Evaluating the financial performances of Korean luxury hotels using data envelopment analysis

Abstract

In the wake of catastrophic natural disasters and rising threats of terrorism, the hotel industry has been hit hard by declining revenues and increasing competition. To avoid such a downward spiral, the hotel industry should find remedies to make its operations lean and robust. These remedies may include: niche marketing, reduced debt ratio, increased profit margin, and continuous improvement of hotel service quality. These remedies, however, would be of no avail, unless the hotel management finds a way to compare its financial strengths and weaknesses against its competitors. In an effort to help the hotel management enhance its financial efficiency and price leverage in the increasingly competitive hotel industry, this article aims to develop a meaningful set of financial benchmarks that will dictate best practices and shape up a successful hotel business model. Thus, we propose a data envelopment analysis (DEA) that is proven to be useful for measuring the financial efficiency of various profit or non-profit organizations. Using the examples of first-class, luxury hotels in Korea, this article illustrates the usefulness of DEA for the continuous improvement of hotel business practices.