Did you resolve to take the plunge into email marketing in 2009? If so, you need a good email list. Finding an email list is easy, but finding clean, qualified, effective email list is much more difficult. To ease the challenge, here are five questions that will help you build a more effective email list.

1. Is the list targeted to your prospects?

One of the first steps in a marketing campaign is to identify your prospects. Does this list specifically target your prospects? How do you know? For business-to-business (B2B) sales we identify target prospects at two levels – target accounts, or companies, and target contacts, people within each target account.

First identify the target accounts. For example, if you are selling transportation services then you want to target companies that handle physical goods. Use

• industry codes such as SIC or NAICS to identify target companies; and
• company sales to identify companies with the size that fits your services.

If you cannot get exact sales numbers for the company, you can usually find a sales estimate or a sales range. Even an employee count can help you estimate if the company is suitable for your services.

When your service is limited to a territory, use geography to narrow your target list. If you sell transportation services on the west coast of the US, then identify companies that ship in that transit lane.

Second, identify the target contacts within each account. Which people at an account use your services; approve purchases of your services? Use function and level to identify these contacts.

For your west coast transportation business, maybe the Manager or Director of West Coast Logistics uses your services and the General Manager or VP of Operations approves the initial contract. Depending on the size of your target, C-level executives (CEO, CFO, and COO) may not be involved with your contract unless it is especially large or mission critical. That means that the levels you want to target are Manager, Director, and VP. The functions you want to target are operations, logistics, shipping, transportation, and deployment. These people want to learn about your services.

Does the list contain your targets? Now that you can describe your targets specifically, you can tell your list provider exactly what you want – company sales, company industry, company location, employee level and employee function. Don’t assume or accept assurances, instead get a sample of the list. Do the companies and titles match your specifications? Do they match your targets?

2. Is the list current?

Job changes are accelerating. Senior level executives stay at a job less than three years, on average. With the recession driving significant layoffs and downsizing, many more emails will be obsolete in 2009.

• How does your list provider update its email lists?
• When was each email used last? Did it bounce?

The provider should have this information for you.

Use your list sample to test the emails. Send individual emails to a large test group, and track the responses yourself. Does your bounce rate correspond to the rate promised by the list provider?

3. Is the list complete?

For B2B sales, every email data record should contain this information.

If the sample from your list provider is missing any of these data elements ask why, but don’t hesitate to find a different list provider if the provider can’t supply the missing data.

Email Quality Counts. All email addresses are not the same. For business emails, you should demand a personal prefix and business domain. For instance, john.severinsen@ibmus.com is far better than severinsenfamily@yahoo.com for business communications.

Examine each email in detail. Is the email prefix personal, and does it match the person’s name? For our friend John Severinsen, the email prefix should be some variation of his name—j.severinsen, jseverinsen, severinj, etc. Look out for prefixes like sales@, info@, and nospam@. Not only will you get no response from these emails, but they may land you on a spam filter list.

Examine the email domain. Is it a business domain or an email provider? Do not send any business emails to email provider domains such as aol.com, yahoo.com, msn.com, gmail.com, pacbell.net, Comcast.net, or other email service providers. That is the fastest route to getting on an email black list.4.

Does “Opt-in” matter?

Yes, opt-in counts, but only in one situation—when the person opts-in to your email list. This “direct” opt-in is extremely valuable to you, and only to you.

Indirect opt-in, where the person opted-in to another list, say for the Modern Logistics magazine, that does not mean the person opted-in to receive email from you. Your list provider will show you the text in their email service agreement where their subscribers agreed to “accept occasional email communications from affiliates…” By buying that list you become a licensed affiliate, but the recipient just does not care. You have probably clicked your agreement to a few of these opt-in lists yourself. If the email is unwanted or not appropriate, it gets deleted at best or even reported as spam. Third party opt-in simply does not provide any value for you as a list purchaser.

5. Does size matter?

Does each recipient of your emails care how many other people received that email? Would your sales increase if you could email to one billion people in China? Good targeting and quality content are much more important than list size. Ideally you want to contact everyone within your target market and not a single person outside your target market. That’s the right size. When you focus your efforts on targeting and content quality, your market and your email list will grow naturally.

6. Test, Test, and Test Some More!

You are the only one who can determine the quality and effectiveness of the email lists you purchase. So test each list first, before you buy it. Ask for a sample of 50-100 records. If you already know key contacts at a few current accounts or target companies, ask your provider for samples from those companies.

Look closely at each email record. See if your contacts appear in the samples from companies you know.  Are any data fields blank? Any obvious errors in data format, such as 4-digit zip codes, misspelled cities or states? Any suspicious patterns in the data?

Examine the emails. Any bad email prefixes or email domains? Any illegal characters? Any bad email formats? Any email provider domains? Does the email prefix correspond to the person’s name?

Send some individual emails. Send personal, individual emails to the people. Track the results. Call them after sending the email. Does the telephone number ring? Is it the right person? Did they receive your email? After you test out 100 email data records this way, you will know the quality of the list. And you may even make a sale!

Contrary to promotional hype, successful email campaigns require significant effort to make them pay off. The key point to remember is that quality gives you more bang for your buck than quantity.

Best wishes for your email success in 2009,
Richard Barrett

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This is the final post in the Evolution of Business series and I hope you’ve enjoyed it.

Evolution offers a wealth of ideas for companies looking to survive in the marketplace; but these four simple guidelines will provide a solid starting point for innovation and growth.

Deliver complete results. Every single organism must compete in every generation. Incomplete organisms, or prototype products, simply will not survive. Drive your teams to deliver complete tests, even when the tests are very limited. Push every test to complete something. The best tests connect directly with the customers. In evolutionary terms, every organism must survive in the environment. Make sure your experiments survive in your market environment.

Measure Everything. Change without a direction is simply chaos, but you cannot guess effective directions for change. As much as you may want to lead or direct the change, it won’t work. Give up, let go, and simply measure everything. The results will point the way to effective change.

Cycle swiftly. Run short, fast tests. Some software development teams compile the entire product every day. This discipline forces the development teams to deliver complete results on a daily basis.

Connect with your customers. They are the ultimate arbiters of your products/services and the source of your survival. Go out of your office to meet with them and live with them. Bring them in-house to live with your teams. Closer, deeper connections with your customers will drive faster, better development.

Best wishes and great success in your evolution and growth in 2009!

See you next year.

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There’s good news evolution-wise for emerging companies.

When the environment is stable, evolutionary selection rewards small, incremental changes that optimize survival within that stable environment.

But in times of rapid environmental change, evolutionary selection rewards large, swift changes that track the environmental shifts.

If you work in a small or emerging company, your timing is excellent.

Change is global; it’s accelerating; and it is disrupting every aspect of business. Change is creating opportunities everywhere, from finance to automobiles, from communication to housing.

You are witnessing the greatest opportunities in a generation. Evolution points the way to success, and the playing field is tilted in favor of small, nimble players.

Smaller Species Learn Faster

Evolutionary history demonstrates that change favors the small and nimble species. Times of climatic stability have seen the growth and dominance of a few species. Dinosaurs, those staples of evolutionary discussions, grew and thrived during the Paleozoic era. Few new species emerged, and successful species changed little.

But when the climate changed suddenly around 251 million years BC, probably due to a huge meteor that impacted the earth in the area of the Yucatan peninsula, the dust cloud from the impact rapidly cooled the earth and the dinosaurs could not adapt quickly.

A new type of animal, one with the ability to control its body temperature, emerged. This animal, the ancestor of all mammals, exploded into many rapidly environmental niches. Very quickly many new species of mammals evolved to fill a wide range of ecological niches.

Evolution favoritism stems from one fundamental reason: they adapt faster to new conditions. Evolution gives smaller, species powerful competitive advantages in changing environments:

• Better Focus: Smaller species have fewer contact points with the environment. Therefore they can adapt faster. (Click here for more in-depth information.)
• Faster Testing (Fail fast): With fewer organisms in the species and a smaller overall environmental footprint, each individual organism tests a larger area of the environment. Each test covers more ground.  (Click here for more)
• Faster Learning: Smaller species learn faster because the adaptations (knowledge of the environment) travel faster through the species. Communication lines are shorter.

These three advantages combine to give smaller species one single overwhelming advantage:

They have no choice. The structure of evolution is rigged in their favor in times of significant change.

Axiom of Evolution: Smaller species learn faster.

Do Emerging Companies Learn Faster?

Emerging companies can learn faster than larger companies, but there is one big caveat here.

Smaller species have no central planning, no hierarchical structure of managers, and no CEO to direct their evolution—whereas emerging companies have all three of these handicaps. This is of critical import and worth repeating, the potential major roadblocks to success for emerging companies are:

• Central planning
• Hierarchical structure
• CEO

These three factors do not exist in evolution; however, it is likely that your emerging company has all three. Moreover, you cannot imagine how your company, or any company, can operate without any of them.

Given humanities addiction to these structural handicaps, how can you and your emerging company apply the lessons of evolution to learn faster?

Better Focus: this simply means that there are fewer contact points with the environment. Each contact point creates a little drag, or inertia. Each contact point is one more interest group or constituency that must be considered and consulted before moving forward. Create enough contact points and the drag can stop your company cold.

Witness most governmental organizations, especially the US Congress and state legislatures, which have so many constituencies that they no longer make any progress at all. Loss of focus is such a common problem that it has earned many nicknames – scope creep, bells and whistles, death by committee, Christmas tree.

To help your organization focus, consider following another evolutionary axiom:

Evolutionary Axiom of Survival: A variation must survive immediately, in the next generation.

Use this approach to tighten your focus: Ask this single question of every extra feature or function: Does it improve survival immediately, for the next generation? Evolution does not keep a detailed priority list of ideas for future exploration. It has a brutally simple priority ranking—now or not now.

Test Fast, Fail Fast

As a business manager, your role here is simply to drive rapid generational testing, not to pick winners among the variations proposed. Let your customers do the selection. Your role is to run generations as quickly as possible.

Driving rapid generations in your service development process:

• Software projects: compile a functional module every day. Each compilation must show something functional and something improved over yesterday.
• Other products: drive for some measurable result and some tangible demonstration every day. Use the failures to map the environment.

Build on these failures to point the direction of possible success.

Evolutionary Axioms of Failure: Fail fast. Fail forward.

Learn Fast

Disseminate failures rapidly throughout your organization. Post them on a blog, a wiki, even on the office walls. Drive your teams to learn fast.

Next time we will discuss the other two facets of this issue: How to overcome the human organizational handicap vs. evolution’s attitude of “It’s not personal, it’s just survival.”

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Previously we discussed the challenge of mapping the environment as a non-linear optimization problem. The environment has peaks, valleys and plains as well as gentle even slopes. Changing a service feature has a non-linear effect, depending upon the topography of the environment at that point. The sensitivity of the environment to a particular service feature is variable.  It is impossible to predict, and can only be discovered by experiment and testing.

Focus Can Maximize Fitness, but Raises the Risk Profile

Evolution has developed an effective response to the problem of non-linear optimization—focus.

Most species focus very narrowly on a particular niche. This tight focus allows these species to limit their contact with the environment to the minimum number of features. As a result they can achieve an extremely good fit to this small feature set of the environment.

In a commercial environment businesses also do the same. The narrow focus of many businesses is amazing. Often I am surprised that a company can build a business with such a narrow service focus.

Reaping the Benefits of Better Focus

Remember back in the hardware store when we found the section with nuts, bolts, and screws, which illustrated the incredible diversity of evolution in business?

Just a few aisles over, in the paint section, we can find a similarly striking example of how evolution drives focus. Years ago, paint manufacturers produced the paint and mixed the colors at the plant. They had to guess what colors consumers wanted, and how much of each, but once the pigment is mixed into a can of paint, it cannot be removed. This proved very costly, since making paint is easier than forecasting consumer color preferences, especially as there are thousands of choices.

In a stroke of brilliance, one manufacturer dramatically simplified the forecasting problem by shifting the color mixing function to the point of purchase.

From a business point of view, this manufacturer intensified its focus on its distributors, thus allowing itself to reduce its points of contact with the consumer environment. The manufacturer had to learn how to transfer tools and technology for color production to each distributor, but it freed itself from the need to forecast the fickle preferences of consumers.

The evolutionary description of this process is similar. The paint manufacturer exploited its strength in color production to increase its competitive advantage; it deepened its relationship with a symbiotic partner; and reduced its contact with the consumer environment.

The result is an entire industry that can more easily survive rapid market changes.

Recognize the Risks of a Narrow Focus

In the short term a narrow focus is an excellent strategy. Most of the time the environment is stable and the business remains well suited to this stationary environment.

However, if the environment shifts just a little, the fitness of the business drops dramatically. Then the business species face a daunting challenge—adapt swiftly or face extinction.

Sounds like the situation today, doesn’t it?

Some small companies concentrate their sales within a few large customers. Many small companies have built good businesses selling primarily to IBM, or General Electric, or General Motors.

In the auto-parts business, suppliers have only a few companies in the total customer universe, probably less than twenty significant customers in North America and even in the world.

Unfortunately, the current market for auto-parts suppliers illustrates the other side of the equation—increased risk. If any one of the domestic auto manufacturers goes into bankruptcy, no doubt many auto parts suppliers will simply shut down—permanently.

Checkup: Maximize the Rewards of Focus

• How do you focus your business?
• Find three specific examples of recent decisions that increased your business focus.
• What critical choices are facing your business in 2009?
• How will you use these choices to increase your business focus?
• What low performing services can you drop?
• How can you deepen your relationships with your top customers and business partners?
• Are you reaping the benefits of focus – reduced expenses, increased profits, better stability?

Checkup: Minimize the Risk of Focus

• Where is your company overexposed –  largest customer, most important product, key employees?
• How can you manage those risks?
• What key indicators, or early warning signs, will alert you to troubles?
• How do you track those key indicators?
• How will you recover if a major customer suddenly disappears? Major supplier? Key employee?

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The table below highlights a few of the major structural similarities between evolution and business:

• A business lives and grows within a broad business ecosystem, just like species lives within a larger physical ecosystem.

• The business generates a constant stream of services, much like a species generates a constant stream of organisms.

• Each of these services (or organisms) lives and dies within a smaller ecosystem.

• A successful business generates a large number of services simultaneously and over time, just like a species some live while others die.

• Within the business, a successful service can spawn a number of similar services, each with some small variation from the “mother” service. Most of the services in this next generation do not thrive in the marketplace, just as most organisms do not do not thrive in the physical ecosystem. The few services that do thrive typically then spawn another generation of new services.

Notice that, in this description, the services appear to have a life of their own—surviving in the marketplace, thriving, and spawning new generations of services. Of course we know that the services do not do anything themselves. They are simply vehicles for the creativity and effort of the people (employees) in and around the business who do all the work.

But is this really different from the process of life? The organisms themselves do not do the actual evolutionary work of replication, variation, and selection. Within each organism the DNA and thousands of proteins actually do the work of replication. Similarly, the organism itself does not generate variations. Here again the DNA and its team of proteins (employees?) execute a process of DNA mixing during the replication phase.

Finally, we may think that the organism at least controls its selection as a parent of the next generation. But we can just as easily describe the external ecosystem as the agent, impartially selecting certain organisms based on fitness criteria totally unknown to the organism.

• When the ecosystem delivers a drought, the individual organisms themselves do not choose their personal tolerance to the drought.
  
• When a lion hunts a gazelle, the unfortunate gazelle does not choose to be weaker, slower, older, or less agile than its brothers and sisters in the herd.

To emphasize this unusual point of view just once more, let’s look at Procter & Gamble from the outside, from our vantage point as a part of the consumer ecosystem in which P & G’s products and services must survive.

We know that the products and all their variations do not appear magically on the retailer’s shelf. We know that P & G has thousands of employees manufacturing (replicating) the products and working on new variations for us.

In just the same way, we know that the DNA and its team of proteins do all the work of replication for living organisms. However, from our point of view as consumers, it seems as if new consumer products simply appear on the shelf. In our role as part of the consumer marketplace ecosystem, we select certain products and reject others. The company (species) dutifully records our choices in its records (DNA) and then replicates more products based on our selection.

Bear with me as we continue using this metaphor to understand what lessons the evolutionary process of selection may have for successful businesses.

Next time, we will continue our exploration of the evolutionary selection process. We will delve deeper into more subtle ways that environmental selection forces species to adapt—specifically how the environment forces each species to focus on its comparative strengths.

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Previously…. We reviewed in some detail how the lessons of evolutionary replication and variation may provide insights into business. This time we will begin exploring the third of the three basic elements of evolution:

• Replication;
• Variation;
• Selection.

How Does Evolution Pick Winners?

The title question is a trick.

Evolution does not pick winners.

In the first post on this topic we discussed how the environment provides the fitness criteria.

Evolution simply generates a large number of variations. Each variation then “discovers” one specific segment of the environmental topography. With enough variations, evolution can draw a pretty good topographical map of the environment for that species.

In some sense, the species itself is the map of the fitness criteria of the environment. The more closely a species conforms or adapts to the topography of the environment, the better is its fit to that environment.

Good adaptation to the environment is the definition of fitness and survivability.
The simple figure below illustrates how an organism with five features fits its environment. Obviously, it drastically oversimplifies the selection process, but provides a useful starting point for our discussion.

Evolution does not use a calculator to determine fitness. It simply generates millions of organisms, and lets the survivors map the terrain.

We may want to think of each survivor as a single yes/no vote, but evolution does not tabulate the votes to select a winner. Each survivor is a winner in the evolutionary selection sweepstakes, so that winning organism gets to transfer its entire DNA to the next generation.

Evolution may be very harsh, but it is also extremely respectful of each organism. Each survivor wins in toto.

Measuring Fitness—Non-Linear Optimization

Mathematically, we can calculate the fitness of the organism to its environment by measuring the difference between feature points of the organism and corresponding points in the environment. One such calculation is a “least squares” error, which sums the squares of the differences, or errors, between each pair of points.

In addition to the squares algorithm, which measures how well two irregular lines fit each other, mathematicians have developed the linear programming algorithm, which actually calculates the best fit of any set of points (service features) with any other set of points (environmental features).

If this linear programming technique is so powerful, why don’t we just put all the business environmental variables into it and solve for the perfect service?

Because linear programming is much too simple to capture the complexities of the environment for any service.

To be solvable, a non-linear program requires “n” equations with no more than “n” variables, and all variables must be connected in linear relationships.

The real-world environment of survival has many characteristics which defeat a linear optimization program:

• many variables are unidentified;
• most variables have non-linear relationships;
• many variables and relationships change over time;
• many variables work in clusters.

Selection is an arms race.

Many variables are unidentified. In fact, one of the big challenges is to identify which variables participate (or are relevant) to the cluster of fitness criteria for a specific service.

• Does gasoline color affect the demand for it? No, color doesn’t matter.

• Does smell affect the demand for natural gas? Ironically, we know this is true. The smell of natural as is injected artificially, specifically to alert a person to a gas leak. Odorless natural gas is not saleable.

Most variables have non-linear relationships. That is, the service needs some amount of a specific variable, but too much or too little makes no difference to the ultimate fitness of the service. For instance, let’s look at one possible curve for the effect of price on demand.

Below some price, the demand for any product is extremely large. At the extreme low, a price of $0, people will simply use all that they can consume. This typically remains true until the price reaches some threshold value, at which demand now becomes sensitive to it. That is, each penny of increase in the price reduces the demand linearly. Finally, at the far right of the curve, the price reaches a point where the demand drops nearly to zero. This is the classical lazy-S adoption curve.

The price of gasoline is an excellent example of this.

• Below $2.00 per gallon, the demand for gasoline is relatively flat. In other words, prices below $2.00 per gallon do not significantly affect our consumption.
• Above $3.00 per gallon, we start to reduce consumption.
• Above $4 per gallon, we dramatically reduce our consumption.

This has been irrevocably proven in Iran and Venezuela. Both countries subsidize gasoline, with prices well below $1 per gallon. In both countries demand far exceeds availability, so much so that other rationing mechanisms have developed—lines at distribution points, and black markets that offer gasoline at much higher (market) prices, but with easy availability.

At the other extreme, consider markets in Europe, where the price of gasoline is routinely $10.00 per gallon. The obvious results are smaller cars, lower gasoline consumption per capita, and much greater use of alternative transportation. The less obvious results are reduced sensitivity to further price increases. Further increases in the price of gasoline will have more limited effects on consumer behavior because consumers have already made significant adjustments.

All this proves that evolution’s selection process is active  and accurate in the business arena.

We have covered a lot of ground to date, with an introduction to evolution and its three basic functions.

Join us next week when we take a moment to review the fundamental parallels between evolution and business.

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Some projects just won’t die. These vampires suck the resources, creative energy, and eventually the integrity out of the organization.

When everyone sees that the project will not succeed, but the boss won’t kill it, far more is lost than just the cost of the project.

Protecting project vampires is much more corrosive to the organization than killing them off too soon; customer rejection of a variation in the marketplace means that the boss can no longer hide a personal bias that keeps the vampire alive.

While feeding the vampires appears to be the opposite of killing them too soon, the root cause is the same—prejudgment.

Just as we “know” that some variations cannot possibly work, we also “know” that a few specific variations just have to work. In both situations we have substituted our own personal opinion, or prejudice, in the place of test results with customers.

Why do we do it?

What are the mental and emotional processes that cause us to continue feeding vampires?

First, there is persistence, that two-edged virtue that causes so much trouble. By feeding a vampire are we being persistent or just plain stubborn.

An old joke asks, “What is the difference between persistence and stubbornness? Come back in ten years to find out.”  But possibly more apropos is Einstein’s definition of insanity—doing the same thing over and over and expecting a different result.

If you keep working the same variation hoping for a different verdict from customers, then it’s time to pull out the silver stake and drive it through the heart of this vampire project. Your team will be surprised and even a little bit impressed.

But perhaps your business instincts are leading you in the right direction. Evolution has a recommendation here—try a few more variations.

When evolution converted a fin into a hand and fingers, it did not know how many fingers were optimal, or even if there was an optimal number for fingers. Evolution has experimented with two fingers, then three, four, five, six, and even seven. The opposable thumb has worked for some species, but not for others.

Finally evolution settled on five fingers for most mammals, but it still uses one or two fingers (hoof or cloven hoof) for other mammals.

So…

• Create a number of variations on the vampire variation.
• Ask the development team working on the vampire. They may have a number of recommendations for changes, based on their direct experience with it.
• Ask the customers who have seen it. What did they like or not like? What would they recommend to improve it? What one feature did they hate?  Why did they stop using it?

Any variation has a number of function points, just like the bolt we discussed earlier. With your development team, review the function list one by one. For each function point, create ten possible variations. Most will not work, but remember not to kill off them too soon.

Use the lessons of evolution to create variations on the vampire variation. That’s persistence.

A second reason to keep a vampire alive may be resource issues. It may be generating resources in a peculiar way. The vampire may be the source or reason for funding by a customer. The vampire may be the project that keeps a highly talented team or individual at your organization. Or you may believe that you cannot afford to kill this vampire because your boss/customer/company will leave/quit/fire you if you kill the vampire. Whatever the reason, identify it directly.

Demonstrate to your boss/customer/ organization/team that the customers have thoroughly rejected the vampire as it exists today.  Outline your plan to create new variations and your plans to test them in the marketplace. The evolutionary process will eventually lead you to success.

Finally, you may have some very personal reasons for keeping the vampire alive. Your own success/promotion/growth/bonus may need this vampire to succeed. In this situation, first recognize your own needs to yourself, if not to anyone else.

Then return to the evolutionary model of creating variations. Somewhere in the mix of new, unlikely variations, the customers will find a few that they like, often using them in novel ways that you did not imagine.

Checkup for Killing Vampires

• What is the difference between persistence and stubbornness? Which are you?
• Why do you think the vampire will succeed?
• What variations have you tried on the vampire?
• Who wants the vampire to stay alive? Why?
• Who wants the vampire dead? Why?
• How can you create many more variations on the vampire?
• What is the personal cost to you for feeding the vampire?
• What is the personal cost to you for killing the vampire?

You may have noticed that this post was not particularly helpful in dealing with personality quirks—personal or organizational—that keep the vampires alive. I am not a psychologist, and do not pretend to offer psychological advice. My blunt advice, taken directly from the lessons of evolution, is: “Grow up. Get over it. Shoot the vampires. Move on.”

Socrates was a little gentler with his dictum, “Know thyself.” Miki says it differently, “Know your MAP and know that you can modify/change it at will.”

Your career/customers/team/organization/boss is more important than any single variation. You are valuable specifically for your ability to create and deliver variations. Kill the vampire! Create one hundred more variations to nurture and test.

Next time:  We will begin to explore selection. How does evolution use the environment to select the fittest variations? What exactly is evolutionary fitness?

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Now let’s tackle some truly challenging differences between evolutionary variation and our business process for generating variations.

Last week we said, Evolution does not care about an individual organism and it does not even care about an individual species. In contrast, we care which particular variations fail and we care passionately about the success of our business. It’s not just business, it’s personal. Quite simply, this difference is insurmountable.

Prejudice makes your world go down

On the surface it seems outrageous to propose that our desire to succeed actually is one source of our failures, but the evolutionary model points in that direction. We cannot eliminate our preferences, but perhaps we can understand the impact of our preferences.

Note the polite reference to our preferences, when the more accurate word is bias or even prejudice.

Literally, a prejudice is a pre-judgment. While judgment is good and even necessary, pre-judgment, that is judgment before the data is available, is not good.

By understanding our prejudices, perhaps we can reduce the negative impact of those prejudices.

As business leaders we like to think of ourselves as rational creatures, dispassionately weighing the facts and evidence, then rendering a judgment—like Solomon—upon the wisdom of any particular issue at hand.

Our self-image depends heavily upon this viewpoint, because it supports and justifies the many decisions we must make every day, usually with insufficient time and almost always with inadequate information to make the decision.

Many external factors affect our ability to make decisions, most of which are beyond our control. For instance, air temperature has a measurable effect on our attitude, so much so that we refer to a person as cold or warm. In a warm room our decisions tend to be more expansive and more generous. Lower the temperature a few degrees and we become colder, more calculating and stingy. Blood sugar level has a similar impact, with lower blood sugar correlated to cautious behaviors and higher blood sugar levels correlated to increased risk-taking.

No doubt you have experienced these variations in your own work. In the morning, after coming into the office from a cold commute and then drinking a cup of coffee, your actions may be just a little quicker, a little more cautious, a little less expansive and open. In the afternoon after lunch, you may be a little more relaxed in a meeting, a little more agreeable and willing to consider an unusual idea.

Also we are affected by internal chemicals such as testosterone, adrenalin, and endorphins. Testosterone, the ultimate male chemical, is correlated with feelings of power and control. Any perceived victory or accomplishment will tend to raise testosterone levels. In stressful situations our bodies release adrenalin, which triggers the well-known “fight-or-flight” responses. Endorphins tend to produce feelings of peace, and euphoria. Exercise typically increases endorphin levels, which leads to the feeling of relaxation and peace after a good work-out. We can change our levels of each of these chemicals by physical activities and also just by our own thoughts.

Outside the chemical and physical realms, our own brains tend to betray us. Tests demonstrate that our estimate of our own knowledge affects our decision making, even when our knowledge is wrong. As Will Rogers said, “It isn’t what a fellow knows that does him any harm. It’s what he knows that isn’t so.”

In today’s business, where change is so rapid, much of our knowledge is outdated, if not plain wrong. Small, subtle differences can have significant impact on the outcomes. Our ability to spot those subtle differences is limited to areas where we have very deep, very current knowledge. Technology and business change so rapidly that it is almost impossible to stay current across a broad range.

Finally, in business we work under short time frames, with incomplete information, and we care passionately about the outcome. Guessing what our customers will want tomorrow is particularly hazardous to our business health.  Truly we don’t have knowledge so much as prejudices, opinions and hunches. As Alcoholics Anonymous states, “The first step is admitting I have a problem.” So let’s confess together, “I am addicted to my prejudices.”

Prejudicial Checkup

• You just admitted you have prejudices. What are a few of your favorite prejudices? Name at least five.
• What external events or situations trigger your prejudices?
• What internal signals indicate that you are replaying an old, familiar prejudice?
• What internal images do you see, what words or voices do you hear internally when a situation triggers one of your prejudices?
• How can you interrupt your internal cycle of prejudicial thoughts? Perhaps you can stand up, count to ten, take a few deep breaths, or stretch.
• How can you protect your development teams and processes from your internal prejudices?

Nurturing New Variations—especially the ones we do not like

With this fresh understanding of our own prejudices firmly in mind let’s return to the first problem that limits our ability to produce variations – killing off new ideas too soon.

Knowing that our prejudices will inevitably lead us to kill off certain types of new ideas too soon, how can we design an environment within our business that protects them from our “best” instincts?

To thrive, new ideas need

• a champion;
• some time to grow;
• a few resources; and
• early exposure to testing by customers.

How do you provide these resources to your teams? It is not your job to nurture every new idea, but it is your job to provide the resources and patiently observe which ones grow. Most new ideas will eventually die, but a few unlikely ones will thrive, just like weeds.

How to move projects along

• Reinforcement from customers is extremely powerful—a few encouraging words from a customer can overcome almost any prejudice;
• set up small tests to demonstrate and validate critical elements early in the process;
• drive your development teams to put every new product in front of customers very quickly, much earlier than the development team believes it will be ready;
• full functionality of a few subsystems is much better than 90% functionality of the whole system; and
• remind your teams to fail fast, fail often, and fail small.

Checkup for Nurturing New Variations

• How do you encourage and support champions?
• How do you protect champions and new ideas from your own prejudices?
• How do you provide just enough resources to allow new ideas to grow?
• How do you expose new ideas to the testing of the marketplace? How quickly?
• How do you keep yourself out of the role of premature judge?

Next week join me to learn how our prejudices feed the vampires that suck the life out of our business—and what to do about it.

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Last week we promised to dig a little deeper into the two primary mistakes—killing most experiments too soon and not killing off the vampires soon enough. Today we will address the first mistake.

Evolution Wins Because Evolution Doesn’t Care

Well, that is the problem for us as business managers. Evolution generates random variations and lets the environment select the winners.

In business we have difficulty matching evolution’s dispassionate process for several challenging reasons:

• Evolution runs thousands of variations each generation. In business we can develop and test only tens or maybe hundreds of variations each generation.
• Evolution has a very low cost for each variation. In business our cost for each variation can be significant.
• Evolution does not care which variation wins. In business we care about which variations succeed.
• Evolution succeeds even when an entire species fails. In business we fail when our business fails and each of us cares passionately about the success of our individual business.

Let’s address the two easy differences first.

Evolution generates thousands of variations, at an extremely low cost per variation. Evolution actually produces nothing but variations. Every individual organism is one more variation for the species. Unit cost and individual variation are inextricably linked. Evolution has designed its production process to generate individual variations as an integral part of the operation.

In direct contrast, since the industrial revolution we have driven human manufacturing processes to produce high volumes and low cost by eliminating variation. For over one hundred years we have driven manufacturing processes to reduce variations down to parts per million.

Fortunately in the past two decades we have begun to shift from a mass production model to a mass customization model, which begins to look a little more like evolution.

As one example, print-on-demand technology has lowered the cost of small-volume book production so much that a publishing run of one single book is now economical. This technology extends the life of low-volume books, but even more important it makes possible production of completely custom books, written and produced for a market of only one person or one event.

The most extreme approach to mass customization is to give the customer the capability to design and produce exactly the product that the customer wants.

Build-a-Bear has built a hundred million dollar business providing components for stuffed bears to children, who then construct a completely custom stuffed animal for themselves. The company has integrated the production process into the consumption process and the customer creates the variation as an integral part of the production process.

Using this approach for books, print-on-demand technology becomes not the source of the customization, but only the last step in creating a unique printed product that the customer has designed individually.

Among other new companies, Giftventure exemplifies the use of print-on-demand for mass customization. Giftventure provides a number of characters and puzzles that the customer can use to build a custom adventure for a child. Giftventure delivers the artwork electronically to a print-on-demand house near the consumer, and delivers the final printed adventure by mail.

Variation Checkup

• How does your customer participate in your product design?
• How does your customer participate in your production process?
• How do you integrate mass customization into your own product designs?
• Can your customer make a completely unique version of your product?
• How does customization affect your production costs?

When Caring is a Negative

Evolution does not care about an individual organism; it does not even care about an individual species.

Fundamentally, we care when particular variations fail and we care when our business fails. Quite simply, this difference is insurmountable.

This topic is one of the most fundamental challenges for business leadership.

Please join us next week when we will explore how our desire to succeed directly causes us to kill most experiments too soon, and how that same desire to succeed prolongs the life of the vampires—those experiments that should have died long ago, but keep coming back to life in every budget cycle.

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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…

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