The application of our approach can provide insight
into the sources of overall shortfalls in performance—
operational (technical inefficiency) vs. strategic (allocative
inefficiency). Furthermore, the results of this performance
benchmarking offer guidance on how to improve performance,
since higher performing “peers” can be used as role
models. Finally, evidence gleaned from the performance
evaluation process could be incorporated into an analysis of
system of incentives. Indeed, we propose here to determine
a specific system of incentive (specific to each individual
business unit—bank branches) with respect to their economic
and social environment and specific to their size for
a single and common profit program maximization (that of
the center of profit—the regional bank).
Our results demonstrate that by applying frontier efficiency
analysis in a novel way, the decision-making of
upper level and lower level managers within an organization
is jointly evaluated; the two separate performance
evaluations combine to provide a measure of overall
organizational performance. In our application we illustrate
that it is possible to control for differences in the
environment in which different units of an organization
operate. Our empirical illustration using a sample of over
1500 branches of a large French bank network has shown
that inefficiency exists at both the higher and lower levels
of the hierarchy. Thus, overall performance could be
increased by improving both strategic and operational
decision-making.