He’s an ordinary guy like most of us, but found something that worked and ran with it for years. He lived the dream that most of us share: to make tons of money without working very hard or taking too much risk.

After being asked about his story by numerous people he decided to write a book called “The Bathrobe Millionaire“. Which chronicles the exact strategies used to make millions of dollars online which is no easy feat. His mission is simply to share his story and hopefully inspire other Internet marketers.

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It is not a get-rich-quick book and he does not claim this his strategies will work for everyone, but he does go into detail about what it took for him to earn such incredible cash. Surprisingly, it was simpler than most people would imagine. He provides lots of practical tips in addition to his personal story. I think it’s a must-read for anyone who is serious about marking money online…

Here are some snippets of reviews the book has received on Amazon:

“I couldn’t put it down. What makes it an interesting narrative is that it is the personal story of the author from his days as a “failure” to resounding “success,” and the learning along the way.”

“This is not the sensational story of some twenty something internet billionaire. It is the story of how an “every day guy” makes his way to a comfortable life by way of the internet.”

“…a Great, well written book. Lots of great, HONEST advice. The techniques that Jason uses are very innovative and he doesn’t hold back. But his advice sprinkled throughout the book is priceless and well worth it.”

“This book should be in every entrepreneur’s library.”

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I hope you enjoy it as much as I did: The Bathrobe Millionaire.

Oil prices swung wildly this week, rising to near 30-month highs after Saudi Arabia sent troops to Bahrain, then plummeting to less than $100 a barrel on expectations that an earthquake-ravaged Japan would demand less oil.

The ride is not over yet, say economists and Wharton professors: There may be ups and downs, but long term, high oil prices are here to stay. On top of volatility caused by natural catastrophes and political upheavals, a tight oil supply and increasing demand promise to keep driving prices up steadily over time. Prices could fluctuate between $60 to $200 a barrel, but probably will not go back to $30 or $50 anytime soon, says Wharton management professor Witold Henisz. Higher prices “are going to be part of the environment for the next few years. There just isn’t a lot of surplus oil.”

Supply and demand are just part of the equation: Fear of a future squeeze also drives prices higher than they should be. That is not good news for a fragile economy struggling to reemerge from a crippling recession, but most experts are not predicting a double-dip just yet. That would require a sustained period of oil prices north of $125 a barrel — or another disaster in an oil-rich part of the world.

The fallout from the 8.9-magnitude earthquake and tsunami in Japan has added to oil market confusion. “Oil prices are being pulled in two opposite directions,” says Bernard Baumohl, chief global economist at the Princeton, N.J.-based Economic Outlook Group and author of The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. “The disasters in Japan are pulling prices down in anticipation of slower Japanese growth in the short term, and because their oil refineries are damaged and thus [they] will order less crude oil. Lifting prices higher, however, is the civil unrest in Bahrain now that Saudi Arabia and other Gulf nations have sent troops into Bahrain. The net result will still be higher oil prices because of the fear that Saudi Arabia is now completely encircled by countries that are unstable. Expect oil to remain in triple digits and gasoline prices to stay above $3 for the rest of the year.”

Every $10 increase in price per barrel translates into about a 25-cent increase per gallon of gas. Before the Japanese earthquake, the U.S. Energy Information Administration forecast a gallon of gas to average $3.56 in 2011, with a 25% chance that gas could top $4 during the summer.

Every penny increase in gas prices drains $1 billion out of the economy each year, according to Baumohl. At this point, rising oil prices are “not having a material effect on the economy,” he says, but “once gasoline prices begin to exceed $4 per gallon, the stress becomes greater.” If gas prices increased to $4.50 per gallon for more than two months, it would “pose a serious strain on households and could put the entire recovery in jeopardy. Once you get above $5, [there is] probably above a 50% chance that the economy could face a downturn.”

That is not likely to happen unless there is a major disruption in Saudi Arabia, notes Wharton finance professor Jeremy Siegel. Based on the amount of oil the U.S. imports, every $10 increase in the price of oil equates to about a quarter of 1% of the country’s gross domestic product (GDP), he says. That isn’t enough to send the economy into freefall. “If oil stays at its current level, it won’t produce a recession,” he predicts. 

Even if oil prices do keep rising, the pain probably will not be as severe as the oil shocks of the 1970s, according to Siegel. In the first place, the energy intensity of the U.S. economy — that is, the energy required to produce $1 of GDP — has fallen by 50% since then as manufacturing has moved overseas or become more efficient. Also, the price of natural gas today has stayed low; in the past, oil and gas moved in tandem. And finally, “we’re closer to alternative sources of energy for our transportation,” Siegel says, “which would be accelerated if oil really moved up.”

‘Oil Has Lagged’

Short term, there is little the government can do to mitigate the impact of rising oil prices on the economy. Wharton experts agreed that rising oil prices are not enough of a reason to tap into the U.S. Strategic Petroleum Reserve, a cache of 727 million barrels of oil stashed in man-made salt domes in Texas and Louisiana. In recent weeks, both Democrats and Republicans have called for the government to consider using some of the reserve to help ease gas prices.

The government “definitely shouldn’t do that,” even if prices rose above $150 a barrel, says Wharton finance professor Franklin Allen. The Reserve was designed as an emergency fund in the case of a sudden disruption in oil supply, not as a way to mitigate oil prices, he notes. “It’s a month supply. If something drastic happened in Saudi Arabia, it would be for that. They shouldn’t touch it now.”

Fighting rising oil prices with monetary policies is also tricky. The Federal Reserve on Tuesday chose to take no action in response to oil prices, calling the rise “transitory.” “Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks,” the Fed said in a statement on March 15. “Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.”

That is probably the right move, according to Wharton finance professor Richard Herring. “The 1970s taught us that trying to facilitate an oil price increase via inflation just doesn’t work. It could lead to stagflation,” he says. “If it’s a real change in the price of oil, there’s not much we can to do combat it.”

Herring is surprised that oil prices have not actually gone higher, given continued demand for oil from emerging markets. Over the past decade, rapid growth in Asia has fueled an increased need for all sorts of commodities, from copper and silver to agricultural products. “They’ve all gone up a lot more than oil,” Herring points out. “You could actually make the case that oil has lagged.” The long-term demand for oil is unlikely to slow down, he predicts. “Once you start putting two billion more people on the roads, as we are in India and China, even if they use just a fraction of the energy we do, it’s bound to be a huge impact on the market.”

Oil prices today behave differently than they did 15 years ago, according to Robert Ready, a Wharton Ph.D. student who studies the oil futures markets. In the past, a natural disaster or political turmoil might drive oil prices up momentarily, but there was always enough global supply to compensate; if one oil-producing nation went offline, another would step in to meet global demand.

“In the last 10 years, there [hasn't been] enough oil supply to respond to a change in price,” says Ready, who will become a professor of finance at the University of Rochester’s Simon Graduate School of Business in July. According to Ready, when discussing oil markets, supply does not refer to how much oil is left in the ground, but how much oil can be produced at any given time. After increasing for several decades, total world oil production has been roughly flat since 2004. Since then, oil prices have behaved differently: They tend to go up and stay up. “In the past, if they went up, you would expect them to go back down — but they don’t go back down anymore,” he notes. “At some point, there just wasn’t enough production to keep up with increasing demand.”

An Unpredictable Future

Embedded in the most recent spike are fears of a future drop in supply, stemming largely from social unrest in North Africa and the Middle East. Chris Lafakis, an economist at Moody’s Analytics who specializes in energy, calculates that “the fundamental price of oil should be $93 to $94″ based on naked supply and demand. But due to uncertainty in so many oil-producing countries, his forecast for 2011 has the price of oil hovering around $98 a barrel, which includes the fundamental price plus a $5 per barrel “uncertainty premium” that he expects to evaporate when crises resolve.

The problem is that nobody knows when that will be. The political upheaval that began in February in Tunisia and led to the ouster of Egypt’s President Hosni Mubarak has thrown a question mark over the entire region. Ongoing rebellion against dictator Muammer Gaddafi has disrupted oil production in Libya, which pumped out 1.6 million barrels each day before the crisis hit. Fears about further instability in the region increased Monday after Saudi Arabia and the United Arab Emirates sent troops to quell protests in Bahrain, increasing tensions with Iran. Saudi Arabia, the world’s largest oil producer, is still working to stave off its own protests: a “Day of Rage” scheduled for March 11 fell flat, but another is planned for March 20.

Escalation of unrest could cause prices to spike, according to Lafakis. If oil production were to shut down in Libya, Bahrain and Yemen, for example, the price could jump to $125 per barrel. Take out half of Iranian production, and the price jumps to $150. “And if we lost half of Saudi Arabian production, the price would go to $200 overnight,” Lafakis says. “These are low probability events. But they would have catastrophic consequences.”

Any predictions about what will happen next are “pure speculation,” says Howard Pack, a business and public policy professor at Wharton and co-author of The Arab Economies in a Changing World. “This story is in its early stages,” he notes. “It’s all very unpredictable.” Arab countries are buckling under a bulge of college-educated youth who can’t find jobs and are frustrated with stagnant autocracies. But even if popular uprisings overthrow current regimes, new leaders may not know how to move the countries forward. It is not clear, for example, whether Egypt’s military will take on the types of economic reforms that the country needs. “These countries with new governments might end up looking more like Eastern Europe from 1990 to 1996 [after the fall of Communism in the region], when GDP went down by 30% to 40%,” Pack points out.

The earthquake in Japan has thrown another puzzle piece into the mix. Japan is the world’s third-largest oil consumer behind the United States and China, and the world’s second-largest net importer. The devastating earthquake and tsunami that hit Japan on March 11 shut down a quarter of the country’s refining capacity and 11 of its 54 nuclear reactors, according to Reuters. Workers are still scrambling to stabilize four damaged reactors at the Fukushima Daiichi nuclear complex in northeastern Japan.

In the immediate aftermath of the catastrophe, Japan’s demand for oil will probably go down, Pack predicts. But longer term, a backlash against nuclear energy — in Japan and beyond — could drive oil prices back up again. “There may be more reluctance to have nuclear power plants,” Pack says. “That could have a very big effect on demand.”

Oil pundits wonder what is coming next. Wharton’s Henisz, who has studied oil company initiatives to improve community relations in several African nations, is keeping an eye on other oil-rich countries. “We’re all focused on the Middle East and North Africa, but a lot of the same conditions exist in Equatorial Guinea, Angola and Nigeria,” he points out. “I’m not saying they’re going to go like dominoes, but it takes uncertainty about [just] one of them to create a real problem.”

The world has watched in awed amazement as an unprecedented wave of popular political protest has swept North Africa and the Middle East during recent months. For Israel, situated at the heart of the region stretching from the Atlantic Ocean to the Persian Gulf, the potential implications of these developments go far beyond the price of oil. The emergence of a new crop of governments in many Arab countries and of a new generation of politically involved young people carries the potential for massive changes in the attitude toward Israel of these countries and their leaders — changes that could be fraught with danger, or laden with opportunity.

This is especially true of Egypt, the largest and most populous of the Arab countries, and traditionally the political leader of the Arab world. Although separated from Israel by the barren and largely unpopulated Sinai Peninsula, Egypt was the lynch pin of the efforts by the Arab countries to eliminate the nascent Jewish state in the 25 years following its creation in May 1948. Israel inflicted heavy defeats on the Egyptian and other Arab armies in 1948, 1956 and, most notably, in the Six-Day War of June 1967, but the resultant Israeli complacency was shattered barely six years later, when Egypt and Syria launched a carefully coordinated assault. While the initial Egyptian military successes were reversed over several weeks of intense fighting, they enabled the country and its armed forces to regain their pride and self-confidence.

The Yom Kippur War of October 1973 changed the strategic perceptions of both Israel and Egypt and triggered a process that moved the relationship between the two countries from one of ongoing confrontation and periodic outbreaks of fighting, to one of co-existence and, in some key areas, co-operation. A series of interim agreements in the mid-1970s saw Israel cede its control of western Sinai — including the oilfields it had discovered there — allowing Egypt to re-open the Suez Canal and paving the way to the full peace treaty concluded between the two countries in March 1979. This marked a watershed event in Israeli and, indeed, Middle Eastern history. For the first time an Arab country — indeed, the most important one — granted formal recognition to Israel and ended all aspects of the state of war between them. Both sides paid a stiff price: Israel withdrew fully from Sinai by 1982 while Egypt suffered a period of political and diplomatic isolation within the Arab world. But both countries judged the long-term strategic benefits accruing from the treaty as more than justifying its costs.

Common Geo-political Interests

Since then, the Israeli-Egyptian relationship has remained solid, but limited in scope. It has weathered numerous ups-and-downs, often linked to positive or negative developments between Israel and the Palestinians. Over time, the ties between the two countries’ political leadership and, critically, between the senior echelons in their military and intelligence services have become robust enough to handle periods of tension and areas of disagreement. These ties are rooted in shared interests at the bilateral and regional level.

One such area of common ground is opposition to radical Islamist groups. In the Israeli case, Hamas is the largest such group in the Palestinian political arena and its extremist ideology makes the movement a sworn enemy of Israel. However, Hamas is an offshoot of the Muslim Brotherhood which, despite having been banned by successive Egyptian governments, remains the largest Islamist movement in Egypt. In the 2006 elections in the Palestinian Authority, the U.S. insisted that Hamas be allowed to participate — despite the objections of both Israel and Egypt. Hamas won a majority in the Gaza Strip and cemented its control there the following year by ejecting its main political opponent, the Palestine Liberation Organization (PLO). Since then, Israel and Egypt have tacitly co-operated in blockading the Gaza Strip, in an effort to neutralize Hamas.

At the regional level, too, there are clear common interests. Israel has long viewed Iran as the primary threat facing it while Egypt, although not directly threatened by Iran, is nonetheless a part of the wider anti-Iranian camp, which includes Saudi Arabia and most of the other Gulf States. These countries, despite being formally hostile to Israel, are in practice allied with it against Iran, and they also look to Egypt for leadership and support.

At the global level, the Israel-Egypt peace treaty, along with other aspects of the relationship between the two countries, are underwritten and supported by the United States. Both countries are recipients of significant American military aid and their armed forces have established close links with the U.S. military establishment.  

Weak Business Links

However, beyond the governmental and military spheres, the shallow and narrow nature of Israeli-Egyptian relations is apparent. This is true in many areas — including sports and culture, where almost no links have been forged — but in trade and business it is easy to measure how much, or little, progress has been made.

Dan Catarivas, head of the international department of the Israel Manufacturers Association, notes, “Bilateral trade relations with Egypt are very narrow.” Catarivas knows not just the numbers, but also what lies behind them. In his previous role, as head of the international division of the Ministry of Finance, he played a leading part in Israeli efforts to expand trade ties with Egypt. Catarivas says that Israeli exports to Egypt, which amounted to a mere $147 million in 2010, represent the precise amount of Israeli content required in Egyptian exports to the U.S. under the terms of a trade agreement between the U.S., Egypt and Israel.

This agreement allows for the establishment of free trade zones — known as Qualifying Industrial Zones (QIZ) — in which manufacturing operations are conducted, the output of which is granted access to the U.S. market free of tariffs and quotas. The QIZ with Egypt is based on a similar arrangement with Jordan authorized by the U.S. Congress in 1997, which awarded to goods manufactured in a QIZ the same status as Israeli goods under the terms of the U.S.-Israel Free Trade Agreement (FTA). The goal of the QIZ with Egypt is to promote Israel-Egypt co-ventures and spur the creation of jobs and industrial production in Egypt.

Jordan’s QIZ agreement was a milestone on the way to a full FTA with the U.S. This encouraged the Egyptians to go down the same route and they signed their QIZ agreement in 2006, which granted tariff- and quota-free access to Egyptian goods, on condition that they contain at least 10.5% Israeli content. In order to meet this demand, Egypt gradually increased its imports from Israel of threads, chemicals, software and other goods and services used by the Egyptian textile industry, which was the main beneficiary of the QIZ.

However, the Egyptians imported no more than the minimum required, and Catarivas notes that this attitude was a key factor in the U.S. refusal to upgrade the QIZ to a full FTA, as had been done for Jordan. “We were constantly seeking ways to expand trade beyond the QIZ requirements,” recalls Catarivas. “The real aim of the QIZ was for it to serve as a springboard for other areas of business co-operation. But the Egyptians were not interested, so nothing came of these efforts.”

Natural Gas Exports

In contrast to Israeli exports to Egypt, Egyptian exports to Israel have grown and amounted to some $355 million in 2010. But these exports are concentrated almost entirely in one item — natural gas, which is supplied by a company called EMG (East Mediterranean Gas) via a pipeline across the Sinai peninsula. EMG was founded as a partnership between Hussein Salem — an Egyptian businessman and long-time confidant of ex-President Hosni Mubarak — and the Israeli Merhav Group, owned by Yossi Maimon, with the Egyptian government-owned EGAS holding a 10% stake. Salem diluted his 65% stake down to 28% during 2008 by selling 25% of the company to PTT, Thailand’s national oil company, and another 12% to American businessmen, while Merhav’s stake declined from 25% to 20.6%. Salem reportedly fled Egypt in late January or early February, as the Mubarak regime crumbled. Rumors that he was arrested in Dubai, carrying $500 million in cash, failed to be proven. On March 10, Cairo’s criminal court confirmed an order freezing Salem’s personal and family assets. 

What is certain is that in 2008, EMG signed a 20-year contract to supply natural gas to Israel, thereby becoming the largest single source of this fuel for the Israeli economy. EMG’s main customer is the state-owned Israel Electric Corp., which is in the process of converting its electricity generators from dirty sources, such as coal and diesel, to natural gas, which is both cheaper and cleaner. At the beginning of 2011, 40% of IEC generation was powered by natural gas, of which Egypt supplied some 35%, or 15% of total production.

An interesting insight into the way the general public in Egypt and Israel view their countries’ relationship is that any reading of the respective popular media, and especially the blogosphere, reveals that the Israelis are convinced that they are being massively overcharged by the Egyptians. In contrast, the Egyptians are equally convinced that their gas is virtually being given away. Indeed, in early March a spate of reports in Egyptian and Gulf-based media claimed that EMG had paid Mubarak’s sons hundreds of millions of dollars in kickbacks in return for being allowed to sell the gas cheaply to Israel.

Whether these accusations have any factual basis remains to be seen, but even in the supposedly staid world of known facts, there is plenty of drama.  On February 5, an explosion at a measuring station in northern Sinai along the pipeline supplying gas to Jordan and Syria led to the closure of a separate pipeline feeding gas to Israel. The Egyptian authorities attributed the explosion to an accident, but in Israel it has been viewed as a terrorist attack, the real target of which was the pipeline to Israel — which is better protected, being encased in concrete and buried underground. In the month following this incident the Egyptian authorities repeatedly announced the imminent resumption of gas supply, but each time the outcome was a further delay. According to a Reuters report issued from Jerusalem on March 16, the supply has now resumed. But while the disruption dragged on, it fueled the suspicion in Israel that it stemmed not from technical or operational problems but from a change of policy on the part of the new Egyptian government.

“[The supply of gas] serves as a litmus test for the attitude of the Egyptian regime,” notes Gil Bufman, chief economist of Bank Leumi, Israel’s largest bank. By the same token, he adds, the emergence of a problem relating to Egyptian supply “serves as proof that we need to diversify by having several providers. Israel’s offshore fields could themselves be viewed as multiple sources, as well as providing a solution to the problem of storage of excess supply — depleted fields can be ‘refilled’ with gas from other fields and used as ‘storage depots.’” Overall, Bufman says that the disruption in supply stemming from the pipeline incident — whatever its true cause — can and should “act as a catalyst for us to move faster in bringing the new fields into production.”

This sentiment is echoed by Uriel Linn, the president of the Federation of Chambers of Commerce. “There is a growing feeling that the gas supply issue is a kind of general warning regarding our exposure to supply disruptions, whatever their cause. This will lead to an all-out effort to speed-up the development of our own energy sources.” However, beyond the specific issue of gas, Linn stresses that “we are not at all dependent on Arab countries for trade. Indeed, our main trade with the Arab world is that conducted with the Palestinian Authority, whereas we have no substantive trade with Arab countries.”

Trade in Services

Nevertheless, there are other economic ties between Israel and Egypt beyond the limited volume of trade in goods. Trade in services is often termed ‘invisibles’ — and with good reason. There are several interactions between Israel and Egypt in services, but the impact of any disruption in these need not always be negative.

Some 20% of total Israeli trade in goods passes through the Suez Canal, so clearly anything that interfered with the Canal’s operations — whether specifically directed at Israel or a more general event — would cause problems, the least of which would be higher costs but which could have a much more profound impact if it involved a breach of the Israel-Egypt peace treaty. On the other hand, Catarivas points out that Egypt’s Mediterranean ports — Alexandria, Damietta and Port Said — have developed into regional trans-shipment ports where large ships unload containers that are then sent on smaller ships to Israel and other countries in the eastern Mediterranean. “Any prolonged upheaval in Egypt will disrupt these trade flows — but there are alternatives,” he says. “The Egyptian ports would lose this business, but that would be to the benefit of ports in Turkey, Israel or elsewhere.”

Tourism is another quintessential service sector — and a critical one for Egypt, where it accounts for 11% to 12% of both GDP and employment. Here, the impact of a crisis is more complex. Experience shows that even a specific incident in one country, such as a terrorist attack, has a knock-on effect on its neighbors — so a general regional upheaval, such as the one currently underway, may be expected to hurt Israel, too, even if it is not involved. Furthermore, in recent years there has developed a useful niche in the Israeli tourism sector: Russian tourists staying at resorts in Egyptian Sinai take one- or two-day trips into Israel and the Palestinian Autonomy, visiting Jerusalem, Bethlehem and Galilee. But against this loss is the prospect of at least partially compensating gains: Some of the tourists who would have gone to Sinai will instead choose Israel’s Red Sea resort town of Eilat, or Jordan’s Aqaba.

What Exporters Think 

Despite the fallout from the events in Egypt and the wider Arab world on various sectors of the Israeli economy, few Israeli businessmen are losing sleep over them. According to Dafna Aviram-Nitsan, head of the Economic Research Department at the Manufacturers’ Association, who maintains close contact with corporate executives from a wide range of industries, this does not reflect apathy but rather the fact that Israeli companies have more immediately pressing concerns.

“From the point of view of most manufacturers, and businessmen generally, the events in Egypt are country-specific,” she explains. “The working assumption is that calm will be restored and that the situation there will stabilize as a new government takes over.” At the other extreme are the events in Libya, which have caused oil prices to shoot up — but that is a global phenomenon that no country or company can escape.

Meanwhile, the challenges that Israeli businessmen have been facing for years have not gone away. “The people I speak to are focused on the ongoing rise in commodity prices — which long predates the political upheavals. They also have to contend with the revaluation of the Israeli shekel, which has been pushing higher against the dollar and euro for several years. More recently, domestic interest rates have been rising, raising their borrowing costs. On top of these is the growing pressure to raise wages. All of these factors combine to erode margins — so that even if a company is still seeing good global demand for its products, its profitability is increasingly under pressure.”

Thus, the view from the boardroom is that the political drama being played out in North Africa is more of a news event than something that directly impacts management decision on a day-to-day basis — so far at least.

Similar sentiments can be heard in the Israeli financial sector, especially in trading rooms. The revolution in Egypt caused the risk premium on Israeli bonds, measured in the CDS market, to jump sharply at first — but it soon settled down again, albeit at a higher level than before the region became a hot topic. As for the Israeli currency and equity markets, one would be hard put to be able to discern a specific “Egyptian influence” on the trading patterns of January and February, beyond news-driven falls on a few days. Indeed, the main share index, the Tel Aviv 25, posted an all-time high in January — exceeding its previous record from 2007 — and almost touched that level again in late February, when the revolution in Egypt seemed to have run its course.

Geo-strategic Scenarios  

Perhaps it is understandable that businessmen tend, as Dafna Aviram noted, to take a detached view of political developments in countries in which they don’t do business. But an attitude that views the fall of the Mubarak regime in Egypt, and of other long-established autocracies and dictatorships in other Arab countries, as just another item on the news may be overly sanguine and even short-sighted from an Israeli perspective. Certainly it is not one with which the Israeli intelligence community or its peers in the U.S. and elsewhere — all of whom failed to foresee the extent of the upheaval, even once it was underway — would agree.

Although Israeli government officials, especially ministers, have been careful to avoid commenting publicly on the events in Egypt and their possible implications, there is little doubt that they are seriously concerned. Indeed, the unusual self-restraint being shown on the subject by Israel’s usually-garrulous leaders is itself the most powerful statement possible. It reflects the sense that, however tough Mubarak and his allies were toward Israel over many issues, their underlying commitment to the Israel-Egypt peace treaty was unwavering — but this may not be the case for the government that succeeds them.

That explains why the Israeli political and military establishment, irrespective of party affiliation and government/opposition status, sought to persuade the Obama administration not to openly line up against Mubarak. This effort failed and, if anything, damaged Israel’s already-frayed relations with the Obama administration. It also will have done little to endear Israel to the liberal opposition groups in Egypt, while the Muslim Brotherhood and other Islamist groups are in any event firmly anti-Israel. That leaves Israel hoping that the Egyptian army will continue to hold direct power in Egypt or, at the least, exert veto power over any civilian government in key areas of foreign and defense policy.

But the wave of revolt sweeping the Arab world has opened a Pandora’s box. New concepts previously unimaginable in Middle Eastern and Maghreb countries, such as public opinion shaping policy, have been unleashed. How these will play out is unknowable, especially over the medium and long term. The most optimistic scenario is that Egypt will move in the direction of democracy so that it will be possible, over time, to establish a ‘peace between peoples’, rather than the peace between governments that has been in place for more than 30 years. But there is also the possibility, however unpalatable to contemplate, that the Egyptian public may choose an unfriendly stance, or even an overtly hostile one.

This year’s Herzliya Conference, a prestigious quasi-academic event that brings together leading Israeli and international experts in the fields of geo-politics, intelligence and counter-terrorism, was held in early February, under the shadow of the unfolding events in Egypt. One of the Israeli speakers prepared to explore the potential negative scenarios was Pinchas Buchris, a former director-general of the Defense Ministry. He noted that the Egyptian army is, by size, the 11th or 12th largest in the world, and that it is equipped with the best American technology. Its potential as a threat to Israel is therefore apparent — but that threat is still remote and requires momentous decisions by a future Egyptian government, which will not be taken either lightly or quickly.

“In a theoretical scenario, if Egypt should decide to revoke the peace treaty, Israel will have time to prepare for that,” Buchris said. However, he added that if a change of strategy by Egypt were to occur, it would require major changes in Israel’s defense posture and, by extension, in the defense budget. The implication, unspoken by Buchris but well understood by Israeli policymakers, is that not only the country’s defense and foreign policy are at stake, but also the underpinnings of its economic and social policies. That is how fundamental the peace treaty with Egypt is to Israel.

This theme has not been part of the public debate in Israel, at least to date — but foreign analysts have homed into it. George Friedman, founder and CEO of Stratfor, an American strategic analysis and research company, opened a note to his clients in February by stating, “The events in Egypt have sent shock waves through Israel”, and then devoting the rest of the analysis to explaining why. His conclusion, like Buchris’s, was that events to date have not been a game-changer — but they serve as a warning of the potential for the game to change.

Yet even the “game-changer” concept is a flexible one. Egypt may yet choose to turn away from the strategy of co-existence and limited co-operation with Israel, with all the negative consequences that would entail from an Israeli point of view. But the regional unrest is still gathering strength and it has many potential victims. Regime change could come to Iran, too — an equally dramatic development, but one with immense positive connotations for Israel.  

If one clear lesson can be extracted from the events of the opening months of 2011, it is that the Middle East is entering a new era, politically, socially and probably economically. After decades of stability that centered on opposition to change, that is a wrench — even for bystanders, let alone for the people directly involved. Israel is more than a bystander, yet not directly involved. In this position, it must wait to see whether the new era will shape up as one of opportunity as the region moves forward, or of threat as old traumas re-emerge.

Water is a paradoxical commodity: It seems free and plentiful, yet its supply is under tremendous strain. Use of fresh water has more than doubled in the past 50 years, and many fear that we are coming close to a frightening breaking point, a world where chronic water shortages for farmers, businesses and people are the norm. Some experts even see international conflict emerging over access to dwindling supplies. Recognizing these concerns, companies are undertaking major programs to realign their water use with core business and humanitarian interests. But while objectives like being “water neutral” and using “footprinting” — tracking the use of water throughout the supply chain — are ambitious, what is being done to achieve them? Are these goals realistic, and will they have enough impact? This special report addresses these questions.

Download the Special Report (PDF 468k)

Over the past two weeks, public sector unions in Wisconsin and other states have staged protests against some legislators’ attempts to restrict collective bargaining power — in effect, taking away a union’s right to negotiate over salary, seniority, pensions, health care and other work-related issues. The clash has brought out supporters on both sides of the aisle and it has set off debates about budget shortfalls, political posturing and most of all, the role of unions in today’s economy.

Knowledge@Wharton asked Janice Bellace, professor of legal studies and business ethics, and Peter Cappelli, director of Wharton’s Center for Human Resources, to talk about what has been headlined “Crunch Time for Organized Labor.”

An edited version of the transcript follows.

Knowledge@Wharton: Janice and Peter, thank you for joining us. So why is this issue so important? Peter, do you want to start?

Peter Cappelli: I think it reminds us that elections have consequences, as they say. And it reveals, in this case, a rather huge divide in public opinion between a model that said unions are an accepted part of the American context and a view that says they are not. The latter [view] has become more popular over time, obviously on the Republican side. We are seeing that play out. One of the reasons why it is such a big issue is that it is such a change in the status quo. It is not about bargaining for better terms and conditions on the management side. It is about getting rid of the unions altogether with a stroke of the pen, which is something that a generation ago would have never even been thought about.

Knowledge@Wharton: Janice?

Janice Bellace: I think it is also reflective about elections — about a certain tension right now in the United States over the idea that … we just have to cut the budget, and about how, if you cut a budget, who suffers those consequences? And about how the middle class [is wondering] why they are the ones feeling the pain.

Knowledge@Wharton: Speaking of public opinion, Peter, there is the latest New York Times/CBS poll that came out this morning that said actually a majority of Americans are opposed to cutting collective bargaining rights, and they are also opposed to cutting salary and pension benefits, etc., for the unions. Would this poll have any effect on a Republican governor’s attempts to curtail collective bargaining? Should it have an effect?

Cappelli: I think it should if they are smart politicians. You know, there is a lot of political intrigue behind these cases, right? Because the unions — particularly in the public sector — are politically very important, very powerful. If you were opposed to the Democratic party — whom they mainly support — and you got rid of unions you would get rid of a lot of your opposition. Interestingly, in Wisconsin, two unions that supported the Governor — the police and fire unions — are not the ones that he is thinking about cutting, which is pretty transparent. So I think there is a lot of interesting political intrigue behind this as well. I think what is interesting about this poll is that part of the rhetoric from the governor and from those in favor of getting rid of the unions’ right to exist and bargain in this context is the sense that public sectors now have more than the private sector does, and that it is not fair. It’s interesting that the poll suggests it does not play that well — as least as of yet.

Knowledge@Wharton: Talking about politics, the Iowa Senate is voting on a bill on Thursday to eliminate collective bargaining for everyone, including police and firemen.

Bellace: … Some Republicans have calculated that the public does not have sympathy with unions. So unions are bad. What is surprising is that the public seems to have sympathy with the average working person and seems to be fearful that we don’t want to pull down [that person]. This is a surprise because that’s not the way it has been depicted.

Knowledge@Wharton: There is also the perception among many that union wages and benefits are much better than non-union wages and benefits. Is there evidence that this is true or not true?

Cappelli: That is certainly true. That’s one of the reasons why you would want to join a union. I think what’s interesting in this case is that the story about public sector employees, and unionized ones in particular, always was that, look, they don’t get the upside. When the economy is booming, they don’t get big wage increases. They don’t get bonuses. They don’t get opportunities to hop from company to company. But they have job security that is very good. And they get pensions, which are at least good for the salaries they make. So the interesting thing now is when the downside actually hits, there is this effort to pull the plug on that. So [now some are saying] it’s not fair that you get these pensions and job security. You ought to pay something for it. Whereas I think the view was they were paying something for it. They didn’t get the upside that private sector employees do.

Knowledge@Wharton: But the downside really has hit now — at least according to what we are reading in the papers. So Scott Walker’s argument is that there is absolutely nothing else they can do to lower their huge state deficit. And this is true across every state, except maybe for Indiana.

Cappelli: Right. I think one of the things that they might do is … say to the unions: Here is what we have to do. We have no choice. Let’s talk about it — let’s negotiate over this and see what’s possible, rather than saying, “I have no choice; therefore, I’m going to get rid of the opposition here so that I can do it the way that I want to.” If you were really just interested in cutting the costs, you would start with, “Let’s see if we could cut the costs.” You might say if we are making no progress on this I have got to do things unilaterally. But you wouldn’t start by getting rid of your partner if you thought the whole issue was simply to try to work out something that would cut costs.

Bellace: That’s the important part, because there are two sides to this and sometimes they get merged. One is so people have a right to join together to seek better terms and conditions of employment. Essentially the governor is saying, “No, you don’t have that right.” The second part is, “Well, do we have to sit down now and see what the deal is?” And is the deal going to be worse for you than it was? Those are very different. One is a fundamental right. The other is what I call hardcore dollars and cents.

Knowledge@Wharton: A compromise position in all of this would be for the unions to say, “Let us keep our collective bargaining rights and we will start talking about some concessions on wages and salaries.” And, in fact, the Wisconsin unions are already doing that as are some other unions. Is this a viable negotiating strategy or is it the case where Republicans are going to say, “A-ha! We’ve got them on the run. Now let’s really hit them hard.”

Cappelli: I think if you were cynical, you would say this was really clever on the part of the governor of Wisconsin to come out with an extremely aggressive position that says we are going to get rid of you altogether — and then back off from that and negotiate very tough concessions from the unions. That would be — at least in the sense of hardball bargaining — a pretty clever thing to do. It is not clear to me that this is really the goal here. It would be like the equivalent in the private sector of saying to your employees — which I think is illegal, Janice; you can tell me whether it is –”Look, we are going to close the plant.” And then coming back and saying, “Alright, well, maybe not, if you can do X, Y or Z.” Maybe it is a clever bargaining tactic.

Bellace: We’ll know in a few weeks whether that was their bargaining position because, as Peter noted, right now the unions have already said we will probably make concessions. The AFL-CIO has said the point is to keep bargaining rights. So if the governor doesn’t respond now, it is going to be pretty evident that he is out to destroy the union and to destroy people’s ability to join together. He just wants to be able to dictate.

Knowledge@Wharton: So that raises the whole question about just how politically motivated these actions are. The unions are big donors and big voters for the Democrats. Republicans are being accused of, as you say, just wanting to kill the unions. Does one have to be cynical to think that’s what is going on?

Cappelli: Well, I would say that you could be ideological as well. I think on the Republican side — particularly in the what is now more mainstream Republican view but a generation ago was on the far right of the Republican view — was the idea that it was improper to allow public sector employees as government servants to have this sort of right. That you couldn’t, you shouldn’t, be able to negotiate with the government because the government has the ultimate authority, and a collective bargaining agreement shouldn’t bind the legislature as to how they spend their money. So you might say that this is a principled ideological argument. It was something that all these states dealt with. Everybody heard that argument when they passed the laws in the first place, and they decided that, in fact, this public sector was not that different than the private sector, and that the public sector management had their own advantages that the private sector doesn’t have. For example, if you go on strike in the public sector, the government actually makes money because it doesn’t have to spend things, and the tax revenue continues to come in. So I think what has changed is the relative importance of those positions as politics have changed. The people who said bargaining is an important right to have — people in power now say no it’s not. And the argument about tying the hands of the legislature becomes, as a result, even more powerful.

Bellace: I’d say also that there is a big difference. We can take two Republican governors — of Pennsylvania and New Jersey — who were just elected [beating out two Democrats]. One governor is very tough talking — Governor Christie of New Jersey, and he certainly wants concessions. But he hasn’t said that he [will try] to get back bargaining rights. And in Pennsylvania, the governor hasn’t even done that. He’s just [indicating] that “Life is going to go on. We’re going to bargain as usual.”

So I think when you look at the Republican party, one also has to look at state level politics and perhaps national level. But I think national interests are looking at particular states as vulnerable, if I can put it that way…. Wisconsin is essentially rural, which is what people forget.

Knowledge@Wharton: Janice, do you think that Governor Walker’s stance could backfire on him and in fact create more sympathy for public unions in his state and in the country?

Bellace: Oh, I do. Because I think when he got elected in November, he didn’t say anything about removing collective bargaining rights. So some people might think, “Wait a moment. Within three months? This was a secret agenda you had.” So that looks false right there. But, secondly, [there is] this idea that your teachers and your people who collect the rubbish — these are average people who do have benefits and you are trying to pull them down. It is unfair that the middle class is getting attacked again. And the middle class obviously feels very vulnerable now since our recent financial crisis. [Walker's stance] could backfire.

Knowledge@Wharton: Let me just read you a couple of figures. In 1981, as we remember, Ronald Reagan fired 11,000 striking air traffic controllers. That year, according to The New York Times, 20% of U.S. workers belonged to a union. By last year, that figure had dropped to 11.9%. But more than half of those union members work in the public sector, which as of last year was 36% unionized. In the private sector, The Times says, unionization has fallen below 7%. So, Peter, what do those numbers suggest to you?

Cappelli: It is a very different story in the two sectors of the economy, and I think the difference has to do with what management does. So in the public sector, management, for the most part, has not tried to resist union organizing. And part of the reason for that is the unions have more political power. As a result, management hasn’t resisted. In the private sector, they obviously have resisted, and have become much more aggressive in terms of resisting unions. I think also the political balance of power changes the rights of management versus labor through court decisions, through National Labor Relations Board decisions. Over time, it has gotten easier in the private sector for management to resist unions. I mean, they can close a plant down and move it some place else and start it up non-union, which they couldn’t have done a generation ago.

So, you know, I’d say that what these figures tell us has a lot to do with the success of management practices in keeping unions out in the private sector. You see very different experiences in the public sector and in the private sector.

Bellace: It also shows — and this is quite in line with what Peter said — but one reason why the percentage in the private sector has gone down is the loss of manufacturing jobs. Manufacturing has left the United States — not just unionized jobs but non-union, too. So as the country becomes more of a non-manufacturing labor force, that explains a lot of it.

Cappelli: I think it is fair to say, though, that the the union movement in the U.S. over the last generation or two really has kind of lost its leverage with the public. Some of that is it got outmaneuvered in terms of public relations by the business community. And I think also, frankly, unions were not as good at offering what workers wanted as they had been in the past. They got some complacency. They didn’t spend as much time or energy on organizing. They didn’t focus on the sections of the economy that were growing. They stayed in manufacturing, which was shrinking. So a lot of this — in fairness to the management side — wasn’t all about management tactics. A lot of it is stumbling on the union side as well.

Knowledge@Wharton: Janice, some Republican governors say their states cannot compete as well for jobs as those states with right to work laws. Is this a big factor in the debate?

Bellace: They say it, but actually the thing that attracts jobs is the cost of doing business in a state. And there are other items in the state budget that have nothing to do with unionization. For instance, ask what percentage of the state budget is Medicaid. It is a huge portion of most state budgets. And the states have some ability to set the level of Medicaid payments.

There are other costs of doing business, and they are much more influential usually than the fact of whether states are right to work or not. Because as Peter mentioned, companies already have gotten much better at resisting unionization — first, by improving their own human resources practices and second, because the law has made it easier. So that’s not really how they are choosing states.

Cappelli: But we might just back up and explain a little bit about what right to work laws means. Maybe you could do that. Because we now are into the private sector.

Bellace: You could go into a very long discussion. Right to work means that you cannot have a union shop. But it doesn’t mean that you can’t have unions that sign collective bargaining agreements with a company. So can you “compel” people to be in a union? When a union organizes, 50% plus 1 of the workers must vote for the union to be certified. So it says that they can’t compel everyone in that grouping to join the union or pay union dues.

It does weaken a union — no doubt. But there are many examples of unionized companies in right to work states. The real point about [not being able to] attract jobs [is related to] costs.

Cappelli: But what is interesting about right to work laws is that they are really about gutting the union’s leverage. Because a union is compelled by law to negotiate on behalf of everybody in the bargaining unit, whether you are paying union dues or not. So you think about what the idea of a union — a right to work state means — it means allowing me as an employee to get the benefits of unionization without paying for them. And so the idea of that is really to weaken the unions financially. I mean, there’s no other particularly good reason for that, right? It is a political tactic for poking at the unions.

Bellace: Unions call it free riders. It allows free riders.

Knowledge@Wharton: Peter, to get back a comment you made about unions having become somewhat complacent, can we say that they have become antiquated? And if that’s true, how do you bring them up? How do you update them for the 21st century?

Cappelli: Well, if you were a worker thinking about joining a union now — is it in your interest to do it? Would you get enough out of it? And I think the answer to that might very well be ‘no’ right now. Because the risks of joining a union — campaigning for a union — are pretty big. [One is] the risk of being fired. It is illegal to fire people for this, but it hasn’t been very well enforced and the penalties are trivial. It is pretty well known that a lot of organizations do this.

So, you know, I might get fired for this if the plant that I’m working at gets organized — there is a pretty good chance I’ll never get an agreement from the union and the employer because the employers have various ways of making that difficult to do. So there is a pretty good chance that I might get in trouble on my job security. I might pay dues. I might never get an agreement. And if I get an agreement and the plant is organized, there is a pretty good chance the company might try to eventually move it someplace else. So if you think about it in an up and down way — is it in my interest to vote for a union these days? The answer is probably no. But I would say a lot of that has to do with the fact that management now has so much more power than they had a generation ago. And the unions haven’t really found any way to counter that. So are they able to offer a compelling story to possible members? I’d say the answer at the moment is probably not. In that sense, they are in some trouble and they are kind of antiquated.

Bellace: I agree. And I think one of the difficulties is that a way for them to modernize is foreclosed to them. During a lunchtime talk, I was proposing that employees can have consultative counsels. You are a stakeholder like a shareholder. You invest your human capital. You should have rights to consult. You should be given information. But companies wouldn’t be happy to do that just like they didn’t give shareholders any information in 1928. So you need legislation. And the issue is, as Peter said, why would companies do that? So if the legislation would change, I would see more employees willing to opt for what I call this more cooperative view of representation. But we as a country haven’t changed our legislation. The basic framework is 1935, which really is antiquated.

Cappelli: And it is illegal to do that, right?

Bellace: That’s right.

Cappelli: You couldn’t do it even if you wanted to.

Knowledge@Wharton: My last question is, what do you think is going to happen in Wisconsin? What will be the end of this?

Cappelli: Well, I think it is going to turn on the political calculations of the governor, frankly. I think his approach certainly has rallied a Republican base — a particular section of the Republican party. And that’s probably helped him a lot in terms of the internal politics. I think in the broader community, as you reported from the poll today, it may actually get him into some trouble. So I think he’s probably making a political calculation. “Are my concerns primarily inside my party? Or are my concerns primarily in the broader voting group?” My guess is, that if it is the former, he will plunge ahead with this and figures even if he ultimately can’t get it through, he wins by taking a hard-line. If it is the latter, I think he will back off, negotiate some compromises and get back to work.

Knowledge@Wharton: Janice?

Bellace: I don’t know what will happen in Wisconsin because I don’t know Wisconsin well enough. I agree with Peter’s analysis. But it will be an interesting signal for the rest of the country. I do think already some governors in certain states have said, “No way am I going to walk that path. I don’t want to start a war in my state.” That’s looking at the voters as a whole. So Pennsylvania might be one state where it just isn’t worth it. But in any one individual state, perhaps it is worth it.

Plenty of merger deals should never happen: Buyers are too often attracted to “false positives” in targets that are overvalued. Less noticed are the deals that get away, but shouldn’t, because of “false negatives” — an undervaluation based on outdated methodologies that leads to a losing bid. The true value of a target company can be determined only if the buyer looks beyond current core operations to include future potential, argue three M&A experts — Alexander B. van Putten, a principal of consulting firm Cameron & Associates and a lecturer at Wharton; Mehrdad Baghai, managing director of Sydney, Australia-based Alchemy Growth Partners, a boutique advisory and venture firm, and a co-author of the book The Alchemy of Growth; and Ian C. MacMillan, a professor of innovation, entrepreneurship and management at Wharton.

“When will we finally close a deal?” The frustration around the management table at Bank X was palpable. The company had just been outbid by its archrival in the pursuit of a key competitor in its rapidly consolidating sector. It was déjà vu all over again.

Only months before, Bank X had gone after the prized local assets of a struggling global player that were being auctioned as part of a restructuring. Its M&A team had felt very confident going into the final round of bidding. The team had completed very detailed financial models and taken into account all synergies to arrive at its final bid. Yet Bank X also lost that chase — and to the same archrival.

What’s more, these two lost opportunities were just the latest in a series of unfinished deals during the past three years. Some were big and others were small but there now was an unmistakable pattern. The company would set a maximum price based on discounted cash flow (DCF) — and it would be outbid. Analysts were asking whether management lacked the courage to make deals. Management wondered whether they were missing something: Were they systematically undervaluing assets for some reason? The often-used justification that Bank X was a very disciplined company was wearing thin, especially since its archrival also had a very strong reputation for discipline.

The company in question is real and its confusion is common. Did it undervalue the deals it pursued and lost? Or did it do well by being outbid? Put another way, how can a company increase its confidence that it is not systematically undervaluing transactions without feeling that it has been swept up in the hype of investment bankers? By the same token, how can it feel more confident that it is not systematically overvaluing transactions?

For quite some time, it has been known that the odds of a successful acquisition are long, yet executives show no signs of losing interest in M&A. Even some companies that eschewed acquisitions in favor of organic growth have thrown in the towel. Witness Dell’s $3.9 billion acquisition of Perot Systems in 2009.

Given the continued reliance on acquisitions as an engine of corporate growth, we sought a way to increase the odds of success, by evaluating deals in a way that reveals a more complete and accurate value.

Lost Opportunities

Most of the literature on mergers considers the effects of what we will call false positives, where in the fullness of hindsight it becomes clear that the acquisition was flawed from the beginning. What are often overlooked, though, are the deals that could have been big wins but didn’t happen, because of false negatives. By that we mean instances, such as the one faced by Bank X, in which a much-needed acquisition was lost due to analytical and valuation methodologies that we think are outdated.

There are, of course, many considerations that affect the success or failure of an acquisition. How well the target company is integrated into the buyer is key. The timing of the absorption of an acquisition has a particular impact in the technology industry. And cultural clashes that destroy value are hardly unusual when large companies are acquired. Though these and other issues are vitally important, they are beyond the scope of this article.

Instead, our focus is on valuing the full potential worth of a possible acquisition, giving pause to would-be buyers that are too optimistic and giving courage to companies that have been bidding with blinders on.

The problem that we hope to mitigate stems from the pressure to make deals pay off quickly in terms of earnings per share, a goal that creates a systematic bias to discount value creation that is tied to future time horizons. While we understand this natural tendency, we believe that it causes companies like Bank X to systematically lose important strategic opportunities to competitors that are more capable of managing the uncertainty associated with multiple time horizons.

To overcome this bias, we combine two frameworks to create a powerful new lens on M&A that avoids both false positivesandfalse negatives. One framework we use is the Three Horizons strategic model developed by McKinsey. The other is a process called Opportunity Engineering, which instills a different way to look at value.

The Three Horizons model ties strategic planning to three time frames:

Horizon 1 (H1) represents the current core operations of a company that produce the cash flow needed to sustain operations, to meet investor expectations and to invest in future growth. Horizon 2 (H2) represents operations that are generating fast-growing revenue streams. These may not be making large contributions to profitability or cash flow at this point, but they show promise to do so in two to three years. H2 opportunities should have the potential to renew the company and to become the new H1 core businesses in the medium-term future. Horizon 3 (H3) represents opportunities for future growth that may take the form of new products, services, capabilities and extensions into new areas that show great promise but are uncertain, and therefore may not mature to the point of being commercially viable. Not surprisingly, H3 investments suffer a high mortality rate.

We find the Three Horizons model useful in defining the full value of a potential acquisition. We do this by analyzing the target’s assets and assigning them to the relevant horizons of the acquirer to understand how they add value. In general, the more horizons that a target reaches, the stronger and more valuable it is, because it not only increases current value but also carries the potential for future organic growth.

Customized Approaches

Since the three horizons represent different time frames and levels of uncertainty, they need to be managed and valued differently. The higher levels of uncertainty associated with H2 and H3 necessitate a valuation methodology that takes into account more than the net present value (NPV) of the target. We call this the Opportunity Value (OV) of an asset. OV allows us to consider the potential upside of an acquisition through a disciplined analysis that is based on range estimates relating to how the future might unfold. Because OV provides a positive view of uncertainty, itcomplements the NPV, which treats uncertainty negatively, and the two together provide an inclusive but not inflated valuation.

In discussions with managers we find that, with rare exceptions, even skillful acquirers do not formally consider anything beyond the H1 assets of a target when arriving at a bid price, although some managers intuitively take future potential into account. As in the case of Bank X, this approach may cause a failed bid due to a false negative. Let’s consider each of the horizons in more detail when combined with Opportunity Engineering.

The H1 aspect of a business is generally straightforward and can be valued using discounted cash flow analysis that results in a determination of NPV. This is entirely appropriate because there should be relatively little uncertainty surrounding H1 assets. But, inappropriately, NPV is what seems to often suffice as an assessment of a target company’s entire value.

The H2 aspect of a business is very different. It is likely to be revenue generating but may lack a large current positive cash flow or profit stream. It may be possible to generate cash flow estimates going forward, which can be valued and added in part to the NPV. But H2 assets will face uncertainties that raise the specter of false negatives occurring in their valuation. Under traditional DCF analysis, uncertainty calls for increased discount rates, or “hair cutting” the cash flow estimates to compensate for higher perceived risk. This conservative bias tends to severely reduce the full value (if any was considered) of H2 assets. Yet uncertainty, by definition, must also include a positive context that could increase value over estimates. This potential for an upside surprise cannot be captured through strict NPV analysis and it is therefore additive. We call this the Opportunity Value that H2 operations represent to the acquirer. Therefore, H2 value is composed of both NPV and OV. Without consideration of the OV, it is likely that the value of the target company will be underestimated.

As for H3 assets, these are rife with so much uncertainty that using a DCF analysis is impossible. Therefore, H3 assets should be valued entirely on their OV.

To NPV and OV, we also need to add what we call Abandonment Value (AV). AV results from having the option to sell all or part of the acquisition in the future. We find that this is rarely considered in valuations because it cannot be captured through a DCF analysis. Due to its linearity, DCF cannot discount both having future cash flows and not having those future cash flows — just as it is not possible to value owning a share of IBM and not owning a share of IBM at the same time, because the two cancel each other out. But we can value owning a share of IBM and owning a put option on that share. In that case, the two are additive. The put option adds to the value of owning IBM because it protects against downside losses. In like manner, the Abandonment Value of an acquisition adds to the value of the acquisition because it reduces the potential for downside losses.

Bank X’s Mistake

Let’s apply the same logic to the latest Bank X acquisition that was lost. If Bank X had bought the target for $800 million, its final bid, would it have been worth nothing the next day? Of course not. Bank X would have had the option to sell off the target if things did not go as planned. Even selling the target at a loss has value because Bank X would get back some of its investment, which could be redeployed elsewhere.

If this seems perplexing, consider whether there is value in having Bank X sell the target for $500 million. That would represent a loss of $300 million, but it also gets back $500 million. The opportunity to get back some or all of the investment creates the AV. A basic notion of what the AV of an acquisition could be worth can be arrived at using online option-pricing calculators that value financial put options. In the Bank X case, the ability to get back $500 million two years after the deal closes generates an AV of approximately $17 million. If one were to assume that the acquisition could be sold for $650 million two years later, that would produce an AV of approximately $49 million. If Bank X had used this analysis and increased its final bid to $849 million, its offer would have eclipsed the $840 million that turned out to be the winning bid.  

As a result of thinking differently, we arrive at an expanded sense of value. Total value = NPV + OV + AV.  Calculating OV is a bit more difficult — there is no proxy for it in financial option pricing — and a discussion of its derivation is beyond the scope of this article. What readers can take away is the mindset that H2 and H3 assets create value beyond what is captured in a DCF analysis.  

So what went wrong at Bank X? In our view the problem was the exclusive reliance on NPV as the measure of value. This caused Bank X to overlook or underestimate the potential value hidden in the target’s H2 and H3 businesses. Bank X’s incomplete analysis of value — tied to its discomfort with, and resulting avoidance of, uncertainty — created a false negative. The target was undervalued and it caused Bank X to draw a line in the sand that allowed a competitor to steal the prize.

The lesson is that uncertainty is often where the greatest opportunities for real growth are to be found. As such, we need to expand our analytical tools to include the potential returns that may lie in the more uncertain H2 and H3 realms of an acquisition.

It may be years before the costs — human and economic — of the devastating earthquake and tsunami on March 11 in Japan are fully known, but they will be enormous. With thousands feared dead throughout the northeastern part of the country and officials scrambling to contain a nuclear disaster, there are now more questions than answers. Three days after the major earthquake hit, Knowledge@Wharton asked four experts to share their thoughts about the impact of the disaster and how the grief-stricken country can begin to pick up the pieces.

In the days and weeks before March 11, Prime Minister Naoto Kan and his governing Democratic Party — in power for less than year — were already juggling a multiplicity of challenges. No longer the world’s super economy that it was some 20 years ago, Japan was confronting the harsh reality of a country losing its competitive edge. Having been in and out of recession several times since the beginning of the 1990s, it has been struggling to leave behind a decade of morale-sapping deflation. The sense of malaise had a number of other components, including a weak consumer economy, a workforce struggling to find secure employment and a political system chronically failing to achieve reform. There was also the reality of an aging population and a demographic decline.

In this special package of interviews, Wharton experts explore where Japan — and indeed, the world — goes from here. First, finance professor Franklin Allen offers his thoughts on the key factors that could affect Japan’s business and economic recovery. Next, Howard Kunreuther, professor of decision sciences and business and public policy, is joined by Erwann Michel-Kerjan, managing director of Wharton’s Risk Management and Decision Processes Center, to size up the lessons risk managers and other corporate executives need to take away from the earthquake and its aftermath. Finally, Jean Lemaire, professor of insurance and actuarial science, discusses what he sees as the disaster’s global impact on the insurance industry and its ability to protect policy holders when future disasters strike.

Franklin Allen on the Economic Costs

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Howard Kunreuther and Erwann Michel-Kerjan on Crisis Planning

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Jean Lemaire on the Impact on Insurance

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The head of one of the world’s largest chemical manufacturers is calling for a new American revolution. Andrew Liveris, chairman and CEO of Dow Chemical, warns that the United States is heading for a dismal future if it does not wake up to global realities and rally to save manufacturing. In speeches, interviews, op-eds and a new book titled Make It in America: The Case for Re-Inventing the Economy, the Australian-born chemical engineer is urging Americans to re-think their country’s approach to manufacturing, government intervention and economic growth.

“When Americans hear the word ‘manufacturing’, they don’t think of the future. They think of the past — and of a present defined by job losses, closed factories and a middle class in peril,” Liveris wrote in his book, which he recently discussed during a visit to Wharton. “This stands in stark contrast to most other parts of the world, where manufacturing conjures thoughts of opportunity, of wealth, of growth, of promise.”

In a speech called, “The State of the Union: A CEO’s Path to a Sustainable Future,” Liveris said he wrote the book and came to Wharton to “get the national conversation going” about manufacturing. Manufacturing, he noted, is no longer about producing textiles and tennis shoes, or smokestacks and steel. Today, when other countries think of manufacturing, they think of advanced manufacturing: “They think semiconductors, solar and photovoltaics. They feel the power of manufacturing. Countries are creating wealth, true value, by investing in highly specialized manufacturing sectors.”

The United States, in contrast, is standing by idly as it loses manufacturing jobs to overseas competitors, according to Liveris. Unless Washington can develop a coherent long-term strategy, the United States will lose not just its factories but its ability to innovate as well, he argued. Government and business need to work together to renew America’s manufacturing industry and secure its future.

Liveris speaks about global manufacturing from first-hand experience: He has worked at Dow for 34 years, and has led the Midland, Mich.-based company for seven. Dow recently committed to developing two new factories in Michigan to build solar shingles and battery packs for electric cars, but many of the company’s other 5,000 products are made elsewhere. Dow employs more than 52,000 people at 214 sites in 37 different countries.

Once a leader in manufacturing, the United States has been hemorrhaging manufacturing jobs for the past decade, Liveris said. Between 2001 and 2010, U.S. companies closed more than 42,000 factories and lost 5.5 million jobs. About a third of the sector has disappeared.

The United States must reverse this trend if it wants to develop a sustainable economy, Liveris stated. Manufacturing is vital to a national economy because it has a high multiplier effect — in other words, it creates supporting jobs outside of the sector. “Manufacturing matters whether I’m in Singapore or Moscow. Manufacturing creates jobs and creates jobs around those jobs.”

Manufacturing supported 18.6 million jobs in the United States in 2009, according to a study from The Manufacturing Institute, a U.S.-based trade association. Analyzing data from the U.S. Bureau of Economic Analysis, the Institute estimates that manufacturing created 11.8 million jobs within the manufacturing sector and supported 6.8 million jobs in sectors outside it, in areas such as accounting, legal services, transportation, finance, insurance and real estate.

“For every dollar [worth of manufactured products created], there’s $1.40 created around it in the supply chain,” Liveris noted, citing the study’s conclusions. “The service sector only supports half of that value…. There’s no question in my mind where jobs need to come from…. Only manufacturing can create the jobs that a new America needs.”

A Trickle-down Effect

If the United States does not find a way to make itself more attractive, manufacturers will continue to move elsewhere, Liveris argued. And once the manufacturing of a product moves abroad, the innovative energy around that product will soon follow. Countries will invest in research and human talent, and “suddenly, ‘Designed in California, Made in China’ becomes ‘Designed in China, Made in China.’” he warned. “If we don’t find new places to innovate, we will lose the critical mass to be the innovator.”

Liveris already sees innovation emerging in China. To complement some of its manufacturing facilities there, Dow built a research center in China three years ago. “We currently employ 500 scientists [there],” he noted. “They are already at double the productivity rate of patent production than our best alternative lab in the world. They’re smart. And we’re employing more and more [who] are coming back from U.S. universities.”

Other countries realize the value of advanced manufacturing, and are working aggressively to attract it, according to Liveris. When considering where to put a factory or build a facility for research and development, other countries have answers to tough questions about building costs, labor issues, market access, tax credits and regulatory requirements. In the United States, the reaction is too often “a blank stare,” Liveris said. “If I get a blank face, I’m pretty much sure that this country doesn’t have a strategy.”

Countries such as Singapore, on the other hand, not only have appealing answers to Liveris’ questions, but also offer stacks of case studies that show how the country has helped business in the past. “They understand what it takes to compete for my business,” he noted. Unlike the United States, Singapore has addressed regulatory issues, taxes, energy, tort, health care issues and infrastructure needs. “They’ve got the rules of the road. And of course, they want to win. So they benchmark other countries, and they show where their country is on every one of these particular items.”

In a separate interview with Knowledge@Wharton, Liveris pointed to Jurong Island as an example of Singapore’s prowess. The government decided it would combine seven small islands off its southern coast to create an Asia-Pacific hub for the chemical industry. It brought government agencies together under the Singapore Economic Development Board to develop tax incentives, streamline regulations and develop the necessary ports and infrastructure. Since its official opening in October 2000, the island has drawn more than $30 billion of fixed-asset investments and now hosts 95 global companies that employ 8,000 people, according to Singapore government statistics.

“Jurong Island, when I first visited 30 years ago, was a swamp,” Liveris said. “Today, it’s one of the biggest petro-chemical/chemical campuses in the world … that not only [attracted] the chemical sector, but all the industries that supply it.”

Singapore and other countries “are winning jobs. They are partners to business. They are mitigating risks,” Liveris added. “America as a nation is not doing that…. Our national posture has been passive.”

Special economic zones are only part of the solution. Liveris pointed out a range of problems that hurt America’s competitiveness: crumbling infrastructure, a breakdown in K-12 education and the lack of a coherent energy policy, to name a few. The last item is a particularly sore point for Dow, which consumes 850,000 barrels of oil a day. “I’m not saying the U.S. can solve [the problems of] oil markets, but how about a national strategy to replace imported oil?” Liveris asked. “Why haven’t we developed this yet? … Do you know how much of our imported oil goes into waste, between buildings, cars and consumption of all sorts? We could take off half the imports if we developed national standards in these things.”

Unlike the manufacturing of the past, advanced manufacturing is not fleeing the United States because of labor costs, Liveris insisted, calling the idea “totally 100% wrong…. It has nothing to do with the wage costs. Often labor costs are a small percent of the total costs. Besides, if it was labor costs, how do you account for Germany? Germany has a vibrant high-tech manufacturing sector.”

Working Smarter

The real culprits, according to Liveris: high corporate taxes, low incentives, confusing paperwork and constant uncertainty about government policies. “There’s a profound policy uncertainty in the United States,” he said, adding that “the lack of certainty is killing manufacturing.”

Only Japan has higher corporate taxes than the United States, Liveris noted in his book. “When state taxes are included, a corporation operating in the United States faces an average statutory rate of 39.1%,” he wrote. Meanwhile, many other countries are streamlining tax filing procedures and reducing burdens.

Government rules and regulations can also be problematic in the United States because they are not coordinated between the states or with the federal government. In one state, for example, it may take nine months to get a factory permit; another state completes the process in nine days. State mandates may differ from federal mandates. Even within the federal government, rules from one agency may contradict those from another. Dow must comply with federal regulations regarding oil, for example, which it uses to manufacture many of its products. But under current regulations, three federal agencies — the Coast Guard, the Department of Transportation and the Environmental Protection Agency — have a trio of different definitions for oil.

“We ask for frameworks, we get burdens,” Liveris said. Regulations are necessary, but they have to make sense. “When they make no sense, then no one is benefitting. What we have is a pile of regulations that really become barriers to companies like Dow to make investments.”

Inconsistency and ambivalence add up. Manufacturing is more expensive in the United States than in other countries, according to a 2008 report by the Manufacturers Alliance/MAPI and the Manufacturing Institute, two U.S.-based trade associations. The report compared the cost of taxes, benefits, energy, tort litigation and regulatory compliance for manufacturers in nine countries, including the United States, Germany, Mexico, Canada, China and Japan, and found the United States to be disadvantaged by 17.6%.

“When you have to invest a billion dollars, which is what an average facility of mine might cost, 17.6% ain’t chump change,” Liveris said during his talk. It would be difficult to explain to shareholders why the company chose to operate in a more expensive environment, rather than build somewhere cheaper and pass profits back to investors.

Liveris’ prescription for the United States is not for less government or more government, but for smarter government. There are not simply two types of economies, with unfettered free markets on one side and Soviet-style socialism on the other, according to Liveris. Governments in other parts of the world are actively partnering with business, and the United States must do the same if it is going to compete in the next century.

In the past six years, Liveris has visited the White House several times and is on President Obama’s Export Council. Over time, he told Knowledge@Wharton, he has noticed the Administration’s tone towards business has changed. “It’s no longer what I call ‘courtesy listening sessions,’” he said. “These are now roll-up-your-sleeves sessions. These are geared toward policies to make America competitive again.” He points to a recent editorial that Obama wrote for The Wall Street Journal as “real tangible evidence that the Obama Administration is serious about reform.”

As with the space program and the interstate highway projects of past decades, government policy has galvanized economic growth in the United States before. Today, Liveris noted, Washington must commit to some type of advanced manufacturing — whether it be alternative energy, green technology, advanced medical devices or something else — and then aggressively incentivize the world to come on board. “Only governments can create policy frameworks that provide certainty, create value and create jobs,” he said. “I’m not afraid of government. I think government is a great partner.”

Things must change, and they must change soon, Liveris added. “This country deserves a better decision than the one we’re making by default.”

In three years as CEO of spice maker McCormick, Alan D. Wilson has been charged with steering the company through difficult economic times and periods of extreme volatility in commodities prices.

Founded in 1889 and based near Baltimore, McCormick recently reported 2010 fourth quarter sales of $979.5 million, a 6% increase over the previous year. But the company also noted that hikes in the cost of products such as dehydrated garlic, black pepper and cinnamon spurred a 3% uptick in the prices of spices McCormick sells to restaurants, supermarkets and other retailers. It is likely that the increase will result in higher prices for consumers buying from the grocery shelf.

Wilson joined McCormick in 1993 and served in several managerial roles before becoming chairman and CEO in 2008. Prior to joining the company, he worked at Procter & Gamble for nine years. In a recent conversation with Knowledge@Wharton, Wilson discussed the economy’s impact on the company; McCormick’s efforts to expand internationally; why the increased popularity of Food Network and celebrity chefs has been a boon; and the company’s aim to create a relationship with customers by playing up “the romance of spice.”

An edited transcript of the conversation follows.   

Knowledge@Wharton: Could you talk a little bit about how closely tied your business is to ups and downs in the commodities market?

Alan D. Wilson: Practically everything we sell is subject to agricultural commodity changes…. We have a wide variety of things that we are dealing with — everything from pepper to anise, basil and turmeric — and they are grown all over the world. Competition for agricultural space is creating that surge in commodities…. A lot of our industrial business — where we are selling products to other food manufacturers or to quick-service restaurants — is subject to things like [the price of] flour and soy bean oil, which really are surging right now.

Knowledge@Wharton: McCormick recently raised the prices of the products it sells to grocery stores and to restaurants, and warned that customers might see price increases as a result. What are the challenges of getting consumer buy-in for that, especially when customers have become used to paying the same price for years — or may not have purchased a particular spice for several years, when the cost was lower?

Wilson: Well, part of [the challenge is] the long purchase cycles of individual products. Consumers come to our section five or six times a year, but they are buying something different almost every time they come. There is not a lot of consciousness in terms of what you paid last time. But there is a comparison between our products and competitors’ products; in our case, private labels [store brands] are our largest competitor. We have to make sure that we are responsible in pricing. Our brand carries a premium and consumers are willing to pay a certain premium for the promise, the taste, the freshness and the flavor that we deliver. But we have to be very cautious about not letting those price gaps get too large.

Knowledge@Wharton: On the face of it, your product is pretty basic. Spices are spices — or at least a lot of customers might think that. How do you encourage innovation within that space?

Wilson: The key thing we are doing is looking at food trends and making those food trends accessible to the home consumer. In our institutional business, where we are selling to restaurants, we do a lot creatively using chefs and food technologists to create new trends — then we are always out front. We have something called the “flavor forecast,” which we release a couple times a year, looking forward a couple of years at what the new hot trends are going to be.

A few years ago, we identified chipotle pepper as a food trend. Now you can get a chipotle dressing on a sandwich at Subway or McDonald’s, so it has kind of hit the mainstream. What we do is identify those trends and bring those to consumer products. [For example,] chefs are using things like smoked paprika or roasted spices, and we have introduced a line of roasted gourmet spices and we also sell smoked paprika, so we stay in front of that.

The other thing we do is convenience. We have a new line called Recipe Inspirations, which [includes all of] the spices that you need to make a specific recipe in one package, and we sell those for under two dollars so it is very easy for the consumer to learn a new recipe, and it is very convenient because everything is in one package.

Knowledge@Wharton: That would also seem to touch on the idea that a consumer might not want to buy a full bottle of a spice like coriander that he or she may never use again after making a specific recipe. But if you buy it in a packet, it’s just for that recipe.

Wilson: It is one use. That’s right. And if you like the recipe, you can go buy the bottle.

Knowledge@Wharton: What kind of food trends do you think we can expect to see in the near future?

Wilson: What we are seeing is a real trend toward fusion kinds of flavors, so a mixture of sweet and hot — [for example,] mixing a cayenne pepper with a tart cherry kind of flavor is something that is really on trend. International foods are continuing to find their way into everyday cuisine, so what used to be more infrequent and exotic is now becoming part of our regular repertoire.

We have a brand called Thai Kitchen that was [born out of] identifying the fact that there are a tremendous amount of Thai restaurants, but most American consumers don’t know how to make Thai food from scratch. We provide the authentic ingredients and easy ways of getting to the things that you experience in a restaurant.

Knowledge@Wharton: I understand that McCormick is trying to expand its presence internationally. What are the most important growth markets for you? How do tastes in those markets differ from the tastes of U.S. customers, and how do you adjust to that?

Wilson: About 40% of our sales today are outside the United States. We see the opportunity and the need to bring the kinds of things that we do to global consumers. Currently, our largest markets outside the U.S. are in Western Europe. But we see a lot of growth in China and India. India is one that is very exciting to us because spices are such a big part of the culture. The average Indian consumer consumes about four times the number — the poundage — of spices in a year that the average American consumer does. [India] is a huge opportunity, but right now it is not an organized market. A lot of the spices are bought in bulk on the street as you need them…. As people move up the economic chain, there is a need for reliable brands and consistent products that are safe for those kinds of consumers….

We have a really good business in parts of Latin America, but in big parts of Latin America we don’t have a presence other than joint ventures or licensees. We don’t have the presence that I think we can have. Eastern Europe is also an open territory for us. We are continuing to work on expanding our presence in Africa…. We think there is a lot of growth from geographic expansion as we look around the world.

Knowledge@Wharton: How much research and preparation goes into figuring out how to sell your product in a new market? How closely do you have to look at the population’s tastes and habits? And how does that translate into the way you push the product?

Wilson: The most critical thing that we have to figure out for our success is how people cook, and then how to make [our products] accessible to them. In China, for instance, we are certainly selling spices and herbs in grocery stores and in food service outlets. But consumers cook differently there. The spice market in China is much, much smaller than you would expect because consumers are cooking with things like chicken powders and bouillons and those sorts of things. Because of that, our product line is a little different in China. We are selling certainly spices and herbs, but we also are selling some Western products like ketchup, salad dressings and jams. But we are also selling chicken powders and chicken bouillons that are [in line with] the way people cook there. We have to keep adapting to what people do in their local market.

Knowledge@Wharton: I had the chance look at your website this week. There is a lot of information there, including recipes, tips and articles about the origins of different spices. How important is that to your overall marketing? How does it play a role in efforts to drive sales at the point of purchase?

Wilson: The biggest thing we can do to help grow our sales is to help consumers find new recipes and add a recipe to their weekly repertoire. If they are doing that, then they are going to continue to buy our products because we are helping to make that easy. The biggest reason people come to our website is for recipes, and we keep refreshing those.

The second piece of it is creating that emotional attachment that every brand has to have with a consumer. A lot of what we do around the origins [of different spices] and creating the whole romance of spice is how we tell our story. [McCormick has] been doing this for over 120 years. We have people traveling to all the places that spices are grown, and there is a tremendous amount of romance attached to the origins, how things are processed and the really unique flavors that you can generate. We want to make sure that we are bringing that kind of appeal to consumers.

Knowledge@Wharton: Do you find that customers tend to gravitate toward the spices they know? Are customers gun-shy about trying something that sounds more exotic? How do you bridge that gap?

Wilson: Things like the Food Network, the Cooking Channel and celebrity chefs have people experimenting more, and that is actually driving a surge. We have seen spice consumption in the U.S. go up substantially over the last several years as people get addicted to things like the Food Network. That is a huge benefit for our business and we are making it easy for consumers as they try to find new things.

There certainly are consumers that are looking for everyday consistency; we want to make that easy too. [For some consumers,] if it’s Tuesday, it is taco night. So we have a taco seasoning mix that is familiar, that kids love and that is really easy [to use]. In New Orleans, there is one night of the week that is red beans and rice night. We produce that product, and sell a lot of that in the New Orleans area, specifically for those kinds of events where people are looking for familiarity.

Knowledge@Wharton: Can you tell me a little more about what is involved in sourcing different spices? What kind of processes are taking place before the products end up on store shelves?

Wilson: Because we are the largest company in the category, we have made an investment in teams of people who [travel] to the farms and the collectors and the local regions [where the spices are sourced]. We’re doing a couple of different things. One, we are working with farmers for sustainable agriculture. We are helping them with growing conditions, [obtaining] the right kinds of seeds, and how they handle product so that we get product that is consistent and safe. [That way,] we have to do less to treat the product when we bring it in to make it safe for consumers.

A second part of that mission is to be on the ground at different parts of the growing cycle so that we see what the yields are going to look like. We can do some economic planning around what the prices are going to be, and the supply part of the supply-demand curve, so that we are anticipating and making decisions on whether we are taking long positions because crops may be short, [or] more expensive or shorter positions because it is a really abundant crop and we know that prices are going to change. We have teams traveling to all parts of the world at multiple times during the growing cycle so we really get an assessment. We are sourcing [products] in different countries because their harvest cycles are at different times. [For example,] Vietnam has a different harvest cycle for pepper than Brazil, than India or than Indonesia. We are really looking at that to see what the optimum timing and the right yields are for all those products.

Knowledge@Wharton: Does that mean at different times of the year if I am buying black pepper, for example, it could be coming from a variety of different countries depending on when I buy it?

Wilson: We create a blend of different origins — and black pepper is a really good example — that gives you a consistent flavor every time you buy it. Now we do have in our gourmet lines very specific origins, so if you are buying Malabar pepper, it is coming from one specific region. But we do certainly blend everything to make it consistent. It is just that the way we bring it in, and the way the crop cycles come in.

Knowledge@Wharton: So if containers of pepper were entirely sourced from Vietnam or from India, the two would taste different? Thus, you blend the different varieties together.

Wilson: To create a consistent flavor.

Knowledge@Wharton: That’s interesting. How important does social responsibility become when you are working with so many different growers and different suppliers all over the world?

Wilson: It is a big part of our heritage. We have always been a very responsible, community-based organization. It also serves our economic interests to make sure that we have sustainable sources of the products that we are buying, because we are dealing around the world with hundreds of thousands of individual farmers. As we are able to help in creating that sustainable agriculture, it helps our business be sustainable — economically sustainable, as well as viable. We found ways of helping so that the farmers and the collectors really want to deal with us. We have done things like building schools and medical clinics in places like Indonesia. We built a medical clinic — two medical clinics — two years ago. When there was an earthquake in Indonesia, those clinics survived and they really became a part of helping the community.

Knowledge@Wharton: What is your biggest challenge as a leader? What do you enjoy most about your job? Conversely, what keeps you up at night?

Wilson: I am in my fourth year as CEO and we have had a lot of volatility with the financial markets. We have seen two up-and-down cycles in commodities in that period, and there is still a lot of uncertainty. We are dealing in most developed markets still with pretty high unemployment and a lack of consumer confidence at a time when commodity prices — in not just our products, but oil prices and almost anything that people are buying in terms of food — are going up.

There is just an awful lot of volatility with that. I have to make sure that our strategies and our business processes are adaptable to pretty rapid changes in the external environment. We are continually working on how we [can] move faster to adapt our plans to what has happened in the external market.

As a leader, the most important thing that I do is make sure that we have the right people in place, working on the right things. That’s where I spend a tremendous amount of my time — making sure that we have got good succession, that we have people that have the skills that they need, that are motivated and rewarded the right way, that are based on building our business.

From the business strategy standpoint, I spend a lot of time telling our story to consumers, with customers and with investors, so that we continue to get the kind of support and deliver the kind of results that we have delivered in the past.

Knowledge@Wharton: What is your favorite part of your job? What do you enjoy most?

Wilson: I love the aspects of being out and being with teams. I spend a lot of time in our culinary centers, tasting the great food that we are preparing. I love walking through and visiting our plants and facilities around the world, seeing the passion that people bring to their jobs every day, and talking to them about where the company is going…. I get to go to some really cool places and eat some great meals. That’s a great part of the job.

Knowledge@Wharton: McCormick was founded and originally based in Baltimore, but later moved its headquarters to the suburbs. I understand that at one point, the company launched a campaign to let customers know that if they still had spices in their kitchen with a Baltimore address on the back of the package, that those products were at least 15 years old and needed to be thrown out.

Wilson: And now they are 20 years old.

Knowledge@Wharton: And now they are 20 years old. Can you tell me a little more about that consumer education component of your business? Did you hear stories from people who had had the same bottle of basil in their kitchen for 20 years?

Wilson: Oh, absolutely. Part of that campaign was based on the fact that people don’t really manage their pantries. When they have spices, it is something that a lot of consumers perceive last forever. While they will still be safe, you lose the flavor aspects of it. The reason you are putting things like sage in your turkey or your turkey gravy, for example, is to get that flavor impact. That campaign was just an education campaign recognizing that people tend not to replenish things in their pantry very often. When I talk to consumers I will ask, “What would you serve your family that is five years old? What food product?” And the answer is, “Nothing.”

But they will keep spices for a long time because they tend to have — some of them especially — lower use-up rates. You have to keep thinking about it. Before I came to McCormick, I had gotten a spice rack as a wedding present. I had been married about 12 years when I came to the company, and when I joined the company I got a new spice rack. I started looking [at the old one] and realized that I had a lot of this stuff for 12 years.

It is an education campaign for consumers to keep replenishing and refining. The obvious question is: How long do spices last? The answer is that it depends on how you store them, but whole spices, until they are ground, have a very long shelf life — several years. But once they are ground, and if they are [stored] in the light, you need to replace them every 12 to 18 months.

Knowledge@Wharton: I understand that you are kind of a foodie. What is your favorite thing to cook and what is your favorite thing to eat?

Wilson: I am a grilling master…. I grill year-round — I create a little path [through the snow] between my back door and my grill so I can grill even when there is a lot of snow on the ground…. I love to do everything from salmon or other fish, to steaks and venison and the kinds of things that really go great on the grill. My favorite thing probably to eat is fish. I eat a lot of different kinds of fish as I travel around and generally whatever is fresh. There are lots of ways to [cook fish,] whether it is with core spices or some marinades that create the flavor. When I am out, I tend to order a lot of fish.

Knowledge@Wharton: When you’re at the grocery store, are you ever tempted to give customers advice in the spice aisle?  

Wilson: I do. I absolutely do. Wherever I go, I go to stores. Sometimes you will see consumers standing in front [of the spice display] and looking for something specific, and I will help them find it…. I will say, “Try this,” or “I see you have some fresh melon, try this Chilean lime on melon — that is really good.”  

Knowledge@Wharton: Do you tell them that you are the McCormick CEO, and what is their reaction?

Wilson: Usually no. But I do sometimes go and talk to the grocery clerk who is managing the spice set, because I want to find out what is working well, what is not working well, and they are very aggressive about telling me whether we are getting good service or not, and what is moving and what’s not. I find a lot out just by walking around talking to people.

In a remote corner of northern Bangladesh, a newborn girl contracted malaria and pneumonia, two big killers of children in the developing world. With the nearest hospital six hours from their island by boat, the child’s parents prayed for healing and hoped for a miracle. It came in the guise of a community health worker, who used a special cell phone to collect and transmit the baby’s health data to a doctor. She also administered antibiotics on the spot. As a result of a mobile phone application developed by Lexington, Mass.-based Click Diagnostics, help was dispatched and a life was spared.

“Mobile phones can be the way that almost half of the world will access health care for the first time,” said Rubayat Khan, founding country director for Click Bangladesh who spoke as a member of a keynote panel on mobile health and banking at the recent BizTech@Wharton Conference. “Two billion people, or almost a third of the world’s population, have never seen a doctor in their lives. Almost four billion do not have affordable access to health care.”

Mobile technology is upending the traditional business delivery models in health care and a host of other industries. The increasing sophistication of cell phones gives companies an opportunity to tap into the device’s mobility to reach people for a host of applications. Banking is another big user of mobile technology as more people use phones to pay bills, access account information and transfer money. “Everyone is going to start tapping [on a smartphone touch screen] to pay,” predicted panelist Iqram Magdon-Ismail, co-founder of Venmo. His company offers mobile payment services with social features, such as letting people use their phones to pay back loans from friends.

While mobile technology has been around for years, special circumstances are coming together now to make it particularly viable. “The devices themselves have become much more capable,” said panelist Vishy Gopalakrishnan, director of industry solutions at AT&T Mobility. “If you go back to the Palm Pilot [in the late 1990s], it was great at that time, but it was not necessarily compelling in terms of user experience.” Developing applications has become easier, and prices for devices have come down. People also have become more comfortable using their phones for many applications, Gopalakrishnan noted. “When the dot-com boom happened, remember all the apprehension people had with putting out their credit card information on the web? Nobody thinks about that anymore. I use my mobile device for all kinds of transactions.”

Panelist Omar Green, director of strategic mobile initiatives at Intuit Inc., credited two companies for changing the way people view mobile applications: Apple and Facebook. With the introduction of the iPhone, Apple turned the cell phone into a more user-friendly, multi-purpose device, while Facebook made people comfortable with sharing personal information online. Consumers rushed to buy smartphones and tapped social network apps for activities such as finding restaurants rated highly by other diners, leveraging the power of the American consumer to drive changes worldwide in the process. “When people in America start caring about something, and start spending their money on something, things change,” Green said.

Mobile technology also has the power to make costly systems more efficient, panelists noted. Consider how Welldoc, a Baltimore company that uses cell phones and the web to manage the health of diabetic patients, is changing chronic disease management. Welldoc uses a mobile phone to give patients real-time coaching about their ailments, offering advice on matters such as how to bring down a glucose level that is too high, or raise it when it is too low. A summary of patients’ habits and health data is sent to their doctors and caregivers. The program was so successful in improving patient health — with broader implications of reducing the nation’s burgeoning health care spending — that Welldoc recently was asked to meet with the Food and Drug Administration and the Federal Communications Commission, said panelist Anand Iyer, Welldoc’s president and chief operating officer.

Privacy, Compatibility and Monetization

But while the promise of mobile technology seems boundless, its execution can be more problematic. For one, there is the issue of protecting consumer privacy, which has become especially critical in the face of the Federal Trade Commission’s “Do Not Track” proposal that would allow Internet users to block websites from collecting information about them. Companies that rely on ad-supported mobile apps, or websites designed for the phone, need to track consumers in order to target ads to them. That is how the firms make money. Without targeted ads, growth of mobile apps would dry up, panelists stated, because the cost would then be transferred to customers who are used to downloading the programs for free. “I would argue that 60% of the innovations coming out of [medical] startups would go to zero if there weren’t ways of monetizing through targeting,” Green stated.

The challenge for companies is finding the fine line between providing helpful information and preserving privacy. For instance, if a patient searches for articles on depression, would it be appropriate to target him or her with ads about depression medication? Gopalakrishnan argued that it can be done tastefully. Facebook has shown that people are comfortable with revealing things about their personal lives to a certain extent, he pointed out. The trick is for the company to use that information in a helpful and subtle way and to “give some assurance — formal or informal — that you’re not going to share [personal data] with the whole wide world.”

Another challenge is the issue of compatibility. Mobile app developers have to write different versions of their programs for different platforms, such as the iPhone, Android and the BlackBerry. Consequently, the programs take longer to implement and are more cumbersome to update, according to speakers at another BizTech panel, which focused on mobile applications. “If you want to win at mobile, you can’t just pick one. You can’t just say, ‘I need an iPhone app,’” according to panelist Eric Blumberg, founder of Smarter Agent, a Camden, N.J., mobile technology development company for real estate agents. “You have to do all of them.”

Making money from mobile technology also requires creativity, panelists said. Zagat, a well-known provider of restaurant reviews, charges a subscription fee to users, noted panelist Ryan Charles, who leads the company’s mobile efforts. But when Zagat tried to put ads into its mobile app, paying users protested. “People said, ‘Why do you have advertising on this app when you’re charging me for it?’” he said. “People don’t want double-dipping. There’s a lot of resistance to that from users.” Now, Zagat tries to find ways to boost its revenue by offering deals and other promotions.

Blumberg said Smarter Agent charges real estate agents and institutions, but is free to consumers. The app, which can be customized by individual real estate brokers, provides consumers with real estate listings. Along with a subscription fee, Smarter Agent also makes money through ads. The ads are not intrusive to people who find them helpful, Blumberg suggested. For example, if a home buyer is searching for a house with hardwood floors but comes across a property that does not have them, the app can serve up an ad from Ikea offering a deal on hardwood flooring. Such a targeted ad is much more effective than blanket TV commercials, Blumberg added.

The key, panelists noted, is to make ads part of the mobile user’s experience instead of a disruption. “Advertising on TV is not advertising on the web. Advertising on the web is not advertising on mobile. [Placing ad] banners on mobile [is] probably going to drive most people away because your screen is only so big and you’re putting a banner on it,” Blumberg pointed out. So he tries to find a way to insert an ad where people will not mind as much. For instance, his company puts an ad on the blank screen that comes up when the phone is loading information. That ad replaces the spinner on the screen as data is downloaded. “Figure out how to put [ads into apps] so they’re not [intrusive],” he advised, “so they’re part of the user experience.”

Some companies offer free apps, but charge customers for access to internal features, Charles said. For example, FarmVille is a game that lets users manage a virtual farm by planting and harvesting virtual crops, and raising virtual livestock. Players earn virtual money to pay for plants and animals as they gain experience, rise in game levels or by paying actual money. Another app, Smurf Village, is free to download but there is a charge for additional in-app content. For example, adding a wagon of “Smurfberries” can cost as much as $100. Charles called it a “free model with an in-app purchase.” This strategy of monetizing mobile apps will not work with everything because consumers “might not be addicted to a certain section of The New York Times as much as they are to upgrading their Smurf Village.”

The bottom line is that companies have to find methods of making money from mobile, and they are experimenting with ways to do it creatively. Without monetization, all the innovation will be wasted because the app will not be sustainable. The trick is to make the ad fill a customer’s needs. “If ads really help you do things … then they’re not really ads, they’re things that help you,” Blumberg said. “If I’m moving and Home Depot is giving me 20% off my next purchase, is that an ad or is that a benefit for using the app? Advertising isn’t a dirty word, but how you implement it can be.”