Now, you could make this a good example by continuing, in lesson 2, to show weaknesses with this approach.
For an analogous case, read Knuth. In 'the art of computer programming', chapter ?2? on random numbers, he gives a convoluted random number generator that, in an abstract sense, is not unlike your one-way function, then shows how bad it is, and makes the case that you shouldn't let ordinary programmers design (or even tweak) these algorithms for you.
I do agree that a follow up could be written (e.g. Bob could compute a 'rainbow table' of the dictionary for the next time Alice uses the same trick; and the Alice could introduce some salt; Alice could introduce multiple rounds as well with a 'work factor' to make Bob's life harder).
If you're trying to non-mathematically explain a mathematical process, I think, more often than not, you're going to end up with an incomplete example. If you try, I'd wager that you'd probably end up with something fairly long and possibly convoluted.
Which isn't to say that more blog posts about the topic would be wasted. I think the posts so far are great ideas for expansion. I just think it accomplished what it wanted to accomplish.
Hopefully the blog post won't spur too many novice developers into writing home-grown password hashing functions based on the outlined technique.
"There's a potential problem with this procedure. What if Alice had started with some other word - say 'FILES' - and following this procedure also led to the word 'THINGS'. In fact, it might be that many, many English words all lead to the word 'THINGS'. If that were so then Bob would be justified in feeling skeptical that Alice had solved the crossword. She'd be using a "bad" one-way function. Both Alice and Bob need to be confident that this procedure doesn't lead to too many collision between English words. This is a challenge that needs to be addressed if you want to prove that a function is truly a good one-way function."
http://www.merriam-webster.com/dictionary/elephant: any of a family (Elephantidae, the elephant family) of...
http://www.merriam-webster.com/dictionary/rhinoceros: any of a family (Rhinocerotidae) of...
http://www.merriam-webster.com/dictionary/crocodile: any of several large...
http://www.merriam-webster.com/dictionary/buffalo: any of several wild bovids...
So, there is some variation, but it isn't hard to find immediate collisions, especially for related words. That makes sense; a dictionary should not attempt to vary the way it describes similar words.