The Sally example is pretty interesting, pretty amazing. You're thinking about startups and venture capitals, really interesting as well. But I wanted to give you one other example about something that a lot of people in business deal with, which is mergers and acquisitions. It gets at the same point around experience and generalizability. But I just want us to think this through together. I did a study a few years ago where I asked the question and maybe it's a bit of an academic question, but I asked the question. Do more experienced acquires, do better than less experience acquires? If you've done a lot M&As in the past as a company, are you going to do better when you do the next M&As versus a company that hasn't done as many? I say it's a bit of an academic question because on the face of it, it sounds like totally obvious of course. But we wouldn't be spending any time. I wouldn't be doing this video if the answer was obvious, it's actually pretty intriguing. Take a look at this result on this graph. On the x-axis as you can see, I looked at the number of past acquisitions, number of M&As that the company made, that the CEO made, that the management team made had a whole bunch of different metrics to assess experienced with M&A. On the vertical, the y axis, I had measures of the actual success, the performance of an individual acquisition. That was for the publicly traded companies, various stock market returns metrics, and for private companies, various internal accounting return metrics, but a variety of different things. I had a lot of really good data, good measures. In this study I was able to control for if you will, a whole bunch of things that could explain or confound the results. Things like how long has it been in-between acquisitions or how old or younger are people, what's the industry, what's the type of acquisition? A whole bunch of things like that. You could ignore them because statistically they are pushed out of this analysis. You see what the curve looks like. It is a U-shaped curve, we didn't expect it when we did this study. What it means is that as you make acquisitions, you actually start to do worse. Consider the first acquisition versus the second. Here's the first acquisition which I've circled and here's, let's say the second acquisition. What that means that on average now of course there are exceptions, but on average, you will do worse with your second acquisition, then you did with your first. Which doesn't sound like learning to me, does it? In fact, you will do worse on your third than you did on your second and you'll continue to have this downward slope until you somehow kick it up and start to do really well. Why is this pattern and give this some thought for a second? Let me pause. Give this some thought. What would explain, do you think this pattern that we found in this study? I wonder what you thought of. Could it be the first time you make an acquisition, you can do a lot of due diligence? You're going to really dig in anytime you do something for the first time, if it's important, you can do a lot of work on it. You're going to really focus on it. Then it went all right. Then maybe the second time you take your foot off the gas a little bit, you get a little bit confident. You feel like you know what you did or you know what to do. That's almost certainly part of the story. There are probably some other explanations as well that you may have thought of and that's okay. But this is the core one I want to focus on. Acquisition 1, you did it, it went however it went, because you see the on this graph, it's like mid-range performance. It's good, it's not unbelievable. You did it. Then the second acquisition comes and what are you going to do? Well, you want to learn from your experience, you want to learn from your experience, and therefore, you will do the things that work the first time for the second acquisition. Of course you will, if it worked the first time, why wouldn't do it the second time? Because you want to learn from mistakes, the stuff that didn't work the first time you're not going to make that same mistake again, you're not going to do it again. Does it occur to you that if this actual second acquisition is different than the first, and anyone who's ever been involved with an acquisition knows that they are always different. Because the people are different, the cultures are different. If it is different then doing what work the first time might not actually be the right thing the second time. Ironically, avoiding the mistakes that you made the first time might not be right either. Just because it didn't work the first time doesn't make it automatically a bad idea the second time. When you do that, that's the trend you get. You start to see this downward slope. Over time, for smart acquires, for smart managers, you start to capture the data, you start to analyze, you start to learn some of that nuance, you start to see the patterns. Over a period of time, hopefully not a long period of time, you start to say, there are a bunch of things that might work or might not, but we need to apply to the specific situation and you gain this deeper understanding. That's when acquisitions success starts to kick up again. Pretty interesting. Could this pattern hold for anything else that you might have done or might have experienced? Think about that for a second. Could this pattern hold because this is explained something else that you might have done or might do on the job? Did you come up with any possibilities? I'll give you a couple. Maybe you thought of this. Sales to a new customers. You work with a particular customer or a particular market, a particular way, and it works out okay. You have a new customer, you apply the same model. Maybe it doesn't work because this customer is different and you need to think about those differences and those nuances. You need to adopt that design thinking mentality that I mentioned in the last module about how you want to understand what customer problems are being solved and how to customize to that. Or maybe another example is new product introductions. You have a new product. The last product introduction went okay, the next one, you doing the same model but you know what, it's a different product, different situation. Maybe it doesn't work so well. It could hold for other things. Oh by the way, how about hiring? That's maybe the biggest place. If you've hired people in the past and I'm sure many of you have, and maybe did a good hire and it worked out well. It turns out the next time you feel pretty confident that you know how to evaluate people and know how to interview well and hire well, it maybe doesn't work out so well. In fact, most of us have that experience of quite a bit of inconsistency in hiring. Until hopefully we've started to spend a lot of time thinking about how to do this and develop processes and systems. Even then, there's a lot of hit and miss. You can see it in hiring. In other words, any repeatable managerial activity, you could see, potentially see the same problem. That all stems from the same underlying factor or issue, which is believing that our experience from a small sample size from the past actually will apply to this different situation. I'll give you one last example and it's a weird one. But just to expand your thinking a little bit about this. Actually this example comes from once I was doing a workshop with a group of executives and I was sharing the Saudi story and part of this discussion about mergers. Somebody raised their hand and said, "Let me tell you, it sounds like what happened to my family that my dad did." I'm thinking, wow, what she's about to tell me. She said, "Well, my dad, he hated smoking. He was really anti-smoking because he had an older brother that had lung cancer from smoking. He hated it so much. She said, "When I turned 13, my dad actually gave me a cigarette to smoke until I felt ill. It's a bit weird, but that's what he did. It came from a place that you meant to do the right thing." But that's what he did. She said, "It was disgusting and I never went near another cigarette for all my years" and she was in her 40s, I guess when she was saying this so a long time. Then she said, "I have a younger brother. When he turned 13, my dad did the same thing and he actually smokes today, two decades later." Anyone who is a parent of two kids or more than two kids, I'm not telling you anything you don't know. Doing exactly the same thing for each kid, behaving exactly the same way, interacting with them, parenting them exactly the same way. It doesn't automatically work, does it? What worked with kid 1, doesn't necessarily work with kid 2, that's just reality. That's the world. It gets back to once again, this fundamental principle about experience that I want you to keep in mind and that we're going to elaborate on in this module on a variety of different ways. Experience is fantastic, it's great, but sometimes it could lead us down the wrong path.
