Using Data Envelopment Analysis to Measure Hotel Efficiency in Crete

Using Data Envelopment Analysis to Measure Hotel Efficiency in Crete

The present paper studies the relative efficiency between hotels operating under a brand and hotels operating independently, in the island of Crete, Greece, using the Data Envelopment Analysis.

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It is well established that the global market for tourism services is a key source of economic growth. The World Tourism Barometer (UNWTO, 2012) estimates that international tourist arrivals reached a total of 980 million in 2011, exhibiting a steady annual increase of 10%. Moreover, Pulina et al. (2010) cite evidence according to which, travel and tourism are responsible for 300 million direct and indirect jobs and represent 13% of the world’s gross domestic product.

Within this global market, Greece is an established tourism destination in the European tourism industry (UNWTO, 2012). SETE (2011) reports that travel and tourism activity in Greece contributes with 15.3% of its GDP and 18.4% of its total employment. The projections to 2021 suggest that the relevant contributions will be increased, implying the crucial role of tourism for the Greek economy. In this context, Crete, the largest island of Greece, attracts almost 2.8 million tourists annually, more than 35% of the national total (HNTO, 2008). Given the importance of Crete’s tourism sector on the local and national economy and the fierce competition between Mediterranean destinations, it is of high interest to examine hotel efficiency in the island. Yet, to the best of our knowledge, there is no relevant study measuring hotel efficiency either for Greece or Crete. Moreover, in the context of fierce competition among tourism destinations in the Mediterranean, hotel branding in Crete has become a strategy for risk reduction, survival, competitive advantage and profitability (Koutoulas, 2009). Hence, a further question is whether the managerial practice of hotel branding guarantees efficiency levels higher than the respective of the hotels operating as totally independent.

Motivated by the above, the present paper attempts to address the following two questions: First, what is the relative efficiency of hotels operating under a brand as compared to those operating as totally independent in the island of Crete? Second, what are the relevant inefficiency causes among hotels and what recommendations could be provided for their improvements? The present paper contributes in both these respects since it is first attempt to examine hotel efficiency in Greece.

To fulfill the above objectives, we construct a sample constituted by 50 superior hotels (Luxury and class A) operating in Crete in 2008. These hotels are classified into four categories, with respect to their type of operational management: hotels operating under an international brand, under a national brand, under a local (Cretan) brand, and finally hotels operating as totally independent. The relative technical efficiency in the above hotels is estimated through the Data Envelopment Analysis (DEA hereafter) methodology, which, regarding a hotel is “a comparative measure of how well it actually processes inputs to achieve its outputs, as compared to its maximum potential for doing so, as represented by its production possibility frontier” (Barros and Mascarenhas, 2005; p. 416). The input variables used in the present study are the number of employees, the number of beds and the total operational cost of a hotel. They reflect the required resources to achieve particular managerial goals. The relevant output variables used, are total revenues total number of nights spent in an establishment, reflecting broad managerial goals and objectives.

As far as the first question is concerned, our results suggest that the hotels in our sample operating under a national brand are the relatively most efficient, followed by those operating under a local brand. Then, the independently operating hotels hold the third position in the relevant efficiency ranking, followed by the hotels operating under an international brand. This relatively high efficiency of the nationally and locally branded hotels can be explained by the advantages of belonging to a brand which is flexible to changes in the relevant local market’s conditions. Regarding the independently operating hotels, they have the maximum potential for flexibility; yet, they have no branding potentials to exploit. Finally, the internationally branded hotels’ efficiency is relatively low because although they exploit high visibility and internationally established managerial practices, their flexibility and ability for adjustments to the local market is relatively low.

Regarding the second question of the present paper, we investigate the inefficiency causes and make suggestions for improving the transformation of inputs to outputs. Regarding the input slacks, our results suggest that when compared to independent ones, branded hotels, are characterized by a relative oversupply of beds, are relatively overstaffed and operate with a relatively higher cost. We can thereby infer that the independently operating hotels need to adopt more slack movements with respect to their inputs for improvements in their efficiency scores. Furthermore, our analysis suggests that both the independent and branded hotels should make adjustments in their outputs in order to improve their efficiency scores. More specifically, the branded hotels, compared to the independent ones, should increase their total revenues relatively more; and the independent hotels should increase their overnight stays relatively more as compared to branded hotels. 

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