Tom McNichol’s got a great story in the What Works section of the current issue of Business 2.0 that examines the virtues of failure in business, and how companies with the right mindset can actually turn these setbacks into victories. One of the prime examples is Google (GOOG), the Internet superstar known for its online innovation.

In the piece Tom talks to Douglas Merrill (pictured), a Google engineering vice president, about Google’s culture of embracing mistakes. (The company prefers to call its flubs “experiments” rather that “failures,” but the bottom line is that its employees often spend time on things that don’t yield impressive results.)

At first, the concept might seem like a no-brainer – of course everything a company tries won’t work! But the valuable lesson is in how companies react to failure. Some reward only the employees who deliver successful ideas, while the smarter ones reward employees who try lots of things, learn from what fails, and use the knowledge to experiment more.

This seems to be especially true on the Web, where companies can release product updates almost instantaneously and can get user feedback in real time.

I’ve learned a lot about that personally, with The Utility Belt. The design has gone through dozens of tweaks as I’ve tracked how readers respond to various design changes. The result has been a site that, at its best, evolves with the audience, making it easier for readers to ingest the content and comment on it.

Embracing failure is actually tough. The instinct of a creative person is to assume his work is great, and that anyone who can’t see that is a dimwit. That tendency to fall in love with our own ideas and dismiss user feedback can slow innovation, and give competitors an edge. Here’s to the companies that get it right, by learning fast when they get it wrong.