Critical Analysis of Leadership Failures at Theranos

Executive Summary

Purpose of Essay

Theranos was a medical technology company founded by Elizabeth Holmes whose mission was to break through the medical field by creating a more accessible blood testing machine. Although a company with a clear goal in the beginning, the leadership in Theranos caused many issues and ultimately resulted in the failure of the entire company.

The purpose of this essay is to:

• Examining four areas of leadership principles: teamwork, practices, composition, and long-term success

• Deconstructing why Theranos failed as a company through their leadership

Statement of the Problems

Holmes’ and the leadership at Theranos lacked the understanding of the initial vision they once strived for and caused a toxic work environment for the whole company. Theranos was a space filled with incoherent leadership, manipulation, internal competition, and an ending of failure to create the product they promised to make.

Findings and Conclusions

Due to the leadership and decisions of Theranos, the company created a self-destructive work environment that ended with the company’s end. The initial vision of the company did not come to fruition and the former CEO and COO were charged with federal wire fraud.

Explanation of Essay’s Importance

The importance of investigating and deconstructing Theranos is to set an example of how leadership can affect a company, its workers and product. In this case, Theranos had unfavorable leaders and many mistaken decisions which caused a spiral of internal issues within the company.

Introduction

Effective leadership, according to William C.H. Prentice, former psychology professor, president of Wheaton College, president of Bryant and Stratton Business Institutes, and dean of Swarthmore College, requires taking “a personal interest in the long-term development of their employees, and they use tact and other social skills to encourage employees to achieve their best'' (Harvardbusinessreview.com, 2022). In looking at the failure of Theranos, the leadership faced some unique challenges and issues. This paper will examine that failure through the lens of leadership principles in four areas, principles of teamwork within an organization, best practices for leaders, how the composition of leadership influences outcomes, and judging the success of project teams both in the immediate and long term. First, it is important to establish what happened with Theranos.

Theranos, a portmanteau word, a combination of “therapy” and “diagnosis” and is the invention of Elizabeth Holmes (O’Brien, 2022). The 2004 Stanford drop out had a dream to disrupt the medical field in how blood testing was done. Her vision was to create a cheap and portable blood testing machine that could perform a wide variety of blood tests much more quickly than traditional labs. Theranos, her startup company, would lead the charge into uncharted territory with the creation of its miniLab platform. Its purpose was to allow for “earlier disease detection and intervention by facilitating low-cost, small-sample collection, testing, and rapid communication of diagnostic information in distributed settings” (businesswire.com, 2022). All that would be required is one drop of blood.

            Unfortunately, that vision did not come to fruition, in April 2017 Theranos “reached a global settlement agreement with the Centers for Medicare & Medicaid Services” where the company would pay $30,000 and agree not to own or operate a clinical laboratory within the next two years (businesswire.com, 2022). In 2018 however, CEO Elizabeth Holmes and former COO Ramesh Balwani were indicted on federal wire fraud charges (O’brien, 2022). A few months later, Theranos, once valued at $10 billion, dissolved leaving investors and the public at large with questions about how this could have happened (Boni & Summat, 2019). In short, a grand failure of effective leadership and teamwork.

Principles of Teamwork Within an Organization

The leadership of Theranos faced issues related to a lack of understanding about the founding vision, nepotism, groupthink, and manipulative leadership. These issues greatly influenced leadership decisions and affected group dynamics to produce not only an outcome of high turnover within the company, but its eventual dissolution and conviction of fraud by the CEO.  Further when confronted with ideas or concerns the CEO did not like, that person or people were often fired (Yahoo Finance, 2021). The fear of being fired or reprimanded was a principle that disrupted teamwork and group cohesion within the company.

The vision of Theranos began with Elizabeth Holmes and its leadership practices began with her. It is interesting to note how the patterns of the CEO become replicated in the board members, some of whom included a former Secretary of State, a former Defense Secretary, senators, a former chief executive officer for Wells Fargo & Co, a former director for the Center of Disease Control, a former U.S. Navy admiral and a former U.S. Marine Corps general (Kunthra, 2021). Regardless of the strong leadership pedigree and teamwork experience of the board members, the organization allowed the practice of fear, intimidation, and lack of accountability to rule.

Holmes lacked the medical or engineering expertise to fully understand and manage her vision of Theranos from conception to final product, so she appointed Ramesh Balwani to the position of COO. Balwani, in his role of COO, was questionable, as he had no medical or science experience (Cohen, 2021). This created a few issues, such as nepotism, which resulted in ethical issues of fairness and a conflict of interest. Two of the most powerful people in the company have little motivation to confront each other when valid concerns are raised. This has a negative impact on teamwork as it ushers in a level of distrust, low morale and raises the potential for the abuse of power (Kim & Moon, 2021).

Nepotism also causes division within, creating the in-group and out-group, and in the case of the work culture at Theranos, the use of fear was a major contributor in creating those groups. The in-group were those whose behaviors and actions aligned with the CEO and COO views and the out-group were those who did not. Out-group members were regularly fired according to reports by former employees (Kirsch & Birquelet ,2021). This led to two main outcomes, groupthink and a toxic fear-based work culture.

It encouraged groupthink that caused intelligent, well-intentioned people to make irrational decisions in order to conform, and that to dissent is an impossibility (pychologytoday.com, n.d.) This can be seen in a statement by former employee Justin Maxell who said, “We knew Theranos to be a deceptive organization, but we had to chill out and not say anything about it because they would make our lives difficult” (Kirsch & Birquelet ,2021). The in-group systematically “shut down, ignored, bullied or threatened” individuals who questioned Theranos or its leadership (Jezior, 2022).

This in-group was cultivated by manipulative leadership and was exemplified in Holmes and Balwani. An article by the Institute of Public Speaking points out that “Manipulative leaders use position, power, and coercion to derive their outcomes…[they] do not value or respect those they try to manipulate…and impose their views and agenda on others while stifling resistance” (Guarino, 2022). By necessity of protecting singular self-interests and agendas, manipulative leaders do not have clear and transparent communication. In fact, Holmes was found guilty of one count of conspiracy to fraud investors which could be argued is a trait representative of manipulative leadership (O’brien, 2022).

An incident between Tyler Shultz, a former Theranos employee who was also a whistleblower, and his late grandfather George Shultz illustrates the effect of manipulative leadership. George Shultz, who was a former Secretary of State, sat on Theranos’ board of directors. He ignored his grandon’s warnings and aligned himself with Homes and Balawni, who had pushed his concerns aside (O’brien, 2022).

While there are many factors and issues that played a role in negatively impacting the teamwork in Theranos, manipulative leadership which created in-groups and out-groups, nepotism which created centralized power, and groupthink reinforced by fear and intimidation aided in creating a toxic culture. Besides the engineering challenges of creating Holmes’ vision for a cheap and portable machine capable of running a multitude of tests from a few drops of blood, there was a significant challenge with the negative impact of leadership.

Best Practices for Leaders

In 2009, at a thought leaders program at Stanford University, discussing the importance of team building, Elizabeth Holmes was quoted, saying “if there is anything, in terms of the messages that I could bring to this meeting, it is the people that you choose to work with absolutely determine the success or failure of the companies that you may start” (O'Brien, 2018). In Holmes’ case, her choices and the people she chose to work, and not work, with were to the detriment of her own company. In an article about Leading the 4 Stages of Team Development, Ken Blanchard wrote, “Building a winning team requires a trained team leader to keep people aligned, monitor progress, provide feedback, create a safe environment and hold people accountable.” (Blanchard, 2019) In this article, Blanchard lists the stages of Team Development as Orientation, Dissatisfaction, Integration, and Production. These stages were first introduced in 1965 by Bruce Tuckman as Forming, Storming, Norming and Performing (Tuckman, 1965). Through each of these stages, Blanchard maintained that an adopted leadership style should be fluid with the stage of team development, ever changing, to mature with the team. As the founder and owner of a healthcare technology startup, and a 19-year-old college dropout, Holmes formed a highly respected and experienced team to bring her vision of disrupting the healthcare technology industry.

With no leadership experience, Holmes seemed to have emulated characteristics of people she admired: Steve Jobs and Larry Ellison, one of her earlier investors. In the forming stage of her team, Larry Ellison the co-founder of Oracle, was portrayed in Hulu’s “The Drop Out”, as an autocratic CEO asking Holmes if she was a leader and explaining how she needed to be aggressive and fire her first person (Showalter, Gregorini, & Watson, Erica, 2022). Being a college drop out himself with a $98 billion dollar company, Ellison was a Silicon Valley success that she could look up too. However, adopting that leadership style was a key factor to the downfall of Theranos. Holmes was so focused on her mission that she did not cultivate positive team cohesion, nor did she put enough trust in her team to allow them the freedom to bring her vision into a reality. All decisions within Theranos, no matter how small, had to first be approved by Holmes.

During the storming phase of her team, Holmes further exacerbated the problems by adding an additional team to compete against the first to develop the technology needed. In this stage, as described in (Saylor Academy, n.d.), “a great deal of creative energy that was previously buried is released and available for use, but it still takes skill to move the group from storming to norming.” Holmes did not facilitate any open lines of communication within any of the teams, nor did she provide any necessary conflict resolutions within. So, the norm for Theranos was operating in a highly stressful environment where employees were unheard, unappreciated, and unable to work harmoniously.

During the norming phase of team development, employees should be coming together, trusting of each other and able to handle conflict constructively. Schultz, one of the whistleblowers, shared during an interview that the culture of Theranos was toxic and full of secrecy (Ma, 2019). Team members did not trust each other and where leaders should be fostering participation and communication, Holmes was threatening them with lawsuits and enforcing frivolous NDAs in the name of protecting trade secrets. Because teams were unable to effectively work together and were ever changing, they seemed to be stuck in the forming and storming phase, never able to truly get to a performing stage.

In the fourth phase of team development, members should feel a sense of satisfaction from their accomplishments and productivity (Stein, n.d.). It is not the final stage; however, it is an important step that played a major role in the downfall of Theranos. The so-called “cutting-edge technology” (Dunn, Thompson, & Jarvis, 2019) never worked. Holmes was often seen as a very charismatic salesperson. She was able to impress investors and the community with her vision, but her team no longer believed. Holmes lied to investors, employees, and falsified working results during demonstrations. In 2013, the National Institute of Health (NIH) released a guide “Collaboration and Team Science: A Field Guide” that explained the importance of teamwork between different fields of science coming together for a common goal. When it came to team dynamics, it quoted that “it is not the science you need to worry about, it is the team dynamics” (Bennett, Levine-Finley, & Gadlin, 2013).

Compositions of Leadership Influences

Steve Jobs was an entrepreneur, visionary and leader who co-founded the world’s most valuable company Apple. He helped transform a multitude of industries during his lifetime and stands among the pantheon of other great inventors (Issacson, 2014). Even after his passing, Jobs is a role model for many entrepreneurs who aspire to achieve his level of success and leadership. Among them includes Elizabeth Holmes, who idolized and modeled herself and her company after Jobs’ success to the point of obsession.

Holmes’ obsession with Jobs went beyond simply copying the management techniques described in Jobs’ biography written by Walter Isaacson. This can be seen by how she presented herself to both public media and her employees, considering herself to be the female version of Steve Jobs (Hartmans, 2018). She would dress like Jobs with his signature black turtleneck, constantly refer to Theranos’ blood-testing systems as “the iPod of healthcare”, hired security to drive her around in a black Audi sedan, and hired the same advertising agency Chiat/Day (Hartmans, 2018). Holmes even went as far as hiring former Apple employees, such as Ana Arriola who was one of the Apple product designers in charge of helping to create the iconic look of the iPhone (Dunn et al., 2019).

As the CEO of Theranos, Holmes’ duty was to manage the organization and dictate the structure of her leadership style to influence the outcome of the company. Jobs' success had a great influence on many of Holmes’ decisions regarding how the company was to be structured. However, despite applying tactics similar to Jobs to her own business’ model, Theranos ultimately failed under her leadership.

Holmes’ intentions were to copy the format of a successful company and entrepreneur. But this plan backfired because she lacked the tact and understanding of how and why Apple was a successful company. Specifically, she imitated Jobs without understanding that there was a distinct, fundamental difference between their companies and industries: Apple is a technology and software company that focuses on making technology and software for devices such as computers and phones; while Theranos was meant to be a health technology company whose focus was to create and provide medical products and services. This led to many of the decisions she chose to implement within Theranos being done so without the careful consideration of what she was putting into her own company, which ultimately ended up influencing an outcome of bad practices.

According to former employees of Theranos, there was a heavy use of manipulation being used which assisted Holmes in the short term, but not in the long term. This resulted in a highly toxic work environment for employees. Work culture was described by former employees as a revolving-door when it came to the hiring and firing of employees. While Holmes did an impressive job at recruiting highly talented employees to the company, she lacked the ability to keep them from leaving (Dunn et al., 2019). One former employee attributes the company’s high termination rate being due to Holmes not wanting to hear other people’s opinions that objected to her own; if there were any disagreements or opinions that did not align with Holmes’ views, the offending parties were immediately terminated (Dunn et al., 2019).

Judging the success of project teams, immediate and longer term

            The leadership and team at Theranos faced a monumental challenge in their attempt to create a cheap and affordable machine that could run 70 blood tests with a few drops of blood. In order to succeed, the team would have to overcome miniaturizing and compacting components that would interfere with each other. In addition, many blood tests dilute or destroy blood samples to produce their result. This fact makes producing 70 tests impossible to do, at least with current technology (Yahoo Finance, 2021). Had Theranos succeeded in producing a machine capable of executing a significant and meaningful range of tests, the company and the leadership would have been successful. Regardless, the leadership made several missteps in addressing the unique challenges of the teams working to solve the problem.

            The short-term solution executed by Theranos was to use third party equipment to produce blood tests results and to manipulate the inconsistent results produced by the minilab platform (Yahoo Finance, 2011). The leadership at Theranos placed excessive pressure on teams to produce results. In one example of negative pressure placed on teams by leadership, two teams were placed in competition with each other with the losing team having their employment terminated (Jezior, 2022). This strategy helped to contribute to the high turnover rate of employees at Theranos and created a toxic culture and ineffective teamwork.

            Competition, when it is at a healthy level, inspires innovative solutions and can help motivate employees to work harder (Ying, 2019). The leadership decision Holmes should have made would have been to reward the successful team instead of firing the losing team. The action of firing talented employees did not contribute to effectively solving the engineering problem of the miniLab platform.

            Another critical misstep the leadership at Theranos made was in attempting to force “a shared and unified vision” with Holmes declaring in a speech to employees, “The miniLab is the most important thing humanity has ever built. If you don’t believe this is the case, you should leave now” (Ying, 2019).  This kind of leadership decision forced out opinions and ideas that could have provided important insights and critical revelations could have sparked innovation. It also silenced opposition and opposing ideas that could have helped prevent a loss of time, and resources, by helping to set healthy boundaries. Theranos as a company needed innovation, however the leadership created a culture counter to the fertile ground needed for such innovation.

            The leadership at Theranos should have made it a point to allow dissenting voices a platform to be heard and understood. Strong declarations of a company’s vision can boost morale and create an environment where employees desire to stay committed to their work. However, the leadership at Theranos failed by only cultivating teams that enhanced the confirmation bias of Holmes (Madhavji, n.d.).

Conclusion

            The collapse of Theranos was due to the many difficulties faced, and caused, by their own leadership. This paper examined the failure through four areas of leadership principles: principles of teamwork within an organization, best practices for leaders, how the composition of leadership influences outcomes, and judging the success of project teams both in the immediate and long term. In each area, it was explained how much of an impact leaders, and their decisions, have in the success of their companies. In the case of Theranos, the lack of effective leadership exemplified was the primary cause of its downfall.

References

Aten, J. (2021, September 29). The painfully obvious reason Elizabeth Holmes isn't anything like

her ... Inc. Retrieved December 3, 2022, from https://www.inc.com/jason-aten/the-painfully-obvious-reason-elizabeth-holmes-isnt-anything-like-her-idol-steve-jobs.html

Bennett, M., Levine-Finley, S., & Gadlin, H. (2013, September). Collaboration & Team Science: A Field Guide. National Institute of Health. Retrieved from https://openresearch-repository.anu.edu.au/bitstream/1885/11070/1/BennettetalCollaboration&teamscience2013.pdf 

Blanchard, K. (2019). Leading the 4 Stages of Team Development. Chief Learning Officer, 18, 18-18. Retrieved from https://eds-s-ebscohost-com.ezproxy.umgc.edu/eds/detail/detail?vid=7&sid=7c29bc24-f099-45fc-a324-122458364a58%40redis&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#db=bsu&AN=136836342

Boni, A. A., & Sammut, S. M. (2019). “The Good, the Bad, the Ugly”: Leadership Lessons From two Companies - Amgen and Theranos. Journal of Commercial Biotechnology, 24(4), 67–73. https://doi-org.ezproxy.umgc.edu/10.5912/jcb918

Businesswire.com. (2017, April 17). Correcting and replacing Theranos reaches resolution with Centers for Medicare & Medicaid Services. CORRECTING and REPLACING Theranos Reaches Resolution with Centers for Medicare & Medicaid Services | Business Wire. Retrieved December 4, 2022, from https://www.businesswire.com/news/home/20170417005931/en/CORRECTING-and-REPLACING-Theranos-Reaches-Resolution-with-Centers-for-Medicare-Medicaid-Services

Cohen, D. (2022, July 8). Everything to know about sunny balwani. The Cut. Retrieved December 4, 2022, from https://www.thecut.com/2022/07/what-to-know-sunny-balwani-guilty-verdict.html

Dunn, T., Thompson, V., & Jarvis, R. (2019, March 13). Ex-Theranos employees describe

culture of secrecy at Elizabeth Holmes' startup: ‘The Dropout’ podcast ep. 1. ABC News. Retrieved December 3, 2022, from https://abcnews.go.com/Business/theranos-employees-describe-culture-secrecy-elizabeth-holmes-startup/story?id=60544673

 Dunn, T., Thompson, V., & Jarvis, R. (2019, March 13). Elizabeth Holmes on Theranos devices not working: 'I know that we made mistakes': 'The Dropout' episode 3. Retrieved from ABC News: https://abcnews.go.com/Business/elizabeth-holmes-theranos-devices-working-made-mistakes-dropout/story?id=60863557

Feeley, J. (2017, May 30). Theranos directors kept quiet during mounting company missteps. Bloomberg.com. Retrieved December 9, 2022, from https://www.bloomberg.com/news/articles/2017-05-30/theranos-directors-kept-quiet-amid-mounting-company-missteps

Guarino, J. (2022, October 19). Manipulative vs. persuasive leadership. Institute of Public Speaking. Retrieved December 4, 2022, from https://www.instituteofpublicspeaking.com/manipulative-vs-persuasive-leaders/#:~:text=Manipulative%20leaders%20use%20position%2C%20power,backfire%20in%20the%20long%20run.

Hartmans, A. (2018, May 27). All the ways theranos founder Elizabeth Holmes was obsessed

with late Apple CEO Steve Jobs. Business Insider. Retrieved December 3, 2022, from https://www.businessinsider.com/elizabeth-holmes-theranos-steve-jobs-obsession-2018-5?amp

Harvardbusinessreview.com. (2022, April 11). Understanding leadership. Harvard Business Review. Retrieved December 4, 2022, from https://hbr.org/2004/01/understanding-leadership

Isaacson, W. (2014, October 29). The real leadership lessons of Steve Jobs. Harvard Business

Review. Retrieved December 3, 2022, from https://hbr.org/2012/04/the-real-leadership-lessons-of-steve-jobs

Jezior, M. (2022, November 15). Lessons from the Theranos Toxic Culture. Eagle Hill Consulting. Retrieved December 4, 2022, from https://www.eaglehillconsulting.com/insights/theranos-toxic-culture-lessons/

Kirsch, N., & Briquelet, K. (2021, September 8). Former Theranos employees get ready to relive the sh*tshow. The Daily Beast. Retrieved December 4, 2022, from https://www.thedailybeast.com/elizabeth-holmes-trial-dredges-up-toxic-memories-for-theranos-workers

KIM, M., & MOON, J. (2021). The Relationship Among Nepotism, Leader Legitimacy, and Work Engagement: Focus on Distribution Industry. Journal of Distribution Science, 19(7), 41–50. https://doi.org/10.15722/JDS.19.7.202107.41

Kunthara, S. (2021, September 17). A closer look at Theranos' big-name investors, partners and board as Elizabeth Holmes' criminal trial begins. Crunchbase News. Retrieved December 4, 2022, from https://news.crunchbase.com/health-wellness-biotech/theranos-elizabeth-holmes-trial-investors-board/

Ma, M. (2019, December 19). Theranos Whistleblower Shares His Story. Retrieved from The Heights for Greater Boston College: https://www.bcheights.com/2019/12/01/theranos-whistleblower-robsham/

Madhavji, S. (n.d.). Leadership bias: 12 cognitive biases to become a decisive leader. Hospitality News & Business Insights by EHL. Retrieved December 4, 2022, from https://hospitalityinsights.ehl.edu/leadership-bias

O'Brien, C. (2018, April 11). 10 inspirational quotes from Theranos founder Elizabeth Holmes that she probably needs right now. Retrieved from Venture Beat: https://venturebeat.com/entrepreneur/10-inspirational-quotes-from-theranos-founder-elizabeth-holmes-that-she-probably-needs-right-now/

O'Brien, S. A. (2022, July 7). The rise and fall of theranos: A timeline | CNN business. CNN. Retrieved December 4, 2022, from https://www.cnn.com/2022/07/07/tech/theranos-rise-and-fall/index.html

O'Brien , T. (2022, January 4). Analysis | theranos directors pay no price for Holmes's fraud. The Washington Post. Retrieved December 4, 2022, from https://www.washingtonpost.com/business/theranos-directors-pay-no-price-for-holmess-fraud/2022/01/04/858bc27c-6d95-11ec-b1e2-0539da8f4451_story.html

psychologytoday.com. (n.d.). Groupthink. Psychology Today. Retrieved December 4, 2022, from https://www.psychologytoday.com/us/basics/groupthink

Saylor Academy. (n.d.). Chapter 9: Groups and Teams. Retrieved from University of Maryland Global Campus: https://leocontent.umgc.edu/content/scor/uncurated/dcl/2215-dcl600/learning-resource-list/managing-groups-and-teams.html?ou=716273

Showalter, M., Gregorini, F., & Watson, Erica (Directors). (2022). The Drop Out S1E2: Satori [Motion Picture].

Stein, J. (n.d.). Using the Stages of Team Development. Retrieved from Human Resources: Massachusetts Institute of Technology: https://hr.mit.edu/learning-topics/teams/articles/stages-development

Tuckman, B. (1965, June). Developmental sequence in small groups. Psychological Bulletin, 63(6), 384-399. Retrieved from https://eds-s-ebscohost-com.ezproxy.umgc.edu/eds/detail/detail?vid=9&sid=7b950d7c-6db7-4dc6-9f98-c1ad4ad3380d%40redis&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=1965-12187-001&db=pdh

Tun, Z. T. (2022, January 4). Theranos: A Fallen Unicorn. Retrieved from Investopedia: https://www.investopedia.com/articles/investing/020116/theranos-fallen-unicorn.asp#toc-what-is-theranos

Yahoo Finance. (2021). Elizabeth Holmes: The 'Valley of Hype' behind the rise and fall of Theranos [documentary]. YouTube. Retrieved December 4, 2022, from https://www.youtube.com/watch?v=to2GSibbrv0&ab_channel=YahooFinance.

Ying, J. (2019, March 16). Case study: Lessons learned from Theranos' corporate culture. Medium. Retrieved December 9, 2022, from https://medium.com/the-coleman-fung-institute/case-study-lessons-learned-from-theranos-corporate-culture-1a836515c139