Previously we discussed how evolution uses two types of variation – small and large – to explore the map of survival and to climb to the peaks of excellent adaptation for the best survival.

The Power of Many Tests

First let’s consider small and large changes in your services and products.

The consumer packaged goods industry, led by Procter & Gamble, has developed small variations to a science.

If Tide sells well in the 32 oz. box, then let’s try small, large, and jumbo sized boxes of Tide. Some will cannibalize other sizes and some (most) will just plain flop. But a few will grow and flourish in the grocery aisles. Product managers have created many other extensions of Tide – low suds, color-safe, and probably even low calorie. Each one is a single, small step exploring the landscape of consumer preference– and each one is an attempt to climb to a peak of survival in the grocery aisle.

This testing of small product changes goes on in almost every other market.

• Software providers offer many performance levels – entry level, professional, and enterprise.
• Credit card providers offer a wide variety of features in their card products – low interest, cash-back, donation to your favorite organization, points, and even your picture on the card.

Large variations may be a little less obvious, but are just as common.

Building on Tide’s success with consumers, product managers developed Tide-in-a-stick, which can remove stains immediately, even without washing. Can Tide make the jump from the laundry shelf to the consumer’s purse?

Apparently so. This is a large jump to a different environment.

• Intuit, the maker of TurboTax, recently began offering loans on tax refunds.
• Cable companies are now offering telephone service and telephone companies are attempting to offer television service.

Embrace Your Ignorance—Focus on the Failures

The examples of product variations discussed above appear to be pretty obvious. But we did not mention any of the failures, only the successes. The failures are gone from the grocery shelves and never even made an impression on us. These failures represent over 90% of the trials, so in running a business, we cannot ignore them. On the contrary, we need to understand them much better.

Bluntly, you cannot skip the failures and go right to the successes. That is called predicting the future and our track record is not very good there. Looking at a random process like the stock market prices, results demonstrate that an index fund—an investment that tracks a particular index (S&P 500, DJIA, etc.)—outperforms over 85% of the active mutual funds consistently, every year. Similarly, a strategy of dollar-cost investing (the same dollar amount every month) consistently outperforms attempts to time the market with purchases and sales.

Axiom of Evolution: The future is unpredictable.

Corollary: Central planning never works.

Evolution does not attempt to predict the future. It does not know, and does not care. To dramatically illustrate the point, evolution has no central planning committee. In a tangible sense, evolution does not even exist. How’s that for a lack of central planning.

For us as business leaders, the first step is admitting we have a problem. Repeat after me, “I cannot predict the future.”

Already I can hear the protesting thoughts in your mind. “I know my business. “I know my market.” “I know my customers.” And yet, the customers and markets continue to surprise us all.

Central planning never works—at the level of governments, businesses, and even individuals. The future simply holds too many surprises for each of us, both personally and professionally. The only events we can depend upon reliably are the failures. Successes are much too rare, and much too random.

So, let’s take a minute to study our reliable friends – the failures – and the patterns they create. Our problems with managing failures are twofold, both related to our desire to pick winners according to our view of the future.

We kill off experiments too soon.

• We do not allow enough peculiar experiments to blossom. Early in the process, we identify some experiments as losers and shut them down before they can yield any useful information.

We allow our favorite experiments to continue too long.Governments suffer this phenomenon in particular. Once started, government programs are almost impossible to shut down.

• One good example is the temporary tax placed on telephone service to fund a war in the Philippines, back in 1898. This tax was finally eliminated only a few years ago, in 2005.
• Bridge and road tolls are another example. Originally these tolls were put in place to pay for the construction of the bridge or road. But, once in place, these revenue generators almost never get removed.
• On the spending side, any number of New Deal era programs are still in operation today.

In addition, when these programs are finally addressed, they are not terminated, but only cut back, or redirected. Like vampires, they keep coming back to suck the life out of the organization.

Evolution tolerates an extremely high failure rate for its mutations—well over 99% of its experiments do not succeed. To keep the experiments from overwhelming the rare successes, evolution is very disciplined about its five basic rules for failures:

1. Fail often.
2. Fail fast.
3. Fail small.
4. Fail cheap.
5. Fail uphill.

Fail often. Evolution is a master at frequent failures. In every single generation, every single organism is a new test. Of these, well over 90% fail the basic test – survival to reproduce the second generation.

Fail fast. Evolution tests each of its experiments immediately, in the next generation. It does not allow any experiment to live a sheltered life in a protected hothouse while the engineers perfect the technology, or the marketers search for the right market.

Fail small. Evolution has designed each test as a single organism, so each individual test is small. Limiting the size and scope of an experiment in a business takes a little more creativity. Speed can help. Forcing each experiment into tests soon and often will help to keep the failures small.

Fail cheap. Fail cheap. For evolution, cheap and small are synonymous. A test of one single organism is not only small, it is cheap, at least for the species, if not for the organism. For a business, if a failure is small and fast, then it is also likely to be cheap.

Fail uphill. This may be one of the most peculiar characteristics of evolutionary variation. In a completely random manner, evolution manages to fail uphill. By spraying out a large number of variations in all directions, evolution tests the “slope” of better survivability on the hill. Only a few variations actually move up the hill. The very next generation incorporates those few successes into the next experiments. Thus, while most experiments fail, the net direction is up the hill of better adaptability and survivability.

Frequent Failure Checkup

• How many experiments does your organization run each year?
• How do you encourage and nurture experiments?
• How do you test each experiment? How soon? How often?
• What are the consequences of each test?
• How many experiments does your organization shut down each year?
• How many vampires (failed experiments) are still sucking resources?
• What signs identify your vampires?
• How do you finally kill your vampires?

Next week we will dig a little deeper into the two primary mistakes mentioned earlier—killing most experiments too soon and not killing off the vampires soon enough. Both of these mistakes are extremely difficult to overcome, because they stem from our internal belief systems. Evolution has some suggestions here, as you may have already guessed. See you then…

This entry was posted on Tuesday, October 28th, 2008 at 4:30 am and is filed under Business info, Innovation, Personal Growth. You can follow any responses to this entry through the RSS 2.0 feed.
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