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

November 29, 1992|By Ian Johnson | Ian Johnson,New York Bureau

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.

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.

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."

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.

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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