International Journal of Hospitality Management 35 (2013) 59–67 Contents lists available at ScienceDirect International Journal of Hospitality Management journa l h om epa ge: www.elsevier.com/ locate/ijhosman Efﬁciency performance of the Algarve hotels using a revenue function Ricardo Oliveira, Maria Isabel Pedro ∗ , Rui Cunha Marques CEG-IST – Center for Management Studies, Av. Rovisco Pais, 1049 001 Lisbon, Portugal a r t i c l e i n f o Keywords: SFA Revenue function Hotels Stars Location Golf a b s t r a c t The tourism industry, particularly the hotel sector, is becoming increasingly competitive and dynamic as a result of the pressures of globalized supply and demand in a context of uncertainty. The aim of this study is to discuss the efﬁciency of hotel companies in the Algarve (Portugal), a tourist destination of excellence in southwest Europe. In particular, we intend to assess the efﬁciency of the hotels in terms of star rating (four and ﬁve-star hotels), their location (Windward and Leeward), owning or not golf courses and owning just a single hotel or more than one. This analysis will be based on the parametric method of stochastic frontier approach using a revenue function. We found relevant levels of inefﬁciency. The results also point out the important role of the operational environment, particularly the hotel location and the existence of golf facilities. Star rating and owning multiples hotels do not seem to be so relevant. © 2013 Elsevier Ltd. All rights reserved. 1. Introduction The tourism industry, particularly the hotel sector, is becoming increasingly competitive and dynamic motivated by the pressures of globalized supply and demand (COM, 2010). However, it is also characterized by a context of uncertainty, despite the growth trend. This motivates the search for continuous and systematic improve- ment of processes and resources toward efﬁciency. Many authors have studied the efﬁciency, including Phillips (1999), Barros (2004) and Chen (2007), all pointing to the improvement of management practices. Differences in markets, tradable products, quality, loca- tion, differentiation and price, among other aspects, can generate the critical factors of success and survival of these organizations. Algarve is a tourist destination of worldwide excellence. It was considered two times the best worldwide golf destination in the last decade by the International Association of Golf Tour Operators (IAGTO, 2013). The Algarve golf courses were also distinguished by Rheingolf Magazine and by Golf Digest, putting San Lorenzo and Vilamoura Old Course between the 100 better golf courses of the world. Recently, in European Gala of World Travel Awards Europe (WTA, 2012), the Algarve was considered the best beach destination of Europe and Portugal was deemed the best golf desti- nation. Also Hotel Quinta do Lago was considered the best hotel of the Mediterranean area, while Martinhal Beach was the best villa resort, the Dunas Douradas Beach Club, the best villas and apartments complex and Conrad Algarve Hotel (Hilton Group) the best new resort of the world. Graham Cooke, President of WTA, ∗ Corresponding author. Tel.: +351 912642544. E-mail addresses: ricardo.d.oliveira@ist.utl.pt (R. Oliveira), ipedro@ist.utl.pt (M.I. Pedro), rui.marques@ist.utl.pt (R.C. Marques). underlined that the “Algarve is also one of the most beautiful coastline of the world”. The Algarve has an area of 5412 km 2 with approximately 450 thousand inhabitants but receives an average of 7 million foreign tourists each year. Despite this, it is essential that hotel companies improve or, at least, maintain their performance levels, so that the Algarve will continue to be a desired place. This study aims to analyze the efﬁ- ciency of hotel companies in the Algarve and simultaneously to assess the inﬂuence of certain exogenous variable on the efﬁciency of these companies. These variables are: location (Windward and Leeward), star rating (four and ﬁve-star hotels), owning golf courses or not and owning only one hotel or more than one. Taking into account the available data and the Algarve setting, we believe that these ‘explanatory’ factors might be the most determinant in the performance highlighted. On the one hand, there is no consen- sus if the existence of golf facilities, star-rating or the number of hotels of the same company inﬂuence positively the performance and, on the other hand, location is surprisingly very relevant with Windward and Leeward presenting signiﬁcant differences and fea- tures. In this study, a revenue function was estimated through the stochastic frontier approach (SFA) methodology. As far as we know, it is the ﬁrst study using a revenue function and also the ﬁrst time that the hotel efﬁciency in the Algarve is analyzed using the SFA methodology, so this work is considered pioneer. The assessment and analysis of efﬁciency using the SFA method- ology has been the target of a number of studies since the 80s to the more recent: Assaf et al. (2012), Assaf and Barros (2011) and Pérez-Calderón et al. (2011). A number of authors have been addressing this issue, but all of them estimate cost functions. The literature review carried out for this research, which will be pre- sented in Appendix A, enabled us to ﬁnd 20 studies worldwide, 10 in Asia, 7 in Europe, two in North America and one in Africa. From 0278-4319/$ – see front matter © 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.ijhm.2013.05.005