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Wednesday, April 4, 2012

The System- An Effective Business Model

Daily Finance uses the model of David Arseneault's System as a model that businesses would be effective to use. Interesting analysis.


Businesses Could Learn a Lot From This Tiny College


Posted 1:51PM 02/28/12Posted under: Investing
In 1989, David Arsenault packed up his bags and moved to rural Iowa to become the new men's basketball coach at Grinnell College. The school, which is consistently ranked as one of the top liberal arts colleges in the country, hadn't seen a winning conference season since 1962.
Instead of coming in and trying to re-create a Hoosiers-esque turnaround in the program, Arsenault decided to fundamentally change the metric by which he measured success. By doing so, the story of Arsenault and the Grinnell College program holds many a valuable lesson for today's business leaders and investors.
The SystemInstead of focusing on winning, Arsenault chose to focus on making sure all his players were participating and having fun.
How do you do that?
Well, consider what a typical game for Grinnell looks like:
  • All five players are substituted out every 35 seconds (or at the nearest dead ball). There are usually three strings in constant rotation.
  • Full-court press the entire game.
  • Three-pointers -- and lots of them... like 60 in one game.
  • Average 113 points per game (that's just this year).
Everyone plays, everyone shoots, and everyone scores. Earlier this year, guard Griffin Lentsch scored a Division III record 89 points in one game! Win or lose, how can that not be fun?
But along with the fun, something interesting has happened: The team has been on a quite a run over the past two decades. On 13 different occasions since Arsenault took over, the team has had a winning conference record. They have made 10 postseason appearances and won the conference on five occasions.
But what does this have to do with investing? Well, I think there are three big takeaways.
1. Think differentlyBy far the most important move Arsenault ever made was to focus on player enjoyment over winning: "The reason we went with this system in the first place was not necessarily to compete for championships, it was to maximize participation and give more kids a reason to play."
I don't think that's all that far from what Starbucks (NAS: SBUX) CEO Howard Schultz had in mind when he took his chain of coffee stores to every city corner in America. You'd think he'd describe himself as the CEO of a coffee company. But, like Arsenault, he views his business in an entirely different light: Schultz views Starbucks as an ideal "third place" for the community to gather -- home and work being the other two. Of course, coffee matters to him, but only in the context of providing a place where people will come to meet others -- and spend some money in the process.
2. Exploit underutilizationSays Arsenault: "Most basketball today, especially at the professional level, has a lot of dead time. We send a new group of five out there every 35 seconds to run around and create as much disturbance as they can."
Arsenault noticed that time was an asset being underutilized. Take one look at the business models at both Zipcar (NAS: ZIP) and HomeAway (NAS: AWAY) , and you see two businesses trying to capitalize on much the same thing.
Zipcar offers Zipsters cars when they need them, for a low price -- which covers both gas and insurance. HomeAway and its signature Vaction Rentals By Owners (VRBO) site help those with vacation homes earn some cash outside the one summer month that the owners use it.
If you sit back and think about how much time your car or vacation house spends notbeing used, you can begin to realize the scope of the opportunity here.
3. Power to the peopleFinally, one of the reasons Arsenault's players give their all is that they're actively involved in producing for the team. As Dan Ariely, professor of behavioral economics at Duke, has shown, even a minimal amount of labor can create lasting experiences: "When instant cake mixes were introduced in the 1950s, housewives were initially resistant: The mixes were too easy, suggesting that their labor was undervalued. When manufacturers changed the recipe to require the addition of an egg, adoption rose dramatically."
Arsenault's players know their labor is valued.
I think that's one of the many reasons why companies like Green Mountain Coffee Roasters (NAS: GMCR) and SodaStream (NAS: SODA) have been such hits. Both companies are taking a process -- making coffee or soda -- that's usually done by someone else, and putting it in the hands of the consumer.
If you think I'm stretching a bit with this connection, just think about how popular Ikea furniture is. Then ask yourself if the company would be even half as successful if all of its products were prefabricated upon delivery at your house.
The power of these companies is that they help the consumer become actively -- and emotionally -- involved in the making of the final product.
Breaking all the rulesOf course, Arsenault has been constantly criticized for avoiding fundamental basketball. Breaking the rules of traditional basketball doesn't bother him much, though -- not when his team is having this much fun.

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