The guiding principle of the winners of the future will be strategic focus.

"If you're not special, you're dead," says author Tom Peters. "Banks have the potential to capitalize upon relationships or core competencies, but there is nothing about it that is automatic."

While bank managements have continuously tried to diversify their companies, geographically and by product line, many lost their focus, contributing to the industry's loss of market share to competitors. The mutual fund, credit card, and mortgage banking businesses are obvious areas where banks lost share to single-product specialists.

We believe some of the most successful banking organizations over the next several years will exit more businesses than they enter.

Wachovia Corp. is one that has recognized the need to depart from the past and is acting on it.

Marshall & Ilsley, Synovus, Signet, Norwest, State Street Boston, and Premier have shown that a clear focus on a line of business and core banking can pay off in processing businesses, mutual funds, or finance companies.

The trend toward differentiation in business mix, earnings growth, profitability, and stock price performance has already started. Take U.S. Trust Corp., which has transformed its balance sheet from nearly 100% commercial banking to exclusively private banking and trust services, deriving 79% of revenues from fee income. The changes have largely gone unnoticed by investors, who have been focused mainly on credit quality and interest margins.

We expect that differentiation in earnings performance will lead to variations in stock performance that more closely resemble the retailing industry - just as bankers must become more retailing-conscious. While 64% of the 60 banking companies covered by Donaldson, Lufkin & Jenrette trade between seven and nine times earnings, in retailing there are only 18% of companies at the highest point of concentration - 14 to 16 times.

Successful, retail-minded bankers in the future will avoid several common mistakes:

*Being all things to all people. Banks have come to grips with the fallacies of that attitude and focus on being all things to the most attractive segments.

*Lacking segmentation or profitability analysis. Many are still not trying to change. Without segmentation and relationship profitability information, banks will continue to lose their best customers to competitors who have it.

*Thinking bound by geography. Many banks perceive their retail services as confined to their physical branch network. While it is important to maximize franchise value and capitalize on physical distribution, it is equally important to develop specialty businesses not defined by geography or by the profitability dynamics of core banking.

*Indiscriminate focus on the cross-sell ratio. Cross-selling is important in increasing customer retention, and customer retention is one key to profitability, but cross-selling unprofitable products can convert profitable customers to unprofitable ones.

*Overemphasis on branches. Most bank CEOs share the view that branches are stores, and they want to increase sales per store and square foot. That's fine, but too often we find an underappreciation of how little selling is actually done through the branches. Banks can do a lot more with them, but they are not the be all and end all. Diversification of distribution channels to meet varied customer needs is essential to future success.

*Cutting costs too much. While we strongly believe the industry's cost structure is too high relative to revenues, costs can be slashed too much in certain areas. Cost cutting requires clear strategic direction, sound analysis, and good judgment to avoid cutting into the bone.

This brings us to some of the attributes of superior performance for an era of true differentiation:

*A new breed of superior management. The management skills that led to superior performance in the 1970s and 1980s will not be sufficient. More than ever, management matters the most in the performance of banking companies, combining new skills - the ability to embrace change, think outside the box, take risks, set focused strategies, and be retailing/merchandising oriented - with traditional strengths like expense control and credit judgment.

*Uniquely attractive franchises. These will be a key to above-average growth, but with two-thirds of the banks trading between seven and nine times normalized 1995 earnings, growth prospects are not reflected in the stock prices. As credit quality and balance sheets strengthen, we expect investors to increasingly focus on the varying business mixes of banks.

*Specialty businesses. Companies with strong specialties that yield diversified earnings and stable performance will likely include Marshall & Ilsley, Synovus, First Source, National Penn Bancshares, and Allied Bankshares.

*Passion for productivity. Improvements can come through dramatic restructuring and reengineering programs and strategic expense management, along with revenue growth and/or cost savings from acquisitions. If successfully executed, reengineering can significantly improve both near- and long-term growth prospects.

Ms. Bird is chairman and CEO of Finexc Group LLC, New York, and editor in chief of The Community Banker, a quarterly journal. Mr. Brown is vice president of Donaldson, Lufkin & Jenrette Securities Corp., New York.

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