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Strategic slimming down U.S. businesses return to doing what they do best

NEW YORK — An article in The Sun Sunday incorrectly stated when Sear decided to spin off its financial services unit, Dean Witter Financial Services Group. Sears unveiled the plan Sept. 29.

+ The Sun regrets the errors.

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NEW YORK -- A new back-to-basics movement is slimming down corporate America as quickly as the latest wonder diet.

From Sears, Roebuck & Co., which decided last month that consumers don't want to buy stocks at the same time they buy a power saw, to USF&G; Corp., which abandoned the oil business, companies are responding to today's intense competition by doing what they do best. And only that.

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That strategic slimming usually involves scrapping troubled subsidiaries, but conglomerates may even be forced to sell healthy ones. Many were purchased years ago, when the corporate cure-all was diversification, and an annual report stocked with a broad range of companies was considered a sign of health rather than dilettantism.

The most recent example of this reversal: Westinghouse Electric Corp.'s decision last week to liquidate its troubled financial services operation and to sell its real estate and office furniture businesses. The new Westinghouse will focus on technology-based businesses, including environmental systems, power systems and the Electronic Systems Group, which employs more than 10,000 people in the Baltimore suburbs.

Still, no one knows whether the slimming is a long-term trend that will change how the United States does business or merely a recession-driven fad.

Business certainly has no shortage of fads. One catchword bandied about in the 1980s was synergy -- the idea that takeovers would create new talent pools and that good ideas would flow from one company to another inside a conglomerate.

But unless these companies make related products, the results are usually disappointing, author Charles Fombrun says.

U.S. automakers, for example, have found that buying high-technology companies didn't translate into quality cars. Humbled by this experience, Ford Motor Co. recently unloaded its aerospace subsidiary, and General Motors Corp. may follow suit by selling off its aerospace wing.

Sears' foray into financial services also was flawed, because the DTC industries were so different, says Mr. Fombrun, author of "Turning Points: Creating Strategic Change in Corporations."

"They couldn't convince customers that Sears was a place to do banking and buy stocks. 'Put your pension fund in our hands while you get your car fixed' just didn't work."

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What they know best

The classic example of the new trend is USF&G;, the Baltimore insurance company that has shed several companies over the past two years.

"The more you distance yourself from what you know best, the greater the chances you have of failing. Sticking to a core business maximizes your knowledge potential," said Chairman Norman P. Blake Jr., who took over USF&G; two years ago.

Staggering losses in 1990 forced a re-evaluation of the company's strategy, Mr. Blake said, leading to the sale of its Oklahoma-based oil subsidiary, as well as real estate and financial services subsidiaries. The goal: to raise money and to allow USF&G; to rejuvenate itself as an insurance specialist.

Under the old strategy, the company tried to become recession-proof by diversifying and installing specialized managers for its different divisions. But this had reduced USF&G; to a holding company, Mr. Blake says.

"It made the management into portfolio managers. The company lacked direction," he said.

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Although badly hit by claims from Hurricane Andrew, most financial analysts believe that USF&G; has turned itself around through the restructuring and will become profitable again next year. The company's stock is up, and the waves of layoffs seem to be abating.

Besides USF&G;, about a dozen other big companies have recently announced steps to focus on a few lucrative lines of business.

Some sell profitable subsidiaries to raise cash. Others sell money-losers to lighten their financial burden. But all are turning back to branches established before the diversification and takeover craze of the 1980s.

This trend has been triggered by a more competitive environment, fostered in part by increasing free trade and globalization, Mr. Fombrun says. Companies are finding that they can compete in this new environment only if they stay focused on their core business and form strategic alliances with competitors in those fields.

"Companies are distracted when they have to manage new fields. They should be concentrating on what they know best," Mr. Fombrun said.

Sears, for example, tried in the 1980s to create a financial supermarket for its department store customers by acquiring Allstate Insurance, Coldwell Banker real estate and Dean Witter Reynolds Inc., an investment banking house. But after suffering a loss earlier this year -- the first in 60 years -- the retailing giant decided to sell off its financial services businesses.

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Unlike USF&G;, Sears was not losing money with its diversifiedacquisitions -- in fact, they were its strongest performers. But Sears realized that no matter how strong these subsidiaries were, the company would ultimately stand or fall on its retailing.

Among the other companies "de-diversifying" are:

* Xerox Corp., which announced last month the sale of its Van Kampen Merritt money-management subsidiary for $360 million.

* American Brands Corp., a tobacco and liquor manufacturer that has sold off dozens of companies, including Pinkerton Guards and Sunshine Biscuits.

* Eastman Kodak Co., which plans to sell off about 10 small subsidiaries to concentrate on photography, copying and pharmaceuticals.

* E.I. du Pont de Nemours & Co., which is selling its electronics division and is forming a strategic alliance with Merck & Co. for its pharmaceutical operations.

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* Marriott Corp., which is dividing into two companies to isolate debt-laden real estate operations from its profitable hotels.

Taking the risk

Still, the trend might not mean that American businesses will permanently shift away from diversity and toward more focus.

William Greene, a management professor at the Stern School of Business at New York University, sees the wave of divestitures as part of a cyclical reaction to bad economic times.

In addition, tougher banking laws mean that highly leveraged transactions, which involve buying a company with little money upfront, are less common than in the more freewheeling 1980s, he says.

And one disturbing aspect to divestitures or diversifications, Mr. Greene says, is that the biggest risk-taker in either transaction is the shareholder.

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People may have owned Sears stock in 1984, for example, because they wanted a conservative investment in a big, traditional retailer. After Sears bought Dean Witter -- during the craze when every big company had to have a financial services company -- stockholders suddenly found themselves in the riskier financial services business.

Whether the recent wave of sales results in leaner, more competitive companies is still open to question, Mr. Greene says. Rather than forging a new corporate culture, the sales could be just an extension of the financial transactions that characterized the 1980s.

BACK TO BASICS

* Westinghouse Electric Corp. -- Said this week it would liquidate financial services and sell real estate (above) and office furniture operations.

* Sears Roebuck & Co. -- Selling Dean Witter Reynolds Inc. financial services subsidiary to concentrate on department stores.

* Eastman Kodak -- Selling 10 information and technology companies to concentrate on photography.

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* Ford Motor Co. -- Sold aerospace subsidiary and steel company and plans to spin off tractor and agricultural business. Focusing on cars and trucks.

* Xerox Corp. -- Selling Van Kampen Merritt money-management subsidiary.

* Marriott Corp. -- Plans to split into two companies by separating indebted real estate operations from core hotel operations.

* USF&G; Corp. -- Sold oil and gas company as well as investment firm. Concentrating on insurance.

For the record

CORRECTION


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