Rod Waters keep a picture of a Japanese bonsai plant on his desk as a reminder of the qualities he expects of his specialty laser company, Florod Corp. One is "small but beautiful"; another is "long lived." There's nothing so remarkable about that -- except that the history of Florod could just as easily have led the studious 50-year-old to detest anything Japanese.

Nippon Electric Company Ltd. (NEC), the giant Japanese electronics corporation, nearly destroyed Florod in the early 1980s, and the stress of that setback nearly destroyed Waters as well. His story leaves little doubt that even the smallest U.S. companies are in an international marketplace -- and that they can learn to compete. Today Florod is highly profitable, with about two-thirds of its $3-million annual sales coming from overseas orders.

Waters's tale starts back in 1980, when he was just another growth-oriented, high-tech entrepreneur in southern California. He, as chief executive officer, and his partner, the chief technologist, had guided Florod to annual sales of $1.6 million over the previous six years. The company's product was a laser eraser, a device that uses a laser beam to remove tiny pieces of unwanted metal from photomasks, which are used to make integrated circuits. The market for erasers was small, probably no more than 40 companies in the entire United States, a fact that lulled Waters into a kind of complacency about potential competition.

But Waters was in for a rude awakening. When NEC introduced its laser eraser into the United States in 1980, not only was it cheaper than Florod's -- $87,000 compared to some $100,000 -- it was better. By Waters's personal rating system, Florod's products were inconsistent in quality, ranging from a few at grade A to mostly grades B and C. He rated the NEC product at a consistent B+.

Because the market for erasers was so small, it took no time for the word to get around. By May 1, 1981, Waters had to lay off a third of his work force, telling 11 employees one by one that he was "put upon" by the Japanese.

And that was only the beginning. Soon after, Florod's bank, with waning confidence in the company, seized $80,000 of Florod's cash to offset its $150,000 line of credit. That left the company so short of cash that its payroll checks bounced. Waters headed off to a factor, where he sold company receivables and paid an interest rate that came to about 30% annually. (After some negotiating, the bank gradually released $50,000 of the $80,000 in return for weekly cash-flow reports.)

Though desperate, the one thing Waters knew was that he wasn't ready to give up. "I had too much sweat equity in the company."

Waters zeroed in on two strategies: he would try to improve Florod's existing eraser; and, at the same time, he'd explore new products. As a way to get started on product development, Waters applied for a $500,000 loan from a U.S. Department of Commerce program that had been set up to help American companies adversely affected by foreign competition. He was turned down for the loan -- "they probably decided the shoe manufacturers were a better risk" -- but he was offered $20,000 worth of help from consultants who were employed by the program. Together they came up with a recovery plan based on testing five products and markets.

In the meantime, Waters was working feverishly to try to upgrade his laser eraser. He started by making his shop even cleaner than it had been, but in the process, he altered the environment that had allowed Florod to build about 10% of its product at grade. A Suddenly everything was coming out at grades B and C. And for the life of him, Waters couldn't figure out how the Japanese were able to consistently produce a grade B+ product. "We tried to find out what the Japanese were doing. It was technologically above us and not in any published literature," he says.

Waters even hired two physicists specializing in laser technology, at a cost of $100,000, but let them go within a year because they weren't making any progress either. He then switched to home remedies. He tried putting some contaminants in the tubes to re-create the earlier, more favorable conditions. He increased the humidity. He decreased the humidity. Nothing worked.

"I thought I was going out of my mind," Waters says, reflecting on those days. "I contemplated suicide. I was like in a catatonic state -- total mental paralysis. The stress was killing me."

By 1982, sales had dropped to about 60% of their 1980 level. But in August, just when things looked most bleak, Waters's two strategies paid off. As part of his market research, he had gathered names of attendees at semiconductor industry trade shows and had sent out short questionnaires asking them to indicate the new products that would interest them most in his five potential markets. Several of the respondents were looking for a device that would allow them to isolate circuits on an integrated-circuit chip in order to identify and correct problems.

That set Waters to thinking that there might be some way to adapt the laser eraser into a tool for circuit-failure analysis. "I decided that before we said 'sayonara,' we should try to make the laser eraser into a laser cutter." His goal was to be able to cut very fine wires, at up to 1/50th the width of a human hair. Such precision would allow users to isolate circuits and to identify the causes of failure.

"Lo and behold, it was a wonderful laser cutter," Waters says of the adaptation. "It was totally and repeatably grade-A performance, never less." And he knew from his research that his main competition would be makers of ultrasonic cutters, which are much less precise.

As he had done years before with the laser eraser, Waters got into his station wagon and went on a national tour to sell Florod's new product. From that tour and from the names he had gathered in his market research, he was able to generate enough orders to help compensate for the steadily eroding laser eraser sales. In 1982, Florod's revenues leveled off at about $800,000.

But as sales of the laser cutter increased, Waters saw that if he didn't do something different this time around, he would become just as vulnerable as he had been with the eraser. Diversification was an option, but he didn't have the capital to attack product development aggressively. Or he could broaden his market by selling his new laser cutter in Janpan and elsewhere so successfully that the competition wouldn't have a chance to flourish.

He decided on the second course. And he felt certain that if he could crack the Japanese market, he could sell anywhere in the world. So, in 1983, he asked around for the best Japanese representative he could find. The name Hakuto, an export-import company that represents industrial products, came up time and again from customers, from suppliers, and from others in the industry.

Following those leads, Waters arranged to meet Hitoshi Kikuiri, the general manager of Hakuto, at a trade show, and interested him in Florod's new lawer cutter. To Waters's surprise, Hakuto was even willing to pay for a demonstration model.

Even after the agreement with Hakuto was made, of course, there was no guarantee of sales. For one think, Japanese prospects were skeptical, Waters says, "simply because we're an American company." For another, Florod's product line didn't have the same credibility with the Japanese distributor as more established lines, so Hakuto didn't always push it as aggressively as it might have.

Luckily for Waters, though, there was one person on his staff who could break down both barriers: a Vietnamese engineer, Vu Tran, who had been with the company for years. As soon as Waters discovered that Tran had been educated in Japan and could speak fluently in Japanese about technical matters, his own education began. From Tran he learned how the Japanese do business. Tran coached Waters on his presentations to the Japanese, and handled requests from Hakuto for demonstrations. "You must go over there with someone who knows the culture, or you'll put your foot in your mouth and you won't even know it," Waters now advises.

In 1986, Florod got a boost when Japan eliminated its import duties on laser products of the type the company produced. By then, Florod was also getting its message across to such Japanese prospects as Mitsubishi Electric Corp. and Hitachi Ltd. After two years in Europe, sales there also were beginning to take hold -- and none too soon, given the depressed semiconductor industry in the United States. By 1987, Florod's overall sales had risen, with about 65% of the orders coming from overseas, and two-thirds of those from Japan.

As far as Waters is concerned, the explanation of his company's near fall and subsequent revival is pretty simple. Florod faltered "because of our incompetence in producing consistent quality." As for his recovery, he thanks the Japanese. "That wonderful company, NEC, that almost put us out of business, he set us up for spectacular success," he says. Without the trauma he went through, he says he would have realized far too late how necessary it was to look beyond the United States for future markets. His presence overseas also helps him keep tabs on possible competition, such as the Japanese company currently trying to sell a laser cutter. So far, he says, its technology isn't on a par with Florod's, and he sees no sign that it will catch up soon.

Florod's experience suggests that there is no simple formula either for dealing with foreign competitors in this country or for counterattacking overseas. But as in most aspects of business, planning and laying the groundwork as far in advance as possible have a way of creating good fortune later on.