The Value of Wading In: A Lesson from Theranos

By Vijay Govindarajan

Recent press might lead you to believe health-technology company Theranos burst on the scene in recent years but, in fact, the company was founded 13 years ago, in 2003. Its founder was an ambitious 19-year-old named Elizabeth Holmes. Holmes wanted to revolutionize the health-care field—or at least part of it—and filed her first patent (for a drug-delivery patch) before age 20. In 2013, her company unveiled the innovations it had been working on for a decade—a “nanotainer” or small vial that collects blood, a tiny needle, and a blood analyzer unit, designed to make it easier and cheaper to test blood for more than 200 ailments. Theranos submitted its first test (for herpes) to the FDA in 2013, for which it was cleared in 2015.

The company didn’t really come to the public’s attention until it partnered with Walgreens to sell testing directly to consumers in September 2013. Theranos quickly became a media darling, enjoying cover story status in publications such as Fortune and Inc. A steady parade of press releases announced more partnerships—with nonprofits Cleveland Clinic and Capital BlueCross, for example—and high-profile board recruits, including former Secretary of State Henry Kissenger, billionaire Riley Bechtel, and former U.S. Senator Sam Nunn. Even Vice President Joe Biden paid the company a visit. In March 2015, the Horatio Alger Association of Distinguished Americans inducted Holmes as a lifetime member. She and the company were riding high.

Then in mid-October 2015, The Wall Street Journal published an article by prize-winning journalist John Carreyrou, who had investigated the company for months. The article challenged the company’s claims and the efficacy of Theranos’s technology and created a juggernaut of media attacks. Theranos went on the defensive. Holmes appeared on TV and online, taking the media, especially The WSJ, to task and trying to reinstate faith in the company. Theranos even revamped its leadership boards after criticism that few of its high-profile members had medical knowledge or training.

As 2016 dawned, there was little respite. An inspection by the Centers for Medicare & Medicaid Services (CMS) found a number of deficiencies at Theranos’s lab in Newark, CA, including one finding at the “immediate jeopardy” level. The news had a toxic impact on the company’s declining reputation. Even relationships with partners began to cool. Mere days after the CMS report, for example, Walgreens said it would temporarily close its Theranos Wellness Center in Palo Alto, CA. (most of the Wellness Centers are in Arizona), and a Walgreens spokesperson said the company was “currently in discussions about the next phase of our relationship [with Theranos].”

The hailstorm raining down on Theranos might have been averted had the company tested the waters first rather than operating in secrecy for 10 years and then flinging open its doors. Certainly there is a market for faster, cheaper lab work, especially in the U.S. where health-care costs are among the highest in the world. But creating and executing an experiment before launching its key products would have been a better, low-cost strategy for Theranos to learn about potential vulnerabilities and determine how much of a market to expect before going all in.

Experimentation is an essential element of Box 3 thinking. In the Three Box paradigm, Box 3 leaders generate ideas today that can be turned into new products tomorrow. The skills and strategy you need to do this differ dramatically from those required for Boxes 1 and 2, where you maintain your organization’s performance (Box 1) and, at the same time, eliminate practices and policies that no longer are relevant or productive (Box 2). Boxes 1 and 2 are about taking care of the present and the past. But you make the future happen in Box 3.

The purpose of experimentation is to learn. That does not mean it will be easy or quick, but it is well worth the investment in time and resources. When Indian automaker Mahindra Group wanted to determine whether India’s middle class would accept—and, more important, purchase—sport utility vehicles, the company first rolled out a lower-cost “test” SUV. The results of that experiment gave them a green light to move forward manufacturing their more expensive and highly popular Scorpio model. Similarly, coffee king Keurig targeted the office market with a single-serve coffeemaker before creating a version for the more lucrative home market (estimated at 20 million American households).

Experimentation is a way of wading in, rather than diving in, allowing you to resolve critical uncertainties (how deep is the water?) and hedge your risk (severe, possibly fatal, consequences). Ultimately, experimenting will lead you to one of three courses of action: (1) confidence to move forward with your strategy or innovation, (2) adjustments to your original strategy/innovation, or (3) a timely exit.

Yes, experimentation is an investment. But it’s also a net gain because any new information you learn can help you avoid potentially costly mistakes, as in the case of Theranos.

Vijay Govindarajan is the Coxe Distinguished Professor at Dartmouth’s Tuck School of Business and a Marvin Bower Fellow at Harvard Business School. He is a WSJ and NYT best-selling author, and author of Three Box Solution: A Strategy for Leading Innovation, HBR Press, April 2016. Watch the book trailer. Twitter: @vgovindarajan.