In this assignment you use your systems thinking skills to analyze the drivers of growth and potential limits to growth for Peloton, a highly valued contemporary startup.

A.  Causal Loop Basics (2 points) This question gives you some practice with a simple causal loop diagram (cld).  The problem for which you will develop a cld is an example of the  phenomenon of policy resistance, a pattern of behavior in which an apparently reasonable solution is not effective in the long run because the system “resists” the apparently sensible policy through some compensating feedback.  To “flex you cld muscles,” you will draw a simple cld.  Your task is to translate the causal logic here into a two-loop cld – a diagram that tells only a small part of the story but that begins to offer insight into why this counterintuitive behavior occurs.

Draw a causal loop diagram based on the following text.  Be sure to assign the polarity of your links, label the loop as reinforcing or balancing, and name your loop. Hint: as you read the text, look for words that signify variables and for the causal relationships between them.

•    As the frequency and severity of automobile accidents increase, it increases the pressure for safety devices and systems.

•    Automakers respond to an increase in pressure for safety devices and systems by installing more automotive safety systems on their automobiles.

•    As automotive safety systems increase, it reduces the frequency and severity of accidents.

Add another feedback loop based on the following text:

•    As automotive safety systems increase, the perceived risk of accident and injury decreases.

•    When the perceived risk of accident and injury decreases, then the pressure to drive slowly and safely decreases.

•    As pressure to drive slowly and slowly decreases, the average speed driven increases.

•    With higher average speed driven, the accident frequency and severity go up.

Turn in your two-loop diagram.  Make sure you have included polarities on your links, labels for your loops, and names for your loops.

B. The Peloton Story Peloton is an exercise equipment and media company which was founded in 2012 by Graham Stanton, Hisao Kushi, John Foley, Tom Cortese, and Yony Feng. It sells luxury stationary bicycles and treadmills with monitors that allow users to stream a growing set of exercise classes and charges users a monthly fee for access to those classes. The company has sold over 577,000 exercise machines, has around 511,000 connected subscribers, offers some 3  dozen live classes every day as well as over 10,000 on demand classes. It has been doubling its  revenue every year in the past 3 years to $915 million in the fiscal year 2019 (ending June 30th). Peloton’s fast growth has boosted its evaluation to $4 billion, and its Initial Public Offering (IPO) is expected later this year.

Despite these impressive results questions about the company’s long-term potential persist: the company lost $195.6 million in the latest fiscal year, competitors and copycats are multiplying, and its revenue depends significantly on the sales of very expensive equipment. The accompanying New York Times article, “Peloton Is a Phenomenon. Can It Last?” (download from latte) provides additional information on the growth of the company and the challenges it may face. Your goal for this assignment is to use your systems thinking tools to understand Peloton’s growth and its limits.  The NY Times article describes Peloton in the period before  pandemic conditions, so limit your analysis to those times.  Do not incorporate the effects of pandemic conditions on the Peloton story.  Base your analysis on the article not on external research about the company.

口 B1.   Using this material and your own insights, identify at leastfour reinforcing loops you believe were contributing to exponential growth in demand for Peloton’s bicycles and classes.

Develop a causal loop diagram capturing the most important reinforcing feedbacks you believe to be responsible for the astounding growth of Peloton, and those relevant for its   future growth.  Paste your diagram for task 1 into your writeup, and provide a one-sentence explanation of each loop.  (2.5 points)

  You can use Vensim to develop your CLD, or draw it neatly by hand. You do not need to

provide equations for the variables.

  Do not use stocks and flows in your diagram.

  Integrate all your loops into a single diagram. Specifically, across different loops do not use different variable names that refer to similar/same concepts.

口 B2. No real quantity can grow forever. Identify at leastfour balancingfeedbacks that might eventually stop the growth of Peloton. Add them to your causal diagram, being sure to keep your diagram clean and readable.  Paste your expanded diagram for task 2 into your write-up, and provide a one-sentence explanation of each loop.  (2.5 points)

口 B3.What is likely to happen to Peloton’s trajectory in the future? Specifically, use your causal loop diagrams to suggest what might happen to (a) the number of subscribers and (b) the sales of equipment, the two determinants of revenue. Draw one graph for each of these two variables.  Sketch the expected future pattern for each variable for a scenario you imagine.  Then, using the same graphs, sketch the expected future pattern for a second possible future scenarios. Make sure the two scenarios are matched across the two graphs (that is you have the same two scenarios not four different ones). You may use a computer drawing tool but scanned hand-drawn sketches are also acceptable. Select an appropriate time horizon (both looking forward and backward), and explain your choice briefly. Name your scenarios and describe in a few sentences how the structure you sketched in tasks 1 and 2 gives rise to the possible behaviors you have sketched.  (1 point)

口  A good answer here will explain how the structure you hypothesize generates the behavior you anticipate. Use the feedback structure and other features of your causal diagram (such as delays) to assess what the likely behavior of subscribers and equipment sales could be.  Chapter 4 of Business Dynamics discusses different feedback structures and the various patterns of behavior they can generate.

口  Don’t forget to label the axes of each graph with a name, units, and scale. You do not need to collect historical data for this question; qualitative trajectories suffice.

口 B4. Choose one of the two possible scenarios you defined in task 3 and elaborate further. Draw graphs of the likely behaviors of five (5) of the key variables in your causal loop diagram. For each variable, also provide a one-sentence description of how the behavior you have drawn for that variable is consistent with your chosen future scenario.  Provide scales on the graph axes where appropriate. (1 point)

口  The behavior of the other variables you show should be consistent with the feedback loop structure in your diagram. Further, the hypothesized behavior of the variables you graph for your selected future should form an internally consistent scenario.  For example, if you argue sales of equipment and number of subscribers will continue to grow, it is not plausible to show revenues falling unless you believe prices fall faster than demand grows.

口 B5. Causal loop diagrams are qualitative, and as such offer only limited policy guidance. Nevertheless they are fruitful vehicles to think systematically about synergies among various elements of strategy, factors that require deeper analysis, and data that may inform policy discussions.

Use the diagram you have developed to provide a brief strategic reflection for Peloton’s future path. Specifically summarize your thoughts on: 1) New reinforcing loops that could be incorporated in their business model to enable further growth. 2) How to postpone the activation of the balancing loops you have identified in A2. 3) What signals and measures could provide early warning to management about shifts in the strength of important loops that require strategic responses? Your write up should be brief and to-the-point (no more than 200 words for each of the 3 subheadings above). Do not add any  further loops to your diagram: your response to this question should only include a write  up with 3 subheadings. (1 point)

Appendix 1

Motivation and Overview of Concepts

Designing and evaluating high-leverage policies demands a long-term, dynamic perspective. The analyst or manager must be able to characterize the strategic problem, including its current symptoms and history. The time horizon should be explicit and must be long enough to include possible side effects, delayed responses to policies, and other feedbacks. This assignment cultivates your ability to develop a reference mode, a graphical characterization of the patterns of problem behavior over time. The assignment also develops your skill in constructing causal loop diagrams that capture the feedback structure of the system, and your ability to relate the structure in a causal map to the problem behavior in the reference mode.

Problem definition involves both textual and graphical statements of problematic behavior. Conceptualization entails identifying feedback loops that are hypothesized to underlie observed patterns of system behavior. Model formulation is the process of moving from a theory of underlying structure to a fully specified mathematical model so that the theory can be tested. This assignment focuses on problem definition and dynamic hypothesis generation. Later assignments will bring these skills together with those of formulation and analysis to focus on a variety of strategic and operational problems.

Assignment Guidelines

Teams

  Teams consist of three people. No exceptions.

  Do the work together, as a group.  While it is tempting to use a “divide and conquer” strategy and have each person work on different parts of the assignment, doing so will take longer, lower the quality of your work, and limit what you learn—and therefore your ability to complete later assignments. Your dialogue with your teammates as you work through the issues will deepen your understanding and improve your work.

In the real world, modeling is almost always done in teams including key stakeholders whose participation is essential for successful implementation. In addition to mastering the technical skills of modeling, you must also master the pragmatic skills of group modeling, including    active listening, publicly testing your assumptions, and building respect and trust for others.

How much should you hand in?

Use your judgment.  Some words of wisdom:

“Be careful that you write accurately rather than much.”                                  —Erasmus

  We don’t give higher grades for longer write-ups.

“Often must you turn your stylus to erase, if you hope to write something worth a second

reading.”                                                                                                                  —Horace

  Allow yourself time for revisions.

“What is written without effort is in general read without pleasure.”  —Samuel Johnson   And graded without pleasure.

  Your graphs and diagrams should be clear and legible – see Section 5.2.7 of Business Dynamics for guidance. Use your time to think about the issues and develop your ideas. A  legible handwritten diagram you had time to think about is preferable to a beautiful computer-generated diagram that took so much time to render you didn’t have time to think deeply about its content.

General hints

  Each of your diagrams must fit comfortably and legibly on a single page in your writeup. Diagrams should include the loops essential in explaining the dynamics, but be simple enough to understand.  Your client will not understand a diagram that includes everything.

  Be sure to follow the conventions and rules for causal diagrams and reference modes

described in chapters 4 and 5.  These include:

−   Show the time horizon of graphs explicitly; provide units of measure and scales for all variables.

−   Label the polarity of every link in your causal diagrams.

−   Identify the polarity of the important loops.

−   Give the important loops a meaningful name.

−   Use variables with a clear sense of direction.

−   Clearly label your graphs.

Operational thinking and dimensional consistency

  Formulate your causal diagrams so they capture operational realities—the physics and decision making procedures—of the processes you seek to represent. The units of measure for the variables should be obvious and conform to standard practice. In many cases, the equation for a key concept should be readily inferred from the causal diagram and units. For example, consider a model of a work process. A key formulation shows how the amount of work completed each day is determined. The following diagram states that work completion rises with resources, effort and skill:

Resources

+

Task Completion

Rate

+

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However, the definitions and units of measure for the inputs to the completion rate are unclear. Are resources measured in people or dollars or dollars per month? What is “effort” and   how do we measure “skill”? A much better diagram is:

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Workweek

Productivity

Task Completion

Rate

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