New Oriental Education & Technology Group Inc.

New Oriental Education & Technology Group Inc.
“Hew a stone of hope out of a mountain of despair and you can make your life a splendid one.”
— Company Slogan

Part I – An Effective Organization
New Oriental Education & Technology Group Inc. (“EDU”) is an example of highly effective organization with sustainable competitive advantage driven by the alignment between the company’s business model and operating model.

Part II – Business Model & Operating Model
*All of the information from this section is selected directly from company’s latest fillings and company website.
Established in 1993 in Beijing by Michael Minhong Yu, EDU is the largest provider of private educational services in China based on the number of program offerings, total student enrollments and geographic presence. On September 7, 2006, the company was listed on NYSE. 1
Originally formed as a place for people gathered to study, New Oriental has now become the most recognized brand in China’s private education sector due to the founder’s groundbreaking vision and the company’s unique, innovative and inspirational instruction style, which combines humorous, interactive teaching techniques with traditional Chinese educational values. 2

Business Model
I. Value Creation
With the goal of creating value through becoming the trusted, lifelong “One-Stop” ecosystem for Chinese families, EDU offers a wide range of educational programs, services and products to meet the needs of students in each stage of life, consisting primarily of:
– Test preparation
– K-12 after-school tutoring
– Language training
– Primary and secondary schools
– Educational content, software and other technology development and distribution
– Online education
– Other services and products (career education, overseas study consulting services, vocational training, etc.)1.

II. Value Capture
Educational Programs & Services (88.5% of total net revenues in 2015) and Books & Others (11.5% of total net revenues in 2015) are the two major revenue sources of EDU. 1

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Operating Model
I. Structure & Process
EDU delivers its educational programs, services and products to students through an extensive physical network of 60 schools, 664 learning centers and 28 bookstores, over 5,000 third-party bookstores and approximately 17,200 teachers in 50 cities as of May 31, 2015. In addition, the company is also operates an online education network, which had approximately 10.8 million registered users as of May 31, 2015. 1

All of EDU’s schools, learning centers and bookstores operate under the “New Oriental” brand. EDU’s hub schools in major cities consist of classrooms and administrative facilities with full student and administrative services, while schools in satellite cities and EDU’s learning centers consist primarily of classroom facilities and limited course registration and management capabilities.1

EDU have also opened bookstores in the company’s established schools to primarily sell educational materials relating to its courses and also sell self-help, know-how, inspirational and other books.1 The company’s extensive distribution channels have attracted international education providers to cooperate. EDU currently has arrangements with Pearson Education, The McGraw-Hill Companies and Cambridge University Press to develop and distribute localized versions of selected educational materials in China bearing both EDU logo and the original publisher’s logo.4

II. Assets & Capabilities
EDU leases all of its facilities except for its Yangzhou school, part of the premises for the company’s headquarters in Beijing and schools in Xi’an, Tianjin, Kunming, Wuhan, Guangzhou, Xiamen, Zhengzhou and Changsha.1

EDU relies on its highly qualified teaching force to deliver high quality educational services. As of May 31, 2015, the company had 25,826 full time employees and 7,667 contract teachers and staff (22% of total employee). Full-time teachers’ compensation and benefits primarily consist of teaching fees based on hourly rates, performance-linked bonuses based on student evaluations, as well as base salary, annual bonus and standard employee benefits in connection with their services other than teaching. Compensation of EDU’s contract teachers is comprised primarily of teaching fees based on hourly rates and performance-linked bonuses based on student evaluations and other factors. To attract and retain high-quality teachers, EDU has granted equity incentives, including restricted shares and share options, to some of its top performing teachers.1

Part III – Support and Alignment
EDU is able to build sustainable competitive advantage over its domestic and international competitors such as English First, Global IELTS School, and TAL Education Group in China’s rapidly evolving, highly fragmented and competitive private education sector through aligning its business and operating model to achieve greater flexibility, higher capacity, maximum labor utilization as well as top-notch scope and quality of program, service and product offerings.

In order to obtain great flexibility in capacity and capability to meet the specific needs of students, parents, educators and employers with tailored location and product offerings, EDU decided to lease instead of own most of its teaching facilities. This unique design of the company’s operating model enables EDU to achieve nationwide economies of scale, to limit downside risk associated with low performing locations and products, to leverage the upside of regions that exhibit strong enrollment potential, and also to provide the right product and class size according to change in demand, demographics, and economic condition.

The success of EDU’s business model is also driven by its high quality and flexible teaching force, another uniquely designed feature of its operating model. Unlike most of EDU’s competitors and traditional Chinese education systems, over 20% of EDU core teaching force are part-time contract teachers, which grants the company great flexibility in curriculum design, change and innovation in the rapidly evolving private education sector. In addition, this design allows the company to be able to recruit famous teachers, who normally teach in top traditional schools during the week. Through employing famous contract teachers from various top schools in China, EDU also created an extensive network of students and alumni, which has been essential in helping the company promote its brand and programs, services and products by word-of-mouth referrals.1 As mentioned before, EDU has a well-designed evaluation and incentive system in place to make sure both full-time and part-time teachers are providing the best quality service.

As a result, EDU has become a market leader with unparalleled national scale and network, strong brand royalty and recognition as well as best-in-class teaching force in China’s private education sector. Financially, the company was able to generate impressive net revenue CAGR of 32.8% from 2007 to 2015 and CAGR of 26.8% in terms of net income growth from 2007 to 2015.3

1. SEC FORM 20-F. 2015. http://www.sec.gov/Archives/edgar/data/1372920/000119312515329099/d43716d20f.htm
2. Company Website. http://www.xdf.cn/
3. New Oriental Fact Sheet. 2015. file:///C:/Users/WeijiaJulie/Downloads/New%20Oriental%20Fact%20Sheet_FY15Q4.pdf
4. WikiInvest. 2015. http://www.wikinvest.com/stock/New_Oriental_Education_%26_Technology_Group_(EDU)