A data envelopment analysis‐based balanced scorecard for measuring the comparative efficiency of Korean luxury hotels

Abstract

Purpose -This paper aims to develop a balanced scorecard for measuring the comparative efficiency of Korean luxury hotels and then set the benchmark of performance standards for Korean luxury hotels in the increasingly competitive hotel industry. It also aims to identify the root causes of inefficiencies and then propose ways to improve the competitiveness of Korean luxury hotels. Design/methodology/approach -This paper proposes data envelopment analysis (DEA) to measure the comparative efficiency of six luxury hotel chains in Korea, relative to prior periods and their key competitors. In particular, this paper develops the Charnes, Cooper and Rhodes (CCR) model that is designed to derive weights without being fixed in advance. Also, the results of the CCR model with constant returns to scale were compared to those of the Banker, Charnes and Cooper (BCC) model with decreasing returns to scale. Findings -The paper finds that the declining efficiency within some Korean luxury hotels coincides with more aggressive government crackdowns on bad bank loans in the wake of the International Monetary Fund (IMF) financial crisis and the slow adaptation of some hotels into ongoing hotel industry restructuring. The deep discount in hotel room rates did not necessarily lead to increased room occupancy. The revenue increase is not significantly correlated with the enhanced profitability of Korean luxury hotels. The Korean hotel industry reached the stage of market maturity and therefore the mere expansion of the hotel capacity would not necessarily enhance the hotel's profitability. Originality/value -This paper uncovers the financial weaknesses and strengths of the Korean luxury hotels and identifies challenges and opportunities for the Korean hotel industry. In addition, it helps Korean hotels formulate the future survival strategies by providing the detailed picture of where they stand in terms of competitiveness. This paper is one of the first attempts to utilise DEA to develop performance measures for hotels under the balanced scorecard framework. The proposed DEA can be easily modified or extended to similar settings in other hotels such as budget hotels or other countries such as USA and Japan.

Integrating the Data Envelopment Analysis and the Balanced Scorecard approaches for enhanced performance assessment

“…For instance, some authors have used DEA and BSC separately in order to assess the usefulness of these approaches [26], whilst others have complemented the DEA analysis with other performance assessment frameworks in order to better understand the DEA results [27,28]. From a different perspective, Min et al [29] have developed a balanced scorecard for Korean hotels in which the financial perspective is evaluated with the efficiency results obtained from DEA analysis.…”

“…Min et al [29] Luxury hotels in Korea DEA, BSC To develop a balanced scorecard to measure the efficiency of Korean luxury hotels A balanced scorecard was developed including the four traditional perspectives. The scores from a DEA model including basic inputs and outputs were used as the performance indicators for the financial perspective of the BSC.…”

Does partial privatisation improve performance? Evidence from a chain of hotels in Portugal

“…In this respect, following the theory regarding the most important indicators in the accommodation context (see, for example, Huang, Ho & Chio, 2014;Min, Min & Joo, 2008;Peng, Huang & Wu, 2013), and constrained by data availability, six performance ratios were calculated, as described below: 1) Rev per worker = Total revenue/Full Time Equivalent workers; 2) Rev to costs = Total revenue/Labour and operational costs; 3) Room rev to costs = Room related revenue and miscellaneous revenue/Labour and operational costs; 4) F&B rev to costs = Food & beverage revenue/Labour and operational costs; 5) RevPar = Room related revenue and miscellaneous revenue/Rooms available; 6) Occupancy rate = Rooms occupied/Rooms available. These six ratios cover three different areas of performance: ratio 1 relates to labour productivity, ratios 2, 3, 4 and 5 relate to profitability and ratio 6 relates to capacity utilisation, allowing us to test the second group of hypotheses (H4, H5 and H6).…”

A Comparative Analysis of Window Width Selection Technique in Data Envelopment Analysis

“…Ross [21] used DEA window analysis to evaluate and identify performance trends of distribution centres over four years. Min [22] formulate and compare a variable return to scale and constant return to scale model to measure the efficiency of six Korean luxury hotel from 2001 to 2003.…”