Learning From Today’s Lean Times : Management: With the squeeze on profits, smart companies are taking a harder look at operations and are finding ways to cash in on opportunities presented in the down economy.

The White House says the recession is over, top business forecasters concur and a rash of statistics points to recovery in many parts of the country, albeit a slow one.

Now that the pain is beginning to ebb, there’s a natural tendency to forget the bad times. But just as those who forget history are condemned to repeat it, the recession that business just survived offers some useful lessons.

Some are obvious, of course. Good times don’t last. Be adaptable. Treat your customers right. Buy low. Sell high.

But some are a little less obvious.

Harvard Business School Prof. Pankaj Ghemawat, for example, finds that ever since the Great Depression, businesses have tended to cut investment way too much during hard times--two to four times the drop in industrial output and up to eight times the drop in gross national product.

“People worry about red ink in a downturn,” he said. “They have less concern about the opportunity costs they don’t see.”

That can be a terrible mistake. In his study, Ghemawat found that the U.S. semiconductor industry failed to invest enough after the 1974-75 recession and was driven out of the market for discrete memory chips, the largest semiconductor market, by the Japanese, who had continued investing.

Intel Corp., the Santa Clara, Calif., semiconductor giant, learned this lesson well. It invested $422 million in 1989, $680 million in 1990 and will invest perhaps $1 billion this year and for the next couple of years, all on plant and equipment, an Intel spokesman said. Despite the 1981-82 recession, Intel has raised research and development spending every year for the past 10 and will spend more than $600 million on R&D; this year.

“For us to have the opportunities and not bet on them, I don’t want to lose that way,” Intel President Andrew S. Grove said.

Why does investment suffer so much during recessions?

One reason is that managers focus on survival--everyone battens down the hatches. Also, liquidity may be severely restricted. Then there’s the herd instinct; Ghemawat says, businesses over-invest during good times. Finally, when hard times set in, it’s less painful to cut long-term investment than to cut the work force.

Another lesson? Don’t cut costs indiscriminately, especially if it affects quality or customers.

“Most organizations cut Indians and not chiefs,” complained Don Potter, president of Windermere Associates, a San Francisco management consultant whose specialty is firms under stress.

Recently, Time Warner Publishing announced plans to cut 600 jobs from its magazines, including sales and editorial staff, to save $30 million a year.

Yet Time Warner Inc. Co-Chief Executives Steven J. Ross and Nicholas J. Nicholas Jr. were together paid $99.6 million in 1990, counting the current value of their stock options, according to Graef S. Crystal, a Napa, Calif.-based compensation expert who used to write an annual executive pay analysis for Fortune, a Time Warner magazine. (He stopped because of what he called “management interference” arising from his valuation of Time Warner’s executive pay.)

One ironic lesson from the immediate past is the need to look ahead. The nation’s first recession in eight years caught many managers flat-footed. Lulled by growth, they didn’t anticipate the downturn and failed to adapt fast.

Without exception, management consultants say companies with leaders who acted decisively in the face of hard times did better.

Tod Kingsland got into the family stucco business--La Habra Products--22 years ago, unloading boxcars. Today, he’s president of this Anaheim construction materials concern.

He weathered two major recessions before this one, as well as other tumultuous times in construction.

This year, trouble struck again. In a depressed market, La Habra’s sales slipped to $20 million from $30 million a year ago. But this time, as soon as he saw the economy heading south, Kingsland moved swiftly to cut expenses and coddle steady customers by improving service and delivery.

To compensate for the 30% drop in sales, he trimmed his work force to 100 from 130. He cut inventory. He encouraged every employee to think and act like a salesperson. And he asked for help.

“I pray a lot,” said Kingsland, whose grandfather founded the family stucco business in 1926.

Kingsland did one other thing: He hired a full-time person to do nothing but collect receivables.

The experts say focusing on these I.O.U.s is a great way to make money out of thin air.

“The cash is in there,” said Bob Pearlman, a Woodland Hills CPA with many small-business clients. “Companies can go out of business by being paid late.”

Just ask Jonathan Funk, a founding partner of InterVen Partners, a Los Angeles venture capital firm: “We had a painful experience where some customers almost dragged down one of our companies. We really had to crack down on collecting the money.”

Insistent letters, attractive terms and toughness can help. Dick Poladian, managing partner of Arthur Andersen’s Southern California accounting and consulting practice, said the firm is reluctantly charging interest on aging accounts and asking the principals of troubled firms to sign promissory notes.

“After a certain period of time, we don’t do additional work for people who have not paid us,” Poladian said.

In fact, accountants say, the recession was a good time for businesses to learn to make better use of their financial statements. These can provide an early warning system when things are going sour.

“Every month, look at your financial statements,” Pearlman urges clients. “So many small entrepreneurs don’t look at financial statements or don’t do financial statements.”

The trick is to look at line items versus prior periods.

“Look for negative trends,” Pearlman said. “If you have a problem with revenue, then look at variable expenses for things you can cut.”

Harris Smith, partner in charge of the Southern California audit practice at Grant, Thornton, said it’s amazing how little owners sometimes know about the financial aspects of operations.

“Most businesses don’t know what the cost of doing business is,” he asserted. As a result, they can’t make fully informed decisions. At times, Smith said, a company will lower the price of a product to gain market share without realizing that it was losing money on the product to begin with. So the company loses more money.

On the other hand, a good grasp of the true financial picture can help companies exploit the downturn--especially if they have cash.

For instance, K. T.’s Kitchens in Glendale turns out private-label frozen pizzas, selling three to a pack for $7.99.

“The recession has helped our business because people are staying home and buying more economical foods,” company President Kathy Taggares said.

K. T.’s, whose combined pizza and salad dressing sales are expected to hit $20 million in 1991, is cash-rich. So Taggares is aggressively using her money to improve her business.

“We are negotiating tremendous discounts for everything from banking services to advertising rates,” she said. “We are renegotiating freight contracts and buying a lot of equipment at huge discounts.”

For better or worse, businesses can also get good deals on people. Since recessions mean unemployment, smart managers can find highly motivated and skilled employees.

That is just what Pic ‘N’ Save President Len Williams did in an effort to energize the discount retailer. Williams, who took over from Chairman Lewis B. Merrifield III in November, was hired by the board to return troubled Pic ‘N’ Save to its former bargain-basement glory.

“There are so few jobs around, we have had to do a lot of hiring and have brought in some very good people,” Williams said.

One recession lesson that many businesses learned the hard way is not to play it too close to the edge.

“You need room to make mistakes,” said Ian Sharlit, a Los Angeles turnaround consultant who’s helped hundreds of companies weather rough times. “You should always plan your business for less-than-expected sales.”

The recession can also make businesses think in new ways about exploiting their expertise. Stein & Co., a big Chicago-based construction company that recently completed a 60-story regional headquarters tower for American Telephone & Telegraph Co. in downtown Chicago, is flourishing by advising other clients on how to build projects.

The Chicago White Sox baseball team hired Stein to monitor the construction of a new Comisky Park. Stein is also advising the Chicago Bulls basketball team and Chicago Black Hawks hockey team on the construction of a new joint sports facility.

“We stand in the owner’s shoes,” said Julia Stasch, Stein’s president.

Perhaps most of all, recessions are humbling, and few firms are immune.

“This recession hit some of our small electronics companies harder than I would have expected,” said InterVan’s Funk, the venture capitalist whose firm manages a $50-million fund invested mostly in small Southern California companies. “Usually a small company is so focused on building the business that macroeconomic issues are secondary.”

Like earthquakes, recessions are relatively evenhanded, which leads to perhaps the two most important lessons of all.

First, don’t automatically blame the downturn if things are screwed up at your business. Chances are, the experts said, a recession just makes it harder to hide.

Second, and perhaps paradoxically, don’t be too hard on yourself.

“People get down on themselves,” said Mark H. Fowler of Emco Financial Ltd., a Santa Monica merchant bank that is no stranger to turnaround situations. He sees this self-flagellation as unfortunate. People have to feel free to make mistakes, he said.

“Some of these things that go wrong are naturally going wrong,” said Fowler, adding that it’s better to look ahead: “You’ve got to be thinking of the next window of opportunity.”

Recession Lessons

* Recessions always end. The average business cycle is about four years. Think past this one.

* Don’t cut costs at the expense of customers. Cut someplace elese.

* Figure out the true cost of doing business, your true margins, etc. You’d be surprised.

* Look for brgains. Otherwise someday you’ll kick yourself.

* Think intelligently about investment. Most firms cut too much.

* Always leave a margin for error. Plan for less-than-expected sales. Step up debt-collection. Accounts receivable are a great source of funds.

* Don’t blame the recession for all your problems.

* Don’t blame yourself for all your problems either. You’re in a recession.