Rethinking How Hotel Performance Is Evaluated

The 11 cities of the Guangdong–Hong Kong–Macau Greater Bay Area (GBA) are an economic powerhouse of southern China. Growth in the GBA’s hotel sector, however, could be improved by strengthening hotels’ operating efficiency, according to Professor Henry Tsai of the School of Hotel and Tourism Management (SHTM) at The Hong Kong Polytechnic University (PolyU) and co-authors. Their study provides an innovative method of hotel performance evaluation tailored to an era of diversification, revealing useful insights for managers.

Boosting tourism is among the main aims of the GBA. The number of hotels in the region increased by 11% between 2015 and 2019, primarily thanks to development in emerging destinations such as Huizhou, Shenzhen and Zhuhai. However, despite the ongoing improvements in connectivity among GBA cities, differences in their business environment persist. “Disparities in economic development, customer demographics, urban characteristics, and competitive landscapes among these cities”, the authors say, “result in substantial variations in hotel operating income”.

The growing concentration of hotels in the GBA has sharpened competition. Many are responding by diversifying their services in a bid to maximise revenue. To help hotel managers strengthen their businesses, scientific methods of performance evaluation can point the way. However, the authors warn that the increasing variety in hotels’ offerings makes this more complex. “The presence of product diversification introduces variations in hotel operations”, they write. “Ignoring this aspect can render hotel performance evaluation impractical and introduce bias”.

“As such”, they continue, “it is obviously not ideal to mix hotels offering different products for performance evaluation”. Instead, an approach mindful of non-uniformity is needed to ensure a fair comparison that can identify underperforming hotels. In particular, hotels across the GBA differ not only in their provision of rooms but also in extra services such as food and beverages (F&B), retail, conference venues and spa treatments. The authors realised that the standard business-studies approach – data envelopment analysis (DEA) – needed to be updated to account for this heterogeneity.

Diversification is well established in hospitality. “By diversifying products”, the researchers note, “hotels can generate economies of scale and scope, thus reducing costs and improving performance”. However, the effectiveness of this strategy in terms of performance is hard to gauge, because diversification means that rival hotels are not competing in exactly the same markets. Moreover, hotels inherently differ in terms of operational resources, such as number of rooms and adoption of technology.

A key measure of firm performance is efficiency. According to previous research – often based on DEA – large or budget hotels may be more efficient than small or mid-range ones, and chain hotels use more advanced technology than independents. However, as the researchers note, conventional DEA “cannot deal with the problem of hotel efficiency evaluation with product diversification”. Their novel solution was to modify DEA so that its unit of analysis – the decision-making unit (DMU) – is non-homogeneous.

Such an approach is particularly relevant in the GBA’s diverse hotel sector. Nonetheless, the authors note that “no hotel efficiency studies have considered the factor of product diversification, despite its practical existence”. To remedy this, they studied a sample of 53 GBA hotels offering different services. With their modified DEA method, they analysed how hotel operating efficiency was impacted by external factors, such as geographical location, and internal factors, such as product diversification.

Businesses that compete through diversification are effectively using the same type of resources to produce different outputs. To capture this essential feature of the region’s hotel sector, Tsai and colleagues applied their model to analyse DMUs in seven GBA cities, aiming to identify resource redundancy. Efficiency is known as a key concern in the hotel sector, which, they write, “grapples with inefficient management of human resources and unnecessary expenditure, areas demanding substantial improvement”.

Rationalising resource usage is especially hard when competing on multiple fronts. “Hotels can be considered as multi-activity decision-makers”, the researchers write, “because they aim to cater to various needs and expectations of customers by offering diverse products”. Hence, their analysis accounted for four outputs: rooms, F&B, meeting services and spa services. Using operational data submitted by hotels to a third-party company for performance evaluation, they clustered the sample into groups that each offered the same mix of these four products, then calculated an efficiency value for each group.

The analysis yielded a range of instructive findings. In terms of overall efficiency, the researchers’ conclusion was stark: “considering the hotels’ diverse products, none were efficient during [the] 2015 to 2019 period, with average efficiency values ranging between 0.044 and 0.376” (out of a maximum of 1.00). This indicates an urgent need for hotels across the GBA to optimise their use of resource inputs and achieve the same (diversified) outputs more efficiently.

The study’s innovative use of non-homogeneous DMUs allowed the causes of these inefficiencies to be diagnosed in more detail than before. An important overarching conclusion is that optimal resource usage by a hotel can only be achieved when each of its product types is efficient. This, however, was not the case for any of the studied DMUs, all of which “had at least one product group that was operating inefficiently”. Meanwhile, the low overall scores emphasise the importance for hotel managers of improving the efficiency of each department to maintain a competitive advantage.

A detailed breakdown showed that the four product types did not contribute equally to the hotels’ efficiency scores. “The weighted efficiency of F&B surpassed that of the other product groups”, the researchers report, “indicating that F&B contributed the most to the non-homogeneous efficiency score”. Moreover, resource management was poorest for rooms and F&B, which had the lowest average efficiency scores. This explains why the least efficient hotel was one that offered only those two products, whereas the best-performing provided all four product types.

The authors’ analysis also confirmed the wisdom of diversification. “While groups providing different products exhibited varying performance levels”, they say, “those with higher levels of product diversification tended to outperform others” – something for managers to note. Meanwhile, a geographic breakdown found that hotels in Guangzhou had the highest efficiency (but still suboptimal), whereas Macau had the lowest. Regional efficiency strengths did emerge, with Zhongshan excelling in rooms, Macau in F&B, Hong Kong in meeting services and Shenzhen in spa services.

“Hotel managers can benchmark their hotel’s performance against others in the GBA, identifying product groups crucial to hotel operations yet displaying suboptimal performance levels”, the authors advise. A further implication is that hotels in node cities of the GBA should rate their performance against those in the better-performing core cities. Governments in node cities can play their part through tax incentives to encourage technology adoption by hotels.

This study provides a sophisticated method of evaluating hotels’ business performance. Given the increasing turn to diversification as a competitive strategy in the dense GBA hotel market, it is more important than ever to account for heterogeneity. “Relying solely on the traditional model may lead to a falsely positive perception of performance”, they warn, noting that their modified DEA model revealed lower efficiency scores than the standard DEA. Managers and academics should now be better equipped to avoid such misapprehensions.

Henry Tsai, Chenchen Gao and Hongwei Liu (2025). Hotel Performance in the Guangdong-Hong Kong-Macau Greater Bay Area: A Non-Homogeneous Perspective. Journal of Hospitality & Tourism Research, Vol. 49, No. 4, pp. 827–841.

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Tiffany Chan

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