"Profitable Education: Applying McKinsey’s Strategies to Thrive in International Schools" (The midpoint)

by Kenneth Tuttle Wilhelm, CSML

I have been working on a series of articles that are looking at what it takes for an international school or private school to establish a viable financial position in their marketplace. My analysis has made use of and continues to make use growth principles that were established out of research that was conducted by McKinsey & Co. This research was conducted over a number of years across many markets and industries and looked at thousands of companies. The McKinsey research identified 10 factors that consistently contribute to a companies ability to move to the top of its marketplace.

As I noted in the first article in the series, these 10 factors that contribute to company’s success. these research identified factors are the following: 1. size of the company; 2. debt level; 3. past investment in research and development; 4. industry trend; 5. geographic trend; 6. programmatic mergers and acquisitions; 7. dynamic allocation of resources; 8. capital expenditure; 9. strength of productivity program; and 10.?improvements in differentiation.

Originally, my plan was to develop 10 articles, maybe fewer, that would, one at a time delve into each of these factors and how they are applicable to the international and private school context. Having completed a discussion of the first five factors, that plan is still on track. But I’m going to interject here and give a synopsis of all 10 factors.

Just as a recap: the McKinsey research took place over 15 years looked at 127 different industries, 62 countries, and in total looked at the performance data of 2393 of the largest companies in the world. What McKinsey was trying to do was to find out, what companies do or don’t do, that will move them up into the upper echelon of their industry, languish in the middle, or decline towards the bottom. McKinsey as they did their research, they categorised the 10 levers, as they identified them, into three areas: endowment, trends, and moves.

In my earlier articles I have covered in discussion - endowment and trends. The trend factors I ended up putting into one article, I combined them. I did this because they’re so related, and really for an individual school the clear area to focus on, is the geographic trend. Meaning, looking at the local demographics of the local marketplace. Certainly for the larger educational management companies the worldwide trend or the industry trend is important. But education is a very localised activity, whereby the geographic or local trend is the factor of real influence.

So here I would like to quickly run through a brief for each of the 10 factors of corporate growth and success, in reaching the top tier of their marketplace. Again, remember that what I’m looking at is how these factors relate to the international and private school industry.

1. Size of The Company:

So let’s look at the size of a school whether you’re an established school or a new school in the planning stages the size of your school is important and there are several interrelated data points that are important.

The crux of the issue is that level of student enrolment has to be financially viable. If there are not enough students paying tuition to cover the expenses and possible debtload of the company, then the school is going to be on a fast track downward, into deeper levels of debt.

So whether your school is established and considering expansion, or a new school yet to open its doors, a realistic and hopefully accurate picture of how many students actually exist in the market and in your target customer segment, is critical.

So when we look at the McKinsey research and we look at the size of company, the relationship of this to the international school and private school market is that it’s the actual student enrolment in relation to the school’s current capacity that is important. Based on my research, this means that a school that is operating at less than 50% capacity is probably in a losing position or nearly so. If a school cannot reach 50% of active capacity in terms of enrolment, then the hole of debt is going to continue deepening. Thus, the geographic trend comes into focus, as this is the primary determinant of whether a school has the potential to reach a level of breakeven or better. And since we have been talking about debt levels, it makes sense that debt is the next topic

2. Debt Level:

It’s interesting how my research into the school market has mirrored what’s going on in other industries, many other industries. Growing through the use of debt is a risky proposition. Schools that expand primarily on debt are placing themselves at severe risk. Even schools that fund their their expansion with some balance of cash and debt, are not surely safe and secure. It goes back to accurately knowing whether the student enrolment will increase enough to cover the debt that is taken on. A new school, one that is yet to open its doors, should only be incurring the level of debt necessary to open facilities that can be comfortably covered by a conservatively predicted level of student enrolment.

In the education sector, taking on debt should be limited by a realistic expectation of student numbers. Because this is where your revenue is, the source of funds to pay operating expenses and long-term liabilities. Debt needs to be paid off as quickly as possible, otherwise a downward spiral is most likely.

3. Past Investment in Research and Development:

In the McKinsey research, they discovered that a company’s history of investment in research and development was a clear indicator of companies that are committed to innovate, to develop, to refine, to grow their product and leadership in the market.

In education, this translates into a commitment towards the professional development and growth of the faculty in a school. In reality education, is a service industry. The primary service is the interaction between Teacher and Student. Education is a professional activity. The countries that are renowned around the world as high achieving systems, are those that are committed to developing and maintaining a professional corps of educators. These systems focus on the support and continual upgrade their educators’ knowledge and pedagogical skills.

If anything, educational systems and individual schools should look at their educators as no less than engineers or doctors. Ongoing training and development of educators is an absolute must. Otherwise, efficacy of instruction declines over time.

4. Industry Trend & 5. Geographic Trend:

When we look at growth trend for the education market it is true that worldwide we continue to see an increasing need for international schools and private schools. There are many many variables that come in to play when looking at this kind of trend whether globally or locally.

What seems to be missing from most considerations and research into this growth is a recognition that the customer market for fees-based education is really illustrated by the image of a pyramid. The top of the pyramid that narrow portion at the pointy pinnacle represents the number of customers who can afford high cost education. The next segments going down in the pyramid where the pyramid begins to widen we find increasing numbers of potential students. And at the bottom of the pyramid we find the largest segment of students, who may or may not be able to allocate discretionary income for fees-based education.

So when established top tier schools or new schools in planning, are aiming to open their doors to full enrolment or expand their facilities and increase their enrolment, they should be cognisant of the fact that they’re going after the smallest potential segment of customers. What is intriguing, is that many of the new schools that are coming into the market, in every corner of the world, are aiming for that top tier. And yet the demographics don’t support what established schools and new schools are trying to do. A simple understanding of supply and demand should suffice here. Build too much capacity, and the market players suffer.

So here I have reached the midpoint of my series of articles on the factors that contribute to the growth of schools to the upper echelon of their chosen market segment. The previous five factors have been covered in expanded more lengthy articles. The following five factors will be the topic of the upcoming articles in the series. Herein I will simply give a short description of these factors and their relative importance to international and private schools.

6. Programmatic Mergers and Acquisitions:

In McKinsey’s research they discovered that the companies that are on an upward track, rising to higher levels in their market are those that are regularly looking to expand their offerings. The point here is that rarely do you find one product serves all customers. That kind of product is called a commodity And we know that commodities typically are low-cost, low profit. In the education sector the commodity might be equated to public, government provided education.

Education is far from being the one solution serves all. The reality is, if this were the case, then there would be no profits to be made. What schools, their investors, their leaders, their managers, need to understand is that their educational product is not something that is static. Schools need to innovate as well. Schools need to not only improve how they’re providing the education, but they also have to improve the options. The schools that really do well in attracting market share, are those schools that recognise that they are not offering one product to the masses, they need to be offering something for the smaller segments with specific interests.

So a school would do well to look around at its environment and see what is available and accessed by its constituency and of those at other schools, that is external to their educational offerings. And then determine whether it’s something they might be able to bring inside their school to enhance the overall educational opportunities and experience for their students.

Alternatively, a school should consider developing an offering that is desirable to its community, it’s constituency, but not readily available in the marketplace.

7. Dynamic Allocation of Resources:

In this factor, RE-allocation of resources, the first key is that businesses are strategising investment in their activities. Companies and schools need to be looking at where they are putting their money, actively trying to move money where there may be opportunities to improve offerings and services. It’s a decision-making process. Putting money into those activities that can produce more value for that investment. Don’t increase the funding into activities that will not add or improve the offerings and outcomes of your organisation.

8. Capital Expenditure:

Companies and schools do not move up the curve to the upper echelon of their industry and market segment, unless they have an ongoing capital investment program. Only focusing on the maintenance of what you have, will not bring the organisation to a higher level. There has to be a commitment to growth and quality, in the services you are providing.

9. Strength of Productivity Program:

In this area, which is primarily about cutting costs and improving the productivity of employees, it’s also about the flexibility and potential of each of your employees, i.e. teachers. Not only does a school have to find ways to save money but it also needs to get the most out of all employees. Small to medium size schools for example, might benefit by focusing the hiring process only on teachers that are qualified to teach multiple subjects. This is in contrast to a very large school that can afford to hire teachers who are specialised in one subject only. Schools might do well to consider using their professional development activities in a way that offers cross-training to teachers. Which not only might make them more useful to the school, but anytime you are facilitating the growth of a teacher your developing their career. You’re also enhancing the likelihood that they will stay longer.

10.? Improvements in Differentiation:

In the world of competition, and yes the school market is competitive, no matter which tier or price level the school may be. The question is what sets you apart from the competitors who are next to you. In terms of schools, the customer is the parent, who is comparing your school with the others in the same price range, in the same to geographic area. What makes you different? How can you justify your price, in the marketplace? Do you have sustainable advantages, differentiated service, innovative pedagogies? What makes you better than your competitors? If you are not better than the competitors, then you definitely are left to compete, primarily, on price.