Management by Objectives

Management by Objectives (MBO) is a process of defining objectives within an

organization so that management and employees agree to the objectives and
understand what they are in the organization.

The term "management by objectives" was first popularized by Peter Drucker in his 1954
book 'The Practice of Management'.

The essence of MBO is participative goal setting, choosing course of actions and
decision making. An important part of the MBO is the measurement and the comparison
of the employee’s actual performance with the standards set. Ideally, when employees
themselves have been involved with the goal setting and choosing the course of action
to be followed by them, they are more likely to fulfill their responsibilities.
Features and Advantages
Unique features and advantage of the MBO process

The basic principle behind Management by Objectives (MBO) is for employees to have
clarity of the roles and responsibilities expected of them. They can then understand how
their activities relate to the achievement of the organization. They also provide direction
for the personal goals of each employee.

Some of the important features and advantages of MBO are:

1. Motivation – Involving employees in the whole process of goal setting and

increasing employee empowerment increases employee job satisfaction and
commitment.
2. Better communication and Coordination – Frequent reviews and interactions
between superiors and subordinates helps to maintain harmonious relationships
within the enterprise and also solve many problems faced during the period.
3. Clarity of goals
4. Subordinates have a higher commitment to objectives that they set themselves
than those imposed on them by their managers.
5. Managers can ensure that objectives of the subordinates are linked to the
organization’s objectives.

Domains and levels

Objectives can be set in all domains of activities (production, marketing, services, sales,
R&D, human resources, finance, information systems etc.).

Some objectives are collective, for a whole department or the whole company,
others can be individualized.
Practice

Objectives need quantifying and monitoring. Reliable management information systems

are needed to establish relevant objectives and monitor their "reach ratio" in an objective
way. Pay incentives (bonuses) are often linked to results in reaching the objectives

Limitations

There are several limitations to the assumptive base underlying the impact of managing
by objectives, including:

1. It over-emphasizes the setting of goals over the working of a plan as a driver of

outcomes.

2. It underemphasizes the importance of the environment or context in which the

goals are set. That context includes everything from the availability and quality of
resources, to relative buy-in by leadership and stake-holders. As an example of
the influence of management buy-in as a contextual influencer, in a 1991
comprehensive review of thirty years of research on the impact of Management
by Objectives, Robert Rodgers and John Hunter concluded that companies
whose CEOs demonstrated high commitment to MBO showed, on average, a
56% gain in productivity. Companies with CEOs who showed low commitment
only saw a 6% gain in productivity.

3. Companies evaluated their employees by comparing them with the "ideal"

employee. Trait appraisal only looks at what employees should be, not at what
they should do.

When this approach is not properly set, agreed and managed by organizations,
in self-centered thinking employees, it may trigger an unethical behavior of distorting the
system of results and financial figures to falsely achieve targets that were set in a short-
term, narrow, bottom-line fashion. How corporate culture impacts unethical distortion of
financial numbers: managing by Objectives and Results could be counterproductive and
contribute to a climate that may lead to distortion of the system, manipulation of
accounting figures, and, ultimately, unethical behavior.
 The use of MBO needs to be carefully aligned with the culture of the
organization. While MBO is not as fashionable as it was before the 'empowerment' fad, it
still has its place in management today. The key difference is that rather than 'set'
objectives from a cascade process, objectives are discussed and agreed, based upon a
more strategic picture being available to employees. Engagement of employees in the
objective setting process is seen as a strategic advantage by many.

A saying around MBO -- "What gets measured gets done", ‘Why measure
performance? Different purposes require different measures’ -- is perhaps the most
famous aphorism of performance measurement; therefore, to avoid potential problems
SMART and SMARTER objectives need to be agreed upon in the true sense rather than
set.

Arguments Against

MBO has its detractors, notably among them W. Edwards Deming, who argued that a
lack of understanding of systems commonly results in the misapplication of objective.
Additionally, Deming stated that setting production targets will encourage resources to
meet those targets through whatever means necessary, which usually results in poor
quality.

Point 7 of Deming's 14 Points encourages managers to abandon objectives in

favour of leadership because he felt that a leader with an understanding of systems was
more likely to guide workers to an appropriate solution than the incentive of an objective.
Deming also pointed out that Drucker warned managers that a systemic view was
required and felt that Drucker's warning went largely unheeded by the practitioners of
MBO.
Evolving Concepts In MBO
 Early Impetus to MBO

Since many centuries people have used their common sense and given
importance to management by objectives. It was in 1954 that Peter F.Drucker
first emphasized that objectives must be set in all areas where performance
affects the health of the enterprise and submitted that the measures adapted to
each individual employee, by his more objectively determined if possible to be
specific, measurable, challenging, realistic and affordable. This method has been
described in detail by Mc Conkie (1979) when he defines as the PMO:
A managerial process whereby organisational purpose are diagnosed and
met by joining the superior and subordinates in the pursuits of mutually agreed
upon Goals and Objectives Which are specific, measurable, time bounded, and
joined to an action plan, progress and goals and measure against it are
monitored in Which Sessions appraisal centers on mutually determined
standards of performance objectives.
Thomson agreed that the MBO is an alternative to the previous approach
in defining the tasks and provide a basis for employee evaluation. According to
him, MBO is used in two phases, which are relevant to the determination of
objectives and another with a performance appraisal. Therefore, the
responsibility of the assessor to give guidance to employees to take appropriate
action or steps to be taken to determine the overall goals of the workers
(Smither, 1988). What is important in assessing the performance of how these
objectives are met (Tosi and Corroll, 1970). To achieve success, Ivancevich
(1995) identified several of the following requirements:
1) Managers and employees need to convene a meeting to identify and
establish a limited number of objective.
2) Those involved need to set realistic objectives, challenging, clear, and
thorough.
3) Management the criteria should be established to assess the
achievement of objectives in consultation with the employee.
4) Determining the date and get the consent of all parties involved to
review the achievement.
 5) Managers and employees to make any modification in the original
objectives.
6) The last valuation made by the manager and employee meetings will
held the counseling session is good.
7) Objectives for the next cycle is made by the employee after consultation
with the manager. Please note on the last cycle and the expectations of
the future.

About at the same time General Electric Co. was using MBO in its reorganization

 Emphasis On Performance Appraisal

In traditional appraisal programs personality traits were used for evaluating

subordinates. But when MBO was implemented emphasis was given on
performance rather than personality which lead to self appraisal and self
development. The active involvement of subordinates leads to commitment and
creates an environment for motivation.

 Emphasis on short-term objectives and motivation

Individual goal setting is an important factor in motivating employees. It is known

that performance is higher when people have specific objectives than when they
are asked simply to do their best.

 Inclusion Of Long Range Plan In MBO

In MBO programs that emphasis performance appraisals and motivation the

focus tends to be on short term objectives, which may lead to undesirable
managerial behavior. Due to these short-comings many organization now include
long range and strategic planning in MBO programs.
 The System Approach To MBO

MBO has undergone many changes. It has been used in performance appraisals
as an instrument for motivating individual and in strategic planning. But there are
still other managerial subsystems that can be integrated into MBO process.
Various managerial activities need to be integrated into a system. For MBO to be
a comprehensive system of managing indicates that most key managerial
activities can and should be integrated with the MBO process. The degree of
integration however differs for individual activities. For MBO to be effective it has
to be viewed as a comprehensive system and it must be considered as a way of
managing and not an addiction to the managerial job.
The Process Of Managing By Objectives
The process starts at the top of an organization and has the active support of
the chief executive, who gives direction to the organization. It is not essential
the objective setting starts at the top. It can start at the divisional level, at the
marketing level or even lower level.

As in all planning, one of the critical need in MBO is the development

and dissemination of consistent planning premises. No manager can be
expected to set goals or establish plans and budgets without guidelines.

Setting preliminary objectives at the top

Given appropriate planning premises, the first step in setting objectives is for the top
manager to determine what he or she perceives to be the purpose or mission and the
more important goals of the enterprise for a given period ahead. Certain goals should be
scheduled for accomplishment in a much shorter period and others in a much longer
period.

The goals set by the superior are preliminary based on an analysis and judgment
as to what can and should be accomplished by the organization within a certain period.
This requires taking into account the company’s strength and weakness in the light of
available opportunities and threats. Most managers also find out the process of working
out goals with the subordinates reveals both problems they should deal with and the
opportunities they were not previously aware of.

When setting objectives, the manager also establishes measure of goal

accomplishment. If verifiable objectives are developed, these measures, whether in sale
dollars profits, percentages, cost level, or program execution, will normally built into
objectives.
Clarifying Organizational Roles
The relationship between expected results and the responsibility of attaining is often
overlooked. Ideally, each goal and sub goal should be one particular person’s
responsibility. Analyzing an organization structure, however, often reveals that the
responsibility is vague and the clarification or reorganization is needed. Sometimes it is
impossible to structure an organization so that a given objective is someone’s personal
responsibility.

Setting Subordinates Objectives

After making sure that subordinate managers have been informed of pertinent general
objectives, strategies, and planning premises, the superior can then proceed to work
with subordinates in setting their objectives. The superiors ask what goals the
subordinates believe they can accomplish, in what time period and with what resources.

Superiors must also be patient counselors, helping their subordinates develop

consistent and supportive objectives and being careful not to set goals that are
impossible to achieve. One of the things that can weaken a program by objectives is to
allow managers to set unrealistic objectives. One of the major advantages of carefully
setting up a network of verifiable goals and a requirement for doing so effectively is
trying in the need of capital, materials and human resources at the same time. All
managers at all levels require these resources to accomplish their goals. By relating
these resources to the goals themselves, superiors can better see the most effective and
the most economical way of allocating them

Recycling of objectives
Objectives can hardly be set by starting at the top and dividing them up among
subordinates nor should they be started from the bottom. A degree of recycling is a
must. Top managers may have some idea of what their subordinates’ objectives should
be; but they will almost certainly change these preconceived goals as the contributions
of the subordinates come into focus. Thus setting objectives is not a joint process but
also an interactive one.
Benefits of Management by Objectives
1. Improvement of managing: Managing Sense in a Manager Improves.
2. Clarification of organization: Management by objectives forces managers to
clarify roles i.e. organizational roles and structures.
3. Encouragement of Personal Commitment: It encourages people to commit
themselves to their goals.
4. Development of Effective Controls: MBO helps in effective planning, it also aids
in developing effective controls.

Weakness of Management by Objectives

1. Failure to teach the philosophy of MBO.
2. Failure to give guidelines to goal setters.
3. Difficulty of setting goals.
4. MBO programs are set for short terms.
5. Danger of inflexibility.

How to structure and MBO

A management buyout (MBO), where the management of a firm acquires the company,
can be structured in three ways: a purchase of the shares of a firm; a purchase of the
assets and trade of a firm; or a purchase of the shares of a newly-created subsidiary into
which a firm's assets and trade have been hived-down. Management typically prefers to
acquire the assets in order to access tax relief. In a share purchase, the buyer merely
inherits the assets' tax written down values. A hive-down arrangement is a hybrid of the
other two approaches that necessitates a sale of assets and subsequently a sale of the
hive-down firm. A hive-down arrangement ensures the continuity of tax losses and
capital allowances and provides protection from capital gains. A case study of a hive-
down arrangement is presented
Management Process
Although management literature is filled with panaceas, new ideas and new,
indispensable methods, nothing is more important for a company than to have an
effective and efficient management process, because without an effective and efficient
management process it is not possible to effectively put the resources to good, profitable
usage. 

For this reason Management By Objectives (MBO) came about in the 1950s, but
experience shows that many organizations have problems making MBO work. There are
many reasons for that, but as senior partner of Considium Consulting Group AS John-
Erik Stenberg discusses in his latest book, there are more to the management process
than MBO suggests.

Notably, the fact that humans are irrational beings should imply that methods
solely applicable to the rationale will ultimately fail in the long run. What is needed is that
the management process is based on a set of agreed-upon rules, values and morals in
addition to the straight MBO.  This is roughly what Considium Consulting Group AS have
been doing for the last 20 years under the name 'Result Assurance' - a remarkably
simple idea that have been successfully implemented in numerous companies.