Using data envelopment analysis to select strategies that improve the performance of hotel companies

Abstract

Purpose

The aim of this paper is to illustrate the value of data envelopment analysis (DEA) for strategic analysis and performance management in the hotel industry.

Design/methodology/approach

The paper uses a world‐wide sample of hotel companies and two cases to illustrate how DEA can be used to develop strategic guidelines to improve organizational performance.

Findings

The study shows that DEA can be used for strategic design and performance management through the analysis of two cases. Additionally, for the sample of 83 hotel companies, there are three main conclusions: a focused strategy performs better than a diversification strategy; for the bulk of the sample, the scale efficiency is higher than the pure technical efficiency, hence hotel managers should concentrate on productivity improvements (that is how to transform inputs into outputs) and not on scale issues (such as increases or decreases in the size of operations); and the majority of the hotel companies in the sample are operating under decreasing returns‐to‐scale, which implies that a decrease in the size of the companies would have a positive effect on the average efficiency level of the industry.

Research limitations/implications

The paper has two limitations: the performance index created from the efficient frontier of the DEA model is a function of the hotel companies in the sample rather than an absolute measure; and the variables used as inputs and outputs for the DEA model were exclusively taken from the financial statements, which limits the strategic analysis.

Practical implications

The DEA allows managers to analyze performance in terms of productivity and scale, to identify benchmarks (or peer units), to determine the targets (or optimum values) for inputs and outputs, and to detect slacks in the usage of resources or the production of outputs. Therefore, this methodology provides more insights for performance management than the traditional ratio analysis commonly used in the hotel industry.

Originality/value

The study is one of the few in the hotel industry to use DEA. The paper contributes to that corresponding literature by using: a larger sample size; a world‐wide sample of hotel companies; a longitudinal analysis (three years); and two illustrative cases to show how the information of a DEA model can be used for strategic analysis and performance management.

Citation

Neves, J.C. and Lourenço, S. (2009), "Using data envelopment analysis to select strategies that improve the performance of hotel companies", International Journal of Contemporary Hospitality Management, Vol. 21 No. 6, pp. 698-712. https://doi.org/10.1108/09596110910975963