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A DEA Evaluation of Taipei Hotels
RESEARCH NOTES AND REPORTS This Department publishes research notes, conference reports, reports on the work of public agencies and associations, field (industry) reports, and other relevant topics and timely issues. Contributions to this department are submitted to its two Associate Editors: Research Notes to Juergen Gnoth (Department of Marketing, University of Otago, Dunedin, New Zealand. Email ) and Conference Reports to Russell Smith (Hospitality and Tourism, Nanyang Technological University, Singapore 639798, Rep. of Singapore. Email ). Unsolicited conference and agency reports will not be accepted.
RESEARCH NOTES
www.elsevier.com/locate/atoures
Annals of Tourism Research, Vol. 31, No. 3, pp. 712–715, 2004 # 2004 Elsevier Ltd. All rights reserved. Printed in Great Britain 0160-7383/$30.00
A DEA Evaluation of Taipei Hotels Wan-Erh Chiang Ming-Hone Tsai Li Shau-Mei Wang National Central University, Taiwan It is always a major concern for top management to measure efficiency. Data Envelopment Analysis (DEA) is an excellent tool for assessing the relative efficiency of decision-making units. This research is aimed at measuring hotel performance by DEA under three operational styles of International Tourist Hotels (ITHs) commonly seen in Taiwan since 2000: Independently owned and operated, franchise licensed, and managed by international hotel operators. The results are expected to provide hoteliers with a basis for constructing strategies and promotion plans. With carefully selected indicators (input/output variables), DEA is able to locate and diagnose inefficiencies, and to provide information for improvements. Several in-depth interviews were conducted with top managers of some Taipei ITHs for critical indicators. Therefore, this study explored the operational efficiency of ITHs not only from a theoretical standpoint but also according to ideas and practical experiences of hoteliers. The data were obtained from the Annual Operation Report of the ITHs 2000, published by the Tourism Bureau of Taiwan. On the basis of market segmentation and geographical location variation 712
RESEARCH NOTES AND REPORTS
713
Table 1. Estimated Overall, Pure Technical, and Scale Efficiency Scores DMU
Overall Efficiency
Pure Technical Efficiency
Scale Efficiency
A. Franchise Licensed Hotel 16 0.878 Hotel 18 1 Hotel 21 1
0.885 1 1
0.992 1 1
B. Internationally Hotel 6 Hotel 11 Hotel 12 Hotel 15 Hotel 25
Managed 1 1 0.978 0.730 1
1 1 0.984 0.838 1
1 1 0.994 0.872 1
C. Independently Hotel 1 Hotel 2 Hotel 3 Hotel 4 Hotel 5 Hotel 7 Hotel 8 Hotel 9 Hotel 10 Hotel 13 Hotel 14 Hotel 17 Hotel 19 Hotel 20 Hotel 22 Hotel 23 Hotel 24
Owned and Operated 0.877 0.886 1 1 1 1 1 1 1 1 0.677 0.765 1 1 0.716 0.726 1 1 1 1 0.727 0.738 0.65 0.69 1 1 0.887 1 0.711 0.714 1 1 0.942 1
0.989 1 1 1 1 0.885 1 0.986 1 1 0.985 0.943 1 0.887 0.996 1 0.942
(Ismail, Dalbor and Mills 2002), 25 four or five star hotels in Taipei were selected for evaluation. The four input variables chosen by the hoteliers were hotel rooms, food and beverage (F&B) capacity (area in pings, the total space utilized by all such outlets in a hotel), number of employees, and total cost of the hotel (including employee salaries, F&B costs, room costs, utilities, advertising, operational cost, maintenance fees, taxes, and miscellaneous costs). The three output variables were yielding index, F&B revenue (the total generated from such businesses), and miscellaneous revenue (the total excluding the room and F&B revenues). The RevPar (revenue per available room) is the most universally accepted measure for overall hotel operating performance (Enz and Canina 2002). Yielding index (personal communication with R. Hanks in 1998, Cornell School of Hotel Administration) is used specifically to examine room performance (yielding index = RevPar of individual hotel/Market RevPar). If the yielding index for an individual hotel is greater than one, it means that its performance is better than market average. While the index has received much attention from hoteliers, it
RESEARCH NOTES AND REPORTS
714
has been neglected in the literature. This study is the first to adopt it for research. To find the DEA results, a specialized computer package—DEAP 2.1 was used to handle the data. The BCC model (named afer those who proposed it; Bank, Charnes and Cooper) is employed to evaluate the overall efficiency, the pure technical efficiency, and the scale efficiency (Overall efficiency = Technical efficiency Scale efficiency; Banker, Charnes and Cooper 1984). Table 1 groups the DEA results by hotel operational styles. Of the 25 properties, 14 have an overall efficiency score of 1.0, which is relatively efficient. Of the franchised hotels (Table 1.A), two are DEA efficient, while one is relatively inefficient. The overall efficiency score of Hotel 16 is 0.878, which means it has only attained about 88% efficiency. This is a result of the lower pure technical efficiency score. Of the five internationally managed hotels (Table 1.B), numbers 12 and 15 are inefficient, with an overall efficiency score of 0.978 and 0.73, respectively. The overall inefficiency is mostly due to technical inefficiency. Among the 17 independent hotels (Table 1.C), 1, 9, 10, 13, 19, and 23 are members of several domestic chains holding multiple properties, with resources shared among properties. However, hotels 1 and 9 are not efficient overall, due to technical inefficiency. It is also worth mentioning that number 10 signed a management contract with an international hotel operator for the first couple of years. After becoming an independent hotel, it successfully transferred obtained know-how internally. The model by Charnes, Cooper and Rhodes (1978) is used to analyze slack. By examining the input/output variables, a number of suggestions can be made (Table 2). For example, hotel 16 as the only inefficient franchised property could cut the number of hotel rooms by 98.15, the F&B space by 2613.69 pings (1 ping
Table 2. Amounts of Improvement/Slack of Inefficient Hotels DMU
Hotel Rooms
F&B Capacitya
A. Franchise Licensed Hotel 16 98.151 2613.686
Employees Total Number Costb
0
B. Internationally Managed Hotel 12 122.614 466.261 58.868 Hotel 15 34.15 485.299 0 C. Independently Owned and Operated Hotel 1 91.544 0 0 Hotel 7 102.645 202.989 36.234 Hotel 9 61.838 1430.368 0 Hotel 14 24.175 74.17 0 Hotel 17 44.84 209.873 41.936 Hotel 20 71.789 297.454 0 Hotel 22 67.277 53.55 6.923 Hotel 24 101.568 95.732 0 a b
Area in pings, one ping equals 35.583 square feet. In millions of US$.
Yielding F&B Misc. Index Revb Revb
10.826 0.311 0 0 2.599 0 0 0 0 0 0 0 0 0
0 0 0.129 0 0.082 0 0 0
0
1.539
0 0
0 0
0 0 0 0 0 0 0 0
3.024 0 1.938 0.114 0 0.067 0 0.079
RESEARCH NOTES AND REPORTS
715
equals 35.58 square feet), the total expenditures, by $10.8 million, to increase the yielding index by 0.311, as well as other revenues by $1.5 million and reach overall efficiency. As another example, of all hotels, number 12 is advised to cut the highest number of rooms (122.614; Table 2.B). From the results obtained, it became clear that not all Taipei’s franchised or managed ITHs performed more efficiently than the independent ones. As to franchised hotels, number 16 did not perform well, and has encountered management problems in recent years. Keeping or dropping a franchise is always controversial. If managed by a well-known company at the expense of high expenditures, hotels that do not achieve productivity efficiency are of great concern. Hotel 12 was the first Taiwan property to sign a management contract, but it has not performed well for years. One of the advantages for independent hotels is that they can meet the needs of local customers in time. Some independent hotels focusing on local F&B business do have an outstanding performance (such as hotels 2, 4, and 13). By incorporating yielding indices and other indicators, DEA has provided Taiwan’s hotel operation with insights into resource allocation and competitive advantages. It also helps with strategic decision-making, especially regarding operational styles under intense competition through high hotel density. This research indicates that future studies should include soft, market-oriented variables such as the hotel’s image, customer satisfaction, and service quality, to achieve a more complete DEA analysis. A
_
Wan-Erh Chiang: Department of Business Administration, National Central University, Taiwan, Ming Chuan University, Taiwan, Chung Li, 320, Taiwan. Email
REFERENCES Banker, R., A. Charnes, and W. Cooper 2003 Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis. Management Science 30:1078–1092. Charnes, A., W. Cooper, and E. Rhodes 1999 Measuring the Efficiency of Decision Making Units. European Journal of Operational Research 2:429–444. Enz, C., and L. Canina 2002 Best of Times, The Worst of Times: Differences in Hotel Performance Following 9/11. Cornell Hotel and Restaurant Administration Quarterly 43(5):22–32. Ismail, J., M. Dalbor, and J. Mills 1991 Using RevPar To Analyze Lodging- Segment Variability. Cornell Hotel and Restaurant Administration Quarterly 43(5):73–80.
Submitted 4 April 2003. Resubmitted 4 July 2003. Accepted 10 July 2003. Final version 30 August 2003 doi:10.1016/j.annals.2003.11.001
RESEARCH NOTES
www.elsevier.com/locate/atoures
Annals of Tourism Research, Vol. 31, No. 3, pp. 712–715, 2004 # 2004 Elsevier Ltd. All rights reserved. Printed in Great Britain 0160-7383/$30.00
A DEA Evaluation of Taipei Hotels Wan-Erh Chiang Ming-Hone Tsai Li Shau-Mei Wang National Central University, Taiwan It is always a major concern for top management to measure efficiency. Data Envelopment Analysis (DEA) is an excellent tool for assessing the relative efficiency of decision-making units. This research is aimed at measuring hotel performance by DEA under three operational styles of International Tourist Hotels (ITHs) commonly seen in Taiwan since 2000: Independently owned and operated, franchise licensed, and managed by international hotel operators. The results are expected to provide hoteliers with a basis for constructing strategies and promotion plans. With carefully selected indicators (input/output variables), DEA is able to locate and diagnose inefficiencies, and to provide information for improvements. Several in-depth interviews were conducted with top managers of some Taipei ITHs for critical indicators. Therefore, this study explored the operational efficiency of ITHs not only from a theoretical standpoint but also according to ideas and practical experiences of hoteliers. The data were obtained from the Annual Operation Report of the ITHs 2000, published by the Tourism Bureau of Taiwan. On the basis of market segmentation and geographical location variation 712
RESEARCH NOTES AND REPORTS
713
Table 1. Estimated Overall, Pure Technical, and Scale Efficiency Scores DMU
Overall Efficiency
Pure Technical Efficiency
Scale Efficiency
A. Franchise Licensed Hotel 16 0.878 Hotel 18 1 Hotel 21 1
0.885 1 1
0.992 1 1
B. Internationally Hotel 6 Hotel 11 Hotel 12 Hotel 15 Hotel 25
Managed 1 1 0.978 0.730 1
1 1 0.984 0.838 1
1 1 0.994 0.872 1
C. Independently Hotel 1 Hotel 2 Hotel 3 Hotel 4 Hotel 5 Hotel 7 Hotel 8 Hotel 9 Hotel 10 Hotel 13 Hotel 14 Hotel 17 Hotel 19 Hotel 20 Hotel 22 Hotel 23 Hotel 24
Owned and Operated 0.877 0.886 1 1 1 1 1 1 1 1 0.677 0.765 1 1 0.716 0.726 1 1 1 1 0.727 0.738 0.65 0.69 1 1 0.887 1 0.711 0.714 1 1 0.942 1
0.989 1 1 1 1 0.885 1 0.986 1 1 0.985 0.943 1 0.887 0.996 1 0.942
(Ismail, Dalbor and Mills 2002), 25 four or five star hotels in Taipei were selected for evaluation. The four input variables chosen by the hoteliers were hotel rooms, food and beverage (F&B) capacity (area in pings, the total space utilized by all such outlets in a hotel), number of employees, and total cost of the hotel (including employee salaries, F&B costs, room costs, utilities, advertising, operational cost, maintenance fees, taxes, and miscellaneous costs). The three output variables were yielding index, F&B revenue (the total generated from such businesses), and miscellaneous revenue (the total excluding the room and F&B revenues). The RevPar (revenue per available room) is the most universally accepted measure for overall hotel operating performance (Enz and Canina 2002). Yielding index (personal communication with R. Hanks in 1998, Cornell School of Hotel Administration) is used specifically to examine room performance (yielding index = RevPar of individual hotel/Market RevPar). If the yielding index for an individual hotel is greater than one, it means that its performance is better than market average. While the index has received much attention from hoteliers, it
RESEARCH NOTES AND REPORTS
714
has been neglected in the literature. This study is the first to adopt it for research. To find the DEA results, a specialized computer package—DEAP 2.1 was used to handle the data. The BCC model (named afer those who proposed it; Bank, Charnes and Cooper) is employed to evaluate the overall efficiency, the pure technical efficiency, and the scale efficiency (Overall efficiency = Technical efficiency Scale efficiency; Banker, Charnes and Cooper 1984). Table 1 groups the DEA results by hotel operational styles. Of the 25 properties, 14 have an overall efficiency score of 1.0, which is relatively efficient. Of the franchised hotels (Table 1.A), two are DEA efficient, while one is relatively inefficient. The overall efficiency score of Hotel 16 is 0.878, which means it has only attained about 88% efficiency. This is a result of the lower pure technical efficiency score. Of the five internationally managed hotels (Table 1.B), numbers 12 and 15 are inefficient, with an overall efficiency score of 0.978 and 0.73, respectively. The overall inefficiency is mostly due to technical inefficiency. Among the 17 independent hotels (Table 1.C), 1, 9, 10, 13, 19, and 23 are members of several domestic chains holding multiple properties, with resources shared among properties. However, hotels 1 and 9 are not efficient overall, due to technical inefficiency. It is also worth mentioning that number 10 signed a management contract with an international hotel operator for the first couple of years. After becoming an independent hotel, it successfully transferred obtained know-how internally. The model by Charnes, Cooper and Rhodes (1978) is used to analyze slack. By examining the input/output variables, a number of suggestions can be made (Table 2). For example, hotel 16 as the only inefficient franchised property could cut the number of hotel rooms by 98.15, the F&B space by 2613.69 pings (1 ping
Table 2. Amounts of Improvement/Slack of Inefficient Hotels DMU
Hotel Rooms
F&B Capacitya
A. Franchise Licensed Hotel 16 98.151 2613.686
Employees Total Number Costb
0
B. Internationally Managed Hotel 12 122.614 466.261 58.868 Hotel 15 34.15 485.299 0 C. Independently Owned and Operated Hotel 1 91.544 0 0 Hotel 7 102.645 202.989 36.234 Hotel 9 61.838 1430.368 0 Hotel 14 24.175 74.17 0 Hotel 17 44.84 209.873 41.936 Hotel 20 71.789 297.454 0 Hotel 22 67.277 53.55 6.923 Hotel 24 101.568 95.732 0 a b
Area in pings, one ping equals 35.583 square feet. In millions of US$.
Yielding F&B Misc. Index Revb Revb
10.826 0.311 0 0 2.599 0 0 0 0 0 0 0 0 0
0 0 0.129 0 0.082 0 0 0
0
1.539
0 0
0 0
0 0 0 0 0 0 0 0
3.024 0 1.938 0.114 0 0.067 0 0.079
RESEARCH NOTES AND REPORTS
715
equals 35.58 square feet), the total expenditures, by $10.8 million, to increase the yielding index by 0.311, as well as other revenues by $1.5 million and reach overall efficiency. As another example, of all hotels, number 12 is advised to cut the highest number of rooms (122.614; Table 2.B). From the results obtained, it became clear that not all Taipei’s franchised or managed ITHs performed more efficiently than the independent ones. As to franchised hotels, number 16 did not perform well, and has encountered management problems in recent years. Keeping or dropping a franchise is always controversial. If managed by a well-known company at the expense of high expenditures, hotels that do not achieve productivity efficiency are of great concern. Hotel 12 was the first Taiwan property to sign a management contract, but it has not performed well for years. One of the advantages for independent hotels is that they can meet the needs of local customers in time. Some independent hotels focusing on local F&B business do have an outstanding performance (such as hotels 2, 4, and 13). By incorporating yielding indices and other indicators, DEA has provided Taiwan’s hotel operation with insights into resource allocation and competitive advantages. It also helps with strategic decision-making, especially regarding operational styles under intense competition through high hotel density. This research indicates that future studies should include soft, market-oriented variables such as the hotel’s image, customer satisfaction, and service quality, to achieve a more complete DEA analysis. A
_
Wan-Erh Chiang: Department of Business Administration, National Central University, Taiwan, Ming Chuan University, Taiwan, Chung Li, 320, Taiwan. Email
REFERENCES Banker, R., A. Charnes, and W. Cooper 2003 Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis. Management Science 30:1078–1092. Charnes, A., W. Cooper, and E. Rhodes 1999 Measuring the Efficiency of Decision Making Units. European Journal of Operational Research 2:429–444. Enz, C., and L. Canina 2002 Best of Times, The Worst of Times: Differences in Hotel Performance Following 9/11. Cornell Hotel and Restaurant Administration Quarterly 43(5):22–32. Ismail, J., M. Dalbor, and J. Mills 1991 Using RevPar To Analyze Lodging- Segment Variability. Cornell Hotel and Restaurant Administration Quarterly 43(5):73–80.
Submitted 4 April 2003. Resubmitted 4 July 2003. Accepted 10 July 2003. Final version 30 August 2003 doi:10.1016/j.annals.2003.11.001