Theory and Methodology Multi-factor performance measure model with an application to Fortune 500 companies Joe Zhu 1 Department of Management, Worcester Polytechnic Institute, 100 Institute Road, Worcester, MA 01609-2280, USA Received 2 February 1998; accepted 8 December 1998 Abstract The paper develops tools for reconciling diverse measures which characterize the financial performance of the Fortune 500 companies. The technology of data envelopment analysis (DEA) is employed to determine a multi-factor financial performance model which inherently recognizes tradeos among various financial measures. This study oers an alter- native perspective and characterization on the performance of the Fortune 500 companies. It is shown that the top-ranked companies by revenue do not necessarily have top-ranked performance viewed as being multidimensional. Only about 3% companies were operating on the best-practice frontier. Substantial technical and scale ineciencies are found. De- creasing returns to scale (DRS) are uncovered among the relatively large (revenue-top-ranked) companies. The study of congestion shows that a reduction in current levels of employees, assets and equity may actually increase revenue and profit levels. Factor-specific measures, within the framework of multidimensional measure, are developed to further study the performance of companies and industries. The performance of best-practice frontier companies is analyzed by con- structing reference-share measures which indicate the role each frontier company plays in evaluating non-frontier com- panies. Finally, the reliability of the best-practice frontier is examined. Ó 2000 Elsevier Science B.V. All rights reserved. Keywords: Data envelopment analysis (DEA); Congestion; Eciency; Profitability; Marketability; Reliability 1. Introduction It has been recognized that business perfor- mance is a multidimensional construct, since it covers diverse purposes and types of organiza- tions/levels (Lewin and Minton, 1986). The single output to input financial ratios, such as, return on investment (ROI) and return on sales (ROS), may be used as indices to characterize the financial performance. However, as indicated in Chakra- varthy (1986), conventional referents of perfor- mance, whether they be measures of profitability, like ROI and ROS, or financial market measures, like the market to book ratio, are unsatisfactory discriminants of ‘excellence’. Since a company’s performance is a complex phenomenon requiring more than a single criterion to characterize it. Consequently, a number of studies has been argued that a multi-factor performance measure- ment model may be used (see, e.g., Bagozzi and European Journal of Operational Research 123 (2000) 105–124 www.elsevier.com/locate/orms 1 Tel.: +1-508-831-5281; fax: +1-508-831-5720. E-mail address: jzhu@wpi.edu (J. Zhu). 0377-2217/00/$ - see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 7 - 2 2 1 7 ( 9 9 ) 0 0 0 9 6 - X