company, I think it's a matter of legitimizing the network -- and empowering it -- rather than formalizing it. And what that really requires is a different attitude on the part of the CEO about what the job is about. You can no longer delegate human resources to the personnel department. The CEO has really got to find a way to climb down off his perch and wander around inside the bowels of his organization, whether it's a small company or a large one, and figure out how to glean from it the ideas and creativity that can make the company better. You've got to be resourceful about it, you've got to be able to break into the internal processes of the organization. In small companies, this comes more naturally. But as companies get larger, what happens is that CEOs think they have to remove themselves from these things, and that's trouble.

INC.: One way companies try to hang on to the spirit of their earlier days is to be fairly aggressive about developing a corporate culture, which is something Apple is known for.

SCULLEY: I think the concept of culture has been misused a lot. It tends to limit a company by putting too much emphasis on tradition, on yesterday's myths and rituals, whose sole value is that they derive from an earlier time. Culture is a feel-good tool, a way for a company to remain comfortable with its habits. It is something that looks backward at the past rather than forward toward change.

INC.: Was one of your tasks, then, to break the Apple culture?

SCULLEY: It's true, we did have some cultural issues that were difficult for us to deal with. We've already talked about one -- the open Mac. When I first asked how our customers would communicate with other computers, somebody threw a floppy disk at me and said, "This. It's all we'll ever need." And they believed it! Well, we know today that, by the end of this decade, probably 85% of the personal computers that are out there are going to be, in some way, connected to other computers. So the original vision of one person, one computer that was so much part of the Apple culture had to be refined a bit: one person, one computer, but a computer connected to the rest of the world.

INC.: Any other cultural idols that had to be smashed?

SCULLEY: Oh, I suppose we used to celebrate the fact that you had the freedom to do anything you wanted at Apple, if you thought it was a better idea. That was fine when the company was a handful of people trying to invent new things. But it became very destructive when there was no focus or process for people to work together. After a while, what it meant was that we were treading water, we weren't developing new products.

INC.: When you first signed on, did you understand how powerful culture and myth and heroes would be?

SCULLEY: No, I really didn't until I'd been here a while. I remember the first time somebody said to me, "So-and-so is going to step outside of Apple for a year." And I said, "What do you mean, step outside of Apple?" And he said, "Oh, he's going off to start his own company for a while. But he'll be back." Well, I had never heard of anything like this. But I soon came to understand that the most powerful myth of all in Silicon Valley is the myth of the entrepreneur.

INC.: And you were working alongside the ultimate mythic figure, Steve Jobs.

SCULLEY: Actually, I had never viewed Steve as a hero. I thought of him as a protege, as a friend, but I never understood what a genuine folk hero he was. In the business world I came from, there weren't any folk heroes. There were Henry Ford and Tom Watson Sr., I suppose, but these weren't people who were on the scene. But now, here I was, in a world suddenly surrounded by living, breathing folk heroes, and I was not prepared for it.

INC.: Was the myth of Steve Jobs, in effect, another cultural idol that had to be smashed?

SCULLEY: I certainly didn't think of it in those terms -- I had never had more fun in dealing with anybody in my whole life than I did in dealing with Steve Jobs. But to get to your question -- yes, I think that an excessive emphasis on heroes can get out of hand. Large organizations cannot run without a very high degree of process and teamwork.

INC.: Did you feel there was the need to purge the corporation of the Jobs mythology in order to get it back on track?

SCULLEY: No -- to the contrary. I made sure we didn't purge the symbols. They are all over here -- the library, the museum. I've never avoided questions about Steve; I didn't pretend he no longer existed, because that would have been naive. I was trying to help preserve a company's roots that were almost inseparable between the founder and the company.

INC.: But without the help of the founder.

SCULLEY: Yes -- and I knew it was going to be harder that way.

INC.: How do you do that? You've made some interesting observations about the limitations of culture in trying to run a forward- rather than backward-looking organization. But organizations rely on myths and heroes because they need some sense of continuity and identity. What is the alternative?

SCULLEY: I think a better way for corporations to think about carrying the past into the future lies in the idea of genetic change. We know that in the human body, our cells change completely every seven years, and yet the same genetic code is present throughout our life, expressing itself differently in different organisms.

INC.: And how is genetic coding different from culture?

SCULLEY: Like culture, genetic coding imprints notions of corporate identity and values. But it does so in a way that is forward looking, that realizes that there will be internal changes responding to changes in the environment. Its perspective is not tribal, like culture's, but biological. Its focus is on the individual, not the group or the institution.

INC.: Maybe this is merely coincidental, but shortly after he left Apple, Steve Jobs also used a genetic metaphor. He told Newsweek that he would still feel good about Apple if he felt that his genes were still there. Do you think his genes are still there?

SCULLEY: I think that he and I are probably the wrong ones to judge that.