SCALE, SPECIALIZATION AND PERFORMANCE: EVIDENCE FROM THE HOTEL INDUSTRY

Abstract

I examine the impacts of specialization and of scale on property performance and chain performance of the hotel industry. I use a large sample of branded lodging companies in the United States from 2010 to 2014 for the analyses. For property performance, I investigate how a hotel company decides on franchising on properties based on its specialization and study the impacts of the combinations of franchising choice and specialization on profitability of hotel properties. I argue that a hotel company is less likely to franchise business units that are in the specialized market segment of the company since it can manage them better with specialized knowledge than franchisees with general knowledge. Consistent with the expectation, the profitability of company-managed properties is higher than franchised properties when properties are in a company’s specialized market segment. I also find that the probability that a company franchises a business unit is lower when the business unit is in the brand’s area of specialization. While prior research focused on the role of monitoring costs in franchising decisions, this study suggests that specialization is a strong alternative determinant of franchising decisions and the resulting organizational performance. Regarding the analysis of chain performance, I explore productivity changes of the hotel industry and identify the characteristics of leaders, followers, and laggards. Using Data Envelopment Analysis, I find that a few hotel chains led industrial productivity growth through technological progress during the period from 2010 to 2012 and that most other chains followed the improvements in the subsequent period. I find that a larger chain was more like to lead the productivity progress of the industry during the sample period.