Using Frontier Analysis to Evaluate Company Performance

The measurement of performance is critical to nearly all managerial disciplines. Yet little is known about the aggregation characteristics of the components of performance and how our notion of a ‘good performing firm’ relates to what we use as a dependent variable. In this paper we propose an approach to the measurement of performance that uses the logic of frontier analysis and the technique of data envelopment analysis. The approach is shown to be a reasonable representation of the multidimensional nature of performance and is shown to replicate, effectively, the components that strategic management scholars typically consider when discussing performance. It is also shown to be superior to the simpler alternatives based on traditional approaches to performance measurement.

[1]  Robert G. Dyson,et al.  Data envelopment analysis and Malmquist indices for measuring group performance , 2006 .

[2]  Michael D. Shields,et al.  Mapping Management Accounting: Graphics and Guidelines for Theory-Consistent Empirical Research , 2003 .

[3]  Jean-François Henri,et al.  Performance Measurement and Organizational Effectiveness: Bridging the Gap , 2004 .

[4]  Timothy M. Devinney,et al.  Understanding Institutional Designs within Marketing Value Systems , 1999 .

[5]  A. Charnes,et al.  Data Envelopment Analysis Theory, Methodology and Applications , 1995 .

[6]  J. Tobin.  A General Equilibrium Approach to Monetary Theory , 1969 .

[7]  Vasudevan Ramanujam,et al.  THE CORPORATE PERFORMANCE CONUNDRUM: A SYNTHESIS OF CONTEMPORARY VIEWS AND AN EXTENSION , 1990 .

[8]  D. Larcker,et al.  Assessing empirical research in managerial accounting: a value-based management perspective , 2001 .

[9]  Maurice Gosselin,et al.  PERFORMANCE MEASUREMENT AND ORGANIZATIONAL EFFECTIVENESS : BRIDGING THE GAP , 2002 .

[10]  Diana L. Day,et al.  Strategic leaders or strategic groups: A longitudinal data envelopment analysis of the U.S. brewing industry , 1995 .

[11]  Joe Zhu,et al.  Allocation of shared costs among decision making units: a DEA approach , 2005, Comput. Oper. Res..

[12]  T. C. Powell.  Varieties of Competitive Parity , 2003 .

[13]  Stephen W. Pruitt,et al.  A Simple Approximation of Tobin's Q , 1994 .

[14]  Paul J. Verdin,et al.  IS PERFORMANCE DRIVEN BY INDUSTRY- OR FIRM-SPECIFIC FACTORS? A NEW LOOK AT THE EVIDENCE , 2009 .

[15]  Alan Forster,et al.  Measuring performance , 2010, Canadian Medical Association Journal.

[16]  James E. Storbeck,et al.  Pluralistic views of performance , 2003 .

[17]  Paul Pomerantz,et al.  Good to great. , 2004, Plastic and reconstructive surgery.

[18]  W. Baumol,et al.  Contestable Markets and the Theory of Industry Structure , 1982 .

[19]  Christopher D. Ittner,et al.  Subjectivity and the Weighting of Performance Measures: Evidence from a Balanced Scorecard , 2003 .

[20]  Robert R. Wiggins,et al.  Response to McGahan and Porter's commentary on ‘Industry, corporate and business‐segment effects and business performance: a non‐parametric approach’ , 2005 .

[21]  James G. March,et al.  Crossroads---Organizational Performance as a Dependent Variable , 1997 .

[22]  R. G. Dyson,et al.  Cost efficiency measurement with price uncertainty: a DEA application to bank branch assessments , 2005, Eur. J. Oper. Res..

[23]  J. Baum,et al.  STRATEGIC DECISION SPEED AND FIRM PERFORMANCE , 2003 .

[24]  Kenneth A. Merchant,et al.  Measuring general managers' performances , 2006 .

[25]  B. Marr,et al.  Defining intellectual capital: a three‐dimensional approach , 2005 .

[26]  Douglas J. Miller.  Firms' technological resources and the performance effects of diversification: A longitudinal study , 2004 .

[27]  A. Hillman,et al.  Shareholder value, stakeholder management, and social issues: what's the bottom line? , 2001 .

[28]  Concepción Román,et al.  A Benchmarking Analysis of Spanish Commercial Airports. A Comparison Between SMOP and DEA Ranking Methods , 2006 .

[29]  Paul J. Verdin,et al.  Is performance driven by industry- or firm-specific factors? A reply to McNamara, Aime, and Vaaler , 2005 .

[30]  Timothy W. Ruefli,et al.  Industry, corporate, and segment effects and business performance: a non‐parametric approach , 2003 .

[31]  Thomas W. Lin,et al.  Strategy, Choice of Performance Measures, and Performance , 2006 .

[32]  Yiannis E. Spanos,et al.  Strategy and industry effects on profitability: evidence from Greece , 2004 .

[33]  R. Rumelt.  How much does industry matter , 1991 .

[34]  T. Devinney,et al.  The Optimal Performance of the Global Firm: Formalizing and Extending the Integration- Responsiveness Framework , 2000 .

[35]  Sumit K. Kundu,et al.  A three-stage theory of international expansion: the link between multinationality and performance in the service sector , 2003 .

[36]  G. Dowling,et al.  Corporate reputation and sustained superior financial performance , 2002 .

[37]  M. Porter,et al.  HOW MUCH DOES INDUSTRY MATTER, REALLY? , 1997 .

[38]  Mike W. Peng.  Outside directors and firm performance during institutional transitions , 2004 .

[39]  Lennart Nørreklit,et al.  Business Performance Measurement , 2007 .

[40]  W. Glenn Rowe,et al.  A Note on the Dimensionality of the Firm Financial Performance Construct Using Accounting, Market, and Subjective Measures , 2009 .

[41]  Paul M. Vaaler,et al.  Is performance driven by industry‐ or firm‐specific factors? A response to Hawawini, Subramanian, and Verdin , 2005 .

[42]  Frances X. Frei,et al.  MEASUREMENT OF MULTIPLE SITES IN SERVICE FIRMS WITH DATA ENVELOPMENT ANALYSIS , 1999 .

[43]  Emmanuel Thanassoulis.  Assessing the Effectiveness of Schools with Pupils of Different Ability Using Data Envelopment Analysis , 1996 .

[44]  D. Larcker,et al.  Performance Implications of Strategic Performance Measurement in Financial Services Firms , 2003 .

[45]  Karl-Heinz Leitner,et al.  Data envelopment analysis as method for evaluating intellectual capital , 2005 .

[46]  V. Pucik,et al.  Relationship between innovativeness, quality, growth, profitability, and market value , 2005 .

[47]  Marshall W. Meyer,et al.  Subjectivity and the Weighting of Performance Measures: Evidence from a Balanced Scorecard , 2003 .

[48]  A. U.S.,et al.  Measuring the efficiency of decision making units , 2003 .

[49]  D. Teece,et al.  DYNAMIC CAPABILITIES AND STRATEGIC MANAGEMENT , 1997 .

[50]  N. Venkatraman,et al.  Measurement of Business Economic Performance: An Examination of Method Convergence , 1987 .

[51]  Pervaiz Alam,et al.  Transfer Pricing Determinants of U.S. Multinationals , 1990 .

[52]  Taylor Randall,et al.  Performance Implications of Strategic Performance Measurement in Financial Services Firms , 2003 .

[53]  Paul W. Beamish,et al.  Geographic scope and multinational enterprise performance , 2003 .

[54]  Don R. Hansen,et al.  Ecoefficiency: Defining a role for environmental cost management , 2008 .

[55]  M. Porter,et al.  Comment on ‘Industry, corporate and business‐segment effects and business performance: a non‐parametric approach’ by Ruefli and Wiggins , 2005 .

[56]  G. Gregoriou,et al.  Assessing The Relative Efficiency Of Credit Unionbranches Using Data Envelopment Analysis , 2004 .

[57]  Emmanuel Thanassoulis,et al.  Data Envelopment Analysis and Its Use in Banking , 1999, Interfaces.

[58]  Anita M. McGahan,et al.  What Do We Know About Variance in Accounting Profitability? , 2002, Manag. Sci..

[59]  Abraham Charnes,et al.  Measuring the efficiency of decision making units , 1978 .

[60]  James G. Tompkins,et al.  A Modified Version of the Lewellen and Badrinath Measure of Tobin\'s Q , 1999 .

[61]  Jill Johnes,et al.  Measuring Efficiency: A Comparison of Multilevel Modelling and Data Envelopment Analysis in the Context of Higher Education , 2006 .

[62]  D. Otley.  Accounting performance measurement: a review of its purposes and practices , 2001 .

[63]  Joel M. Stern,et al.  THE EVA® FINANCIAL MANAGEMENT SYSTEM , 1995 .

[64]  Joseph Sarkis,et al.  Evaluating performance of public–private research collaborations: A DEA analysis , 2003, J. Oper. Res. Soc..

[65]  George Strauss,et al.  Tracking the Giant Corporation@@@Scale and Scope: The Dynamics of Industrial Capitalism. , 1991 .

[66]  B. Wernerfelt,et al.  Multiple point competition , 1985 .

[67]  Michael E. Porter,et al.  The Emergence and Sustainability of Abnormal Profits , 2003 .