Data Envelopment Analysis for Managerial Control and Diagnosis

Data envelopment analysis (DEA) is a linear programming-based technique that converts multiple input and output measures into a single comprehensive measure of productive efficiency. This is accomplished via the construction of an empirically based production frontier and by the identification of peer groups. Each unit is evaluated by comparison against a composite unit that is constructed as a convex combination of other units in its peer group. DEA has now been applied in a variety of managerial contexts. In this paper we draw on theories of decision making, measurement and control, the mathematical properties of DEA, prior reported applications, and our own experience, to assess the potential of DEA as a general management tool. We first make the distinction between managerial diagnosis and control. We show how measurement requirements differ for these two managerial decision contexts, and argue that DEA has the potential to provide support in each context. Measurement and decision support criteria for each activity are then developed by reference to the literature on diagnosis and control. Based on its mathematical definition and properties, the relevant attributes of DEA are then derived. The technique is evaluated in each capacity by comparison to the appropriate set of criteria. This evaluation is supported with evidence from our experience with DEA in a large public-sector organization. We argue that the structural properties of DEA, critical managerial choices in its application, and situationally specific factors, interact to determine the strengths and limitations of DEA in each decision context. Implications for research and practice are discussed.