(FORTUNE Magazine) – HERE'S A TEST of your investment acumen. You have a choice of buying stock in one of two companies. Do you believe in return on shareholders' equity? For 1988, Company A had an ROE of 22%; Company B's was 18%. Do you like earnings per share? In the past five years Company A has increased them 123%, while Company B's have gone up 68%. You want dividends? In the same period, Company A's dividend has about doubled, while Company B's is up 55%. P/E ratios? Company A's stock has risen from 27 to 64 but still trades at a multiple of just 11 times earnings; Company B's stock has gone from 29 to 56 and trades at a P/E of 14. So which stock do you buy? Easy, right? Then why did you buy Company B -- General Electric -- instead of Company A -- Westinghouse? Westinghouse? Talk to any top executive of Westinghouse Electric Corp., and before long you'll hear the same complaint: ''We can't get no respect; we're the Rodney Dangerfield of industrial America.'' There's nothing funny about the numbers the Pittsburghers have put on the board -- but maybe it's hard to get respect when you are unfashionably diversified. While today's trend is for American corporations to brag about returning to core businesses, Westinghouse executives refer proudly to their ''portfolio'' of enterprises -- shades of yesteryear -- that range from advanced radar technology and nuclear power to 7 Up bottling. The company is also still living down unhappy reminders of a messy past, such as a complex dispute with the Philippine government, now headed for arbitration, in which Westinghouse is battling charges of bribery and sloppiness in constructing a nuclear power plant. But Westinghouse is not the misshapen conglomerate it was in the 1970s, when it ran a record club and built low-income housing. And it has been carrying on a revolution in management, dramatically raising quality and productivity in recent years. Chairman John C. Marous is convinced that by the end of 1990, when he hands the company over to his designated successor, Paul E. Lego, Westinghouse -- stodgy old Westinghouse -- will have become not just a good company but a great one. In 1975 the company was barely profitable, with a 2.8% return on sales. (Westinghouse expects to hit 10% this year.) The new chairman, Robert E. Kirby, unclogged channels of communication -- ''To make sure that if there was bad news I heard it second'' -- then began pruning the corporation's more unprofitable blooms. When he retired in 1983, Douglas D. Danforth picked up the shears. Danforth moved factories offshore, bought back stock, took a couple of restructuring hits, and channeled capital away from sluggish businesses and into fast-moving ones. Light bulbs, cable television, and many others were cut away. Between 1985 and 1987 Westinghouse made 70 divestitures but held sales steady -- and improved profits -- through internal growth and 55 acquisitions. One of Danforth's stars was Marous, who took over Westinghouse's biggest division, the troubled Industries segment, in 1983. There he joined forces with Lego. Both are engineers who had grown up in working-class neighborhoods (Marous in Pittsburgh, Lego in Johnstown), gone to the University of Pittsburgh, and spent their entire careers at Westinghouse. What the two did in Industries was surgery, though for a while it looked like butchery; between 1983 and 1985 they turned the segment from a $19 million loser into a $61 million winner. Lego's reward was a high-visibility staff job, where he learned to cultivate a bedside manner to go with his scalpel. Marous stayed with Industries and by the end of 1987 had quadrupled profits to $224 million. His wasn't the only success story at Westinghouse, but when it came time for Danforth to retire at the end of 1987 Marous got the chairmanship. Because of his age -- he was 62 -- Westinghouse also named Lego, then 57, president and chief operating officer and announced that the big office would be his in 1990. The housecleaning continued last year as Marous and Lego dumped businesses with $700 million a year in sales, including Westinghouse elevators. Now the company's still astonishing array of roughly 75 lines are arranged in seven groups: -- Industries (24% of company sales: circuit breakers, motors, transport refrigeration, hazardous waste management). -- Energy and utility systems (22%: fuel and service for nuclear power plants, waste-to-energy plants, turbines, defense materials production, and other products). -- Electronic systems (21%: defense and civilian radar, defense electronics, and more). -- Wesco (13%: commercial electrical supply stores). -- Commercial (9%: beverage bottling, office furniture, watches). -- Financial services (6%: corporate and real estate financing, land development). -- Broadcasting (5%: Group W radio and TV stations, programming, and satellite communications). In structuring their portfolio Marous and Lego, like Danforth, have relentlessly aimed to create value for shareholders. ''It's the whole basis of what we do,'' Lego says, boasting that Westinghouse has ''the most sophisticated strategic planning process of any company in the United States.'' The process is called Vabastram (for VAlue-BAsed STRAtegic Management). Behind that Sanskrit-sounding acronym is an arsenal of techniques, mostly developed by Donald Povejsil, now retired as vice president for corporate planning. Vabastram, says Burton Staniar, chairman of Westinghouse Broadcasting, ''forces internal units to make decisions that will increase shareholder value.'' One technique involves calculating what Westinghouse calls a ''warranted equity value'' for each piece of the company -- in essence, notional balance sheets the sum of whose assets equals the assets of the company as a whole. Westinghouse calculates these imaginary annual reports not only at the business unit level but below that level, in some cases down to individual product lines. This, Lego says, ''allows us to portfolio-plan on a micro basis.'' Acquisitions must pass a shareholder-value test and must complement existing lines of business. An example: hazardous-waste disposal, an outgrowth of the technical expertise and familiarity with complex regulatory environments that Westinghouse had developed from years of handling its own hazardous and nuclear waste. In the last two years the company has made a pair of acquisitions to get both on-site and off-site waste destruction capabilities. Now toxic and industrial waste disposal is a $200-million-a-year business (among the top five in the industry) and growing 30% a year. That snazzy growth is helped by snazzy new tools like the ''pyroplasma torch,'' installed in a truck trailer that can be driven to a waste site. Load the gunk into the ! truck, turn on the torch, and its 5,000 degrees C. blast dissociates the molecules of nasty stuff like PCBs and renders them harmless. The torch, it turns out, was a happy accident: The Research and Development Center and the Power Circuit Breaker division invented it as a way to melt scrap metal. Serendipitous discoveries seem to occur when a company sticks to what it knows. Another came when a decision to expand its boiler-service business led Westinghouse to buy Global Power in 1983. Global, in turn, owned 80% of O'Connor Combustor, which made a highly efficient rotary kiln. Says Theodore Stern, the executive vice president who runs Westinghouse's utility businesses: ''Our original thought was to spin off O'Connor. We were expanding into service -- O'Connor didn't really fit.'' But when Westinghouse engineers began playing with the big, spiraling O'Connor combustor, they realized that it could be used to convert municipal waste into energy. The result: a brand- new business for Westinghouse, which has grown to a $1 billion backlog in two years and is also targeted to grow 30% a year. Thanks to the rigors of Vabastram, fast growth doesn't imply fast-and-loose management. Joseph Dorrycott, who runs the Resource Energy Systems division, bid on only half the contracts offered last year, and won half of those. Mindful of regulatory pitfalls, he'll bid only if he can show a profit at every phase from design to operation. As a result, Dorrycott's young division has made money from the start, while less disciplined competitors -- some of which have offered to sell out to Westinghouse -- are still smarting from losses they took in the early stages of construction. Patience and discipline have been institutionalized. Three times in the past four years Westinghouse has tried to add a television station to the five owned by Group W, and three times it has backed away when the price got too high. Meantime Staniar, the group's boss, made a deal in April to buy ten radio stations from Metropolitan Broadcasting Corp. and Legacy Broadcasting Inc. (The deal, estimated at $375 million, hinges on whether the broadcasters can buy back some junk debt.) Looking for TV and ending up with radio sounds like the plot of Working Girl, but it's smart business: Group W stands to pick up an estimated $35.6 million in cash flow and become the second-biggest radio network in the country (after ABC), with stations in nine out of the ten biggest markets and about $190 million in advertising billings. Such dealmaking has won the respect of investment professionals. A year ago security analyst Linda Shuman at Prudential-Bache was expressing her ''distrust in management's competence in the crucial areas of strategic planning, acquisition analysis, and financial controls.'' Today she says, ''They've gotten infinitely better than they were. Their acquisitions make sense. They're buying companies in areas where they're good -- broadcasting, environmental services, defense.'' A favorite: The torpedo business of Gould Inc. was ''a superb move -- they paid $100 million for what's now $100 million in sales and going up.'' COMPLEMENTING Vabastram's discipline is a part of Westinghouse that pulls rabbits out of hats: It can make inventory disappear, levitate productivity, and turn red ink into black. Ten years ago Westinghouse set up a skunkworks it called the Productivity Center. Showing that it was serious, the center's leaders within months declared that productivity was a byproduct of quality and changed its name to the Productivity and Quality Center. ''When you accept the challenge of doing the same work in half the time, you must improve quality,'' says Carl Arendt, the center's marketing manager. ''By definition bad quality is a waste of time.'' The message clearly got through: In company shorthand, the center is always referred to as the Quality Center. Installed in a former Chrysler warehouse outside Pittsburgh, the center is a SWAT team of some 130 computer gurus, consultants, and engineers whose job is to help business units ''do the right things right the first time.'' The center has a sweeping mandate. Says Lego: ''When most people think of quality they think of the product; we try to think of the process.'' He means looking for ways to improve everything that goes into a product, from engineering to plant maintenance to billing. The goal is customer satisfaction -- the result of emphasizing quality rather than productivity. Boasts John Yasinsky, executive vice president for World Resources and Technology: ''In any major business that we're involved in, we're probably closer to our customers than any of our competitors.'' A business unit can order a Total Quality Fitness Review for all or part of its operation whenever it wants to. The call goes out almost 100 times a year, bringing a team from the Quality Center to conduct interviews and analyses at all levels of the organization -- and, notably, to survey customers. The team identifies weaknesses in training, processes, and products. The results are translated onto a Total Quality scorecard and presented to the manager. They are not passed up the chain of command; instead, the Quality Center helps managers set up teams to discover and deploy improvements. Quality Center experts stand by to advise and measure results. The process can become an obsession. At one point the Thermo King factory in Galway, Ireland, which makes truck refrigeration units, had 300 employees and 48 quality teams; the Nuclear Fuel division, while waiting to hear if it would win the government's Malcolm Baldrige Award for quality (it did), was busy with 19 new self- improvement projects. The teams don't stop on the factory floor. Mainly because of the center's work, white-collar productivity is rising 6% a year at Westinghouse, twice the national average. In the company's service businesses, where the inventory rides up and down in the elevator, productivity is harder to quantify. The center is now working with the corporate finance staff to invent accounting techniques to capture the savings and identify ways to save still more. Even so, claims Arendt, Westinghouse can quantify enough to know that savings in services are ''significantly larger than those in the factories.''

The Productivity and Quality Center's work is winning fans outside Westinghouse. Says Tom Davenport, a senior research associate at the Harvard business school: ''The approach is unique. It has a heavy emphasis on process redesign and more of an information technology component than others.'' For example, the center helps its ''clients'' find new uses for the companywide electronic mail system. Westinghouse is also unusual, says Davenport, in applying the techniques to corporate staff. ''They must be pretty good,'' he adds. ''Consulting firms have tried to hire their people away.'' The Boston Consulting Group has already got one. As Westinghouse gets its house in order, the Quality Center works more and more with customers. When Pacific Power, an Oregon utility, told Westinghouse rep Paul Shameklis that it wanted to set up a computer link with his company to get a 10% saving in ordering costs, Shameklis went one better: He put Pacific Power together with the center, which flow-charted and redesigned the utility's entire purchasing process. When the changes are all in place, the time it takes to send and process a purchase order will drop from 14 days to six hours, and the cost per order from $86 to $12. Shameklis proudly put in for one of the company's quality awards. He came in fourth. You can't spend time at Westinghouse without realizing that Total Quality is the house religion. The missionary zeal begins at the top. Marous set an example for the faithful by ordering a fitness review of his own office. ''Total Quality is everything, it's everybody,'' he says. ''It's a matter of survival. And it is almost like a religion. To have total quality you're going to have to change your culture. You can't change your culture without an emotional experience. The Japanese have given us that.'' He likes to tell about an employee in Columbia, South Carolina, who was asked by a visitor if he was a machine operator. ''I used to be the machine operator,'' he replied. ''I manage machines now.'' MAROUS faces obstacles on the road to corporate greatness. Westinghouse's defense business cannot sustain the 13.5% growth rate of the Reagan years -- the company is aiming for 8% -- and the Utilities segment will grow more slowly, since hardly anybody is adding generating capacity. Westinghouse keeps its nuclear engineers sharp by servicing and fueling existing power plants and managing government-owned reactors. This spring the company took over operation of the government's troubled Savannah River nuclear-weapons materials plant, the probable site of a new government production reactor. Westinghouse has poured millions into developing a new-generation nuclear power plant, the AP600, and is confident that it represents the future of nuclear power in America -- if there is a future for nuclear power in America. Even Robert Pollard, a nuclear engineer at the Union of Concerned Scientists and one of the industry's toughest critics, says that the AP600 is ''a better deal'' than conventional nuclear plants because, with 50% fewer moving parts and safety features that require little or no action by workers, ''the probability of an accident occurring is lower.'' But for Westinghouse that better deal isn't a good deal until someone orders an AP600, and if Pollard and other critics have their way, that day will never dawn. Meanwhile the nation's 112 nuclear power plants get older and more worrisome. Such is the public's skittishness, Stern acknowledges, that few people distinguish between one kind of reactor and another. To the public an accident anywhere is proof of an accident-waiting-to-happen everywhere else. The waste-to-energy business also has a superheated political and regulatory climate. Worried about air pollution and hazardous ash, several states are tightening standards for burning and disposal, and Massachusetts recently declared a moratorium on new waste-to-energy plants. Westinghouse builds ''mass burn'' plants, which consume most garbage straight from the truck. Competitors like Wheelabrator, Mitsubishi, and Waste Management are buying or licensing technologies that sort and mechanically process waste first; the resulting ''resource-derived fuel'' (RDF) produces more BTUs and recyclable byproducts along with less ash. Neil Seldman, who works for an advocacy group called the Institute for Local Self-Reliance, says the economic benefits of RDF are so clear ''we no longer plan citizen protests; we just talk to the local Chamber of Commerce.'' Although so far no Westinghouse deal has been canceled, 35 to 40 cities have killed mass-burn plants. The Environmental Protection Agency is now being asked to declare that pretreatment of waste is a so-called best-available-control technology, which would make the process mandatory. If that happened, Westinghouse would have to add a costly processor to the O'Connor combustor, putting the gift horse in a whole new race. Diversity should keep Westinghouse safe from the worst effects of an economic downturn -- environmental and utility services, for example, are fairly recession-resistant. But the company is not immune to the business cycle. A recent dividend increase commits it to pay out 40% of profits, equal to about a 7.5% return on equity. Lego estimates that another 7.5% in ROE is needed to feed existing business. Whatever's left is free cash flow, available for stock buybacks, acquisitions, or still higher dividends. If it can keep ROE in its target range of 18% to 21%, Westinghouse will have plenty of money to play with or reinvest. This year, Marous says, the company will generate enough cash to make a billion-dollar acquisition. But that attractive financial picture could change if capital spending, defense, construction, and real estate -- the markets that have given Westinghouse its fastest earnings growth over the past ten years -- slow greatly. If the machine starts to smoke and clank, Marous and Lego can open up a sophisticated tool chest. The Productivity and Quality Center guarantees a continuing stream of ''work-smart'' ideas. The R&D Center ranked second among American companies in new patents in 1987 and third in 1988, and almost a third of its budget goes to projects for which it does not yet have a ''customer'' in the company. Westinghouse can take a relatively long view -- as a defense contractor and broadcaster, the company is shielded from a foreign takeover, and sheer size makes it a difficult target for anyone else. Almost all senior managers are engineers or physicists comfortable with technology, so radar experts understand office furniture experts and vice versa. That helps support strong internal communications. Eight task forces, each sponsored by a top executive, have the job of cutting across the lines of command to insure that a ''Eureka!'' uttered anywhere in the company will be heard wherever it can be put to use. So does an every-Monday-morning breakfast for the top 14 executives -- from Pittsburgh, Baltimore, and New York City -- who gather for a no-agenda hour and a half in which ideas are shared and problems talked out. If there's especially good news -- a big contract won, an acquisition -- Marous will uncork a bottle and pour everybody a little glass of champagne. The first time he did it, Marous says, it shook people up. But they're getting used to it.

BOX: A TOOLBOX OF TRICKS FOR DOING THINGS BETTER

More than 2,000 organizations, from NASA to Motorola, have toured the Westinghouse Productivity and Quality Center since it opened a decade ago. What the visitors see is an overflowing toolbox of techniques, many invented there. These range from tests of error-free performance to measures that quantify the value customers place on Westinghouse products vs. those of competitors -- and others that relate such values to cost and price. The most widely used tool is a method of charting the steps in making a product or delivering a service, then identifying the costs and time at each step. The result: a map of the process that helps managers find ways to squeeze out cost and time. The analysis starts on a graph with a cost axis and a time axis. When, say, a ton of copper is bought, the line jumps up the cost axis; if that copper sits in the plant for a few days, the line shifts right along the time axis; when workers begin using it, the line rises diagonally, reflecting wages; new materials cause another jump on the cost axis; and so on, until a product is shipped and billed. What's below the line at any moment is inventory -- money to you bean counters. The goal is to cut both cost and time, and shrink the area below the line. That means advanced automated factories. It means just-in-time production -- now in place at more than two-thirds of Westinghouse's factories. It means electronic mail, now routine at Westinghouse, and lots of electronic data interchange with customers.

Though the center has applied its techniques to everything from janitorial services to information systems, the results are easiest to see in manufacturing. The center has helped Westinghouse reduce average inventory as a percentage of sales from 23% to 16% over five years -- a cumulative savings of $820 million. By 1992 chairman-designate Paul Lego wants that figure down to 10%. Some parts of the company, like the office furniture business, have already reached the goal. In the Industries group, says executive VP Gary Clark, ''most plants had been jammed to the wall; now they have anywhere from 15% to 30% free floor space, and inventory as a percentage of sales is below 14%.'' A motor-control components factory in Fayetteville, North Carolina, now needs 40,000 square feet to do work that used to take up 100,000 square feet. Overall, says Lego, ''we won't need any new brick and mortar for five years -- we have essentially created factories for nothing.''

CHART: NOT AVAILABLE CREDIT: SOURCE: WESTINGHOUSE ELECTRIC CO. CAPTION: HOW WESTINGHOUSE SAVES TIME AND MONEY

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: INVESTOR'S SNAPSHOT WESTINGHOUSE ELECTRIC