It's not just culture, communication and collaboration that will help a company like New Oriental Education & Technology Group stay at the top of its field, according to the Beijing-based, NYSE-listed company's president, Chen Xiang Dong. He says a big wave of competition is also key for China's largest private education provider, as old rivals expand their offerings and new ones arrive to test New Oriental's growth strategies like never before. It's a potentially game-changing shake-up, but one which Chen says will ultimately be good for the company.
New Oriental is facing growing competition from a position of strength, however. Opening its doors in 1993 and making its stock market debut in 2006, the company is reaping the rewards of being a pioneer in China's private education sector. Revenue in the first nine months of fiscal 2011, which ended on February 28, climbed more than 40% to US$420.5 million, while income from operations was up 15.5% to US$85 million.Total student enrollments at its 456 schools nationwide jumped 16.8% year on year to approximately 1.6 million.
To be sure, New Oriental is not the same company Chen joined as a teacher back in the late 1990s, nor is private education in China the sector it was once was. To say the learning curve has been steep would be an understatement, and in this interview with China Knowledge at Wharton, Chen, who was promoted to president late last year, discussed why that is so, given the new dynamics of extra-curricular education in the country. He also talked about the company's "challenging and painful" restructuring that has taught him many leadership lessons.
The following is an edited translation of the conversation.
China Knowledge at Wharton: How has New Oriental managed to sustain rapid growth in recent years?
Chen Xiang Dong: Our growth has been driven by several factors. One is that our brand recognition has been increasing since the company was founded in 1993. Second, our "channel" building has matured, and third — which is very important — our principals have grown up with us and are now about in their mid-30s. Fourth, our management team has been effective — since March 2009, we've been using a matrix management system. And fifth, from a broader perspective, China’s education and training market has grown rapidly.
In terms of standardizing our management system, we are facing several challenges. One is that the education business is unique, and because we are the leading player, there is no precedent to follow. Also, problems are always emerging when an industry and a company grow so rapidly. In some respects, we have not done well in talent management, and we will strengthen this area in the future.
China Knowledge at Wharton: What role does corporate culture play?
Chen: Corporate culture is very important. It's an area that I've looked into quite a bit. Many big companies collapse because their cultures collapse. What’s behind culture? Communication. What’s behind communication? Collaboration. In other words, the key question is: How should power be shared?
Why do we say it's the bigger companies that need to build corporate cultures the most? It's because big companies need to have a consensus among many parties. Everyone needs to be able to share, and compromise. If management is not willing to share decision-making powers, getting a consensus becomes difficult, which eventually leads to a serious crisis.
It’s easy to gather different opinions, but it’s difficult to consolidate them. [A company's] highest goal is said to be the ability to align everyone. How do we align the interests of our teachers, employees, students, parents and other parties around one goal? That’s the challenge we face.
There's a thought that I love: If you want to redefine your life, do three things: One, create value for others; second, build trust with others; and third, recognize the contribution people around you have made. These are three things everyone is able to do.
China Knowledge at Wharton: Who is a typical New Oriental employee, and how do you attract your people?
Chen: The basic qualities of New Oriental employees are energy, optimism, spirit and responsibility. When an organization grows rapidly and more and more new employees come on board, the chances of the corporate culture being diluted increase. So it’s especially important to maintain and rebuild our culture.
A company needs three things to succeed. First, you have to develop the business, which is the core way to attract, retain and motivate talent. Second is training. In the current fiscal year, there will be nearly 200 training courses at the group level. Third, which is especially important to our company, is a culture of care and love. As senior executives, we have to care for and love our principals, and they have to love their team leaders, and team leaders should love the teachers and other employees. Then love can be given to our students. Love is not only remuneration and benefits, but also better and more effective management.
Everyone makes decisions in his or her best interest. If an employee finds a better place to go, he will leave us. What can New Oriental offer to employees? Besides salary, [health and social] benefits, and bonuses, we offer a sense of honor and security.
China Knowledge at Wharton: What are your thoughts about the management restructuring that New Oriental started last year?
Chen: For a big company to maintain long-term growth — and high-speed and high-quality growth — it has to have strong leadership at the top, and excellent products and services that are standardized at branches across the country.
We started a challenging and painful restructuring process in 2010, which was a major strategic choice. One thing that entailed was the promotion of two principals from the best schools to group level, which has strengthened our headquarters….
Some of our schools have been making significant contributions to the whole group, including Beijing New Oriental School, which accounts for 25% of our total revenue, and the students in Beijing account for nearly 20% of our total enrollment….
It’s always hard to launch a reform, because there are all kinds of vested interests. In some ways, reform means reallocating those interests.
China Knowledge at Wharton: What new products does New Oriental have planned?
Chen: When many people think New Oriental, they think of overseas studying and training, because we started that way and that's where our brand recognition lies. However, that brand recognition has been a barrier to developing other businesses.
Whenever we explore a new program, [there are tradeoffs] — especially as our commitments to primary or middle school businesses grow rapidly, we need to reduce our spending on English training, which is already very strong.
So now, how do we deal with challenges from competitors focused on the niche market of training primary or middle school pupils? We have to redefine our brands and our clients.
Right now, New Oriental is focused largely on overseas studying, English courses and other courses for college students. U-Can mainly targets domestic exams and tutoring middle school students, and Pop Kids targets toddlers and primary school kids. There are also brand alliances, including our New Oriental Dogwood Publishing House and New Oriental Vision Overseas Consulting Company.
China Knowledge at Wharton: Since going public in 2006 on the New York Stock Exchange, New Oriental has acquired three companies — Ming Shi Tang in Beijing and Tongwen in Changchun for college entrance examination tutoring, and Shanghai Newave Education for kindergarten-to-12th grade English courses. How are these acquisitions performing?
Chen: We know it’s generally difficult to do M&A in China’s education market, and [at New Oriental] we don’t have much experience doing it either. In addition, many small companies in this market are not well managed, and they lack financial reports. Of course, many companies are now restructuring and optimizing their businesses, which is a good thing for our further expansion.
In terms of the college entrance examination [for Chinese universities], we have not done well enough to make a long-term strategic decision for this market yet. What we didn't foresee was how the expansion of college enrollment, the country's low birth rate and the opening of [applications for] overseas universities would have a major impact on this market. Tongwen is developing steadily in Changchun, and Shanghai Green Light is relatively small and doing well.
China Knowledge at Wharton: Will you step up M&A?
Chen: We will strengthen our efforts in deals that complement our business. We have client and channel resources, but there are aspects we are not good at, or have no time to devote to developing like small educational technology companies can.
China Knowledge at Wharton: In recent years, many new players have entered English training. How do those competitors impact your business?
Chen: The competitive pressure is not really intense right now because this is a huge market. Education and training have been developing particularly fast since 2008. Since New Oriental went public, many agencies have begun offering English courses. This is a good thing for the industry, which is becoming more regulated, professional and transparent, and it benefits all players. A promising industry always has several successful companies.
In addition, the emergence of competitors is a good thing for New Oriental. Three years ago, we didn't really have any rivals to speak of, but since the second half of last year, we're seeing some respectable competitors. Now, New Oriental can have a greater sense of how we can learn from others and a clearer path for the future.
China Knowledge at Wharton: Which competitors have attracted your attention?
Chen: There are different ways of doing business in different segments, and different companies can be a benchmark. For example, Wall Street English has done better than us in the government agencies channel, and English First has outperformed us in marketing to white-collar workers. There are many cases like this.
China Knowledge at Wharton: Since arriving in the top job late last year, what has your personal mission been?
Chen: Under the recent board decision, Yu Min Hong [the founding director] largely focuses on the strategic, cultural and public image of the company. I oversee the more detailed, day-to-day operations. But the highest decision-making body is the president's office, which includes Mr. Yu.
The biggest change is that before, I made suggestions; now, I am a decision maker. Also, I have seen some interesting changes since I became executive president. Before, when I was in charge of schools and human resources, people under me were relatively close, and if they had a complaint, they came to me directly. But things are different now. Today, I am only in direct communication with about 20 people, compared with 50 before.
China Knowledge at Wharton: What are your major accomplishments?
Chen: The most important thing is communication — I have made the time to meet with many relevant people.
Second, we have been nurturing a more digital standardized and streamlined New Oriental. For example, before, we had more than 50,000 courses. That has been reduced to 10,000. Textbooks and training programs are becoming more standardized. We have also just launched a new web site, which aggregates the ideas of many people.
China Knowledge at Wharton: What role will the web site play in the company’s strategy?
Chen: The web site — xdf.cn — will be a free platform offering value-added services complementing our offline courses. It will be a center sharing data and other resources. It will play a very important role in our business. We have two million students every year and nearly 20,000 teachers, and if they are willing to create content on the web site, it will be unmatchable.
We have also built many mechanisms to encourage teachers to recommend the platform through blogs, microblogs and so on. It is only a first of many online services that we will be offering.
China Knowledge at Wharton: As a leader, what’s your view of leadership?
Chen: I have written a book, Be the Best Team, in which I described nine golden rules. The number-one rule is that the person at the top has to be a good leader. I also summarized five types of leader. Level one — the most tragic — is when you, the leader, stands there, and no one takes notice of you; you are nothing. Level two is when others like you; level three, you are trusted; level four, you are admired; and level five, you are loved and cherished by others.
But how do you reach level five? First, you have to love your people, try hard to create value for them and sincerely enjoy their growth. Then you will be one of them, and they will love you.