Management by Objectives (MBO)

Management by objectives (MBO) is a management model that aims to improve performance of an organization by clearly defining objectives that are agreed to by both management and employees. According to the theory, having a say in goal setting and action plans should ensure better participation and commitment among employees, as well as alignment of objectives across the organization.

Management By Objectives (MBO) is also known as Management By Results (MBR).

The Origins of Management by Objectives (MBO)
The idea of management by objectives (MBO), first outlined by Peter Drucker and then developed by George Odiorne, his student, was popular in the 1960s and 1970s. In his book “The Practice of Management”, published in 1954, Drucker outlined a number of priorities for the manager of the future. Top of the list was that he or she “must manage by objectives”. John Tarrant, Drucker's biographer, reported in 1976 that Drucker once said he had first heard the term MBO used by Alfred Sloan, author of the influential “My Years with General Motors”. With the benefit of hindsight, it may seem obvious that managers must have somewhere to go before they set out on a journey. But Drucker pointed out that managers often lose sight of their objectives because of something he called “the activity trap”. They get so involved in their current activities that they forget their original purpose. In some cases it may be that they become engrossed in this activity as a means of avoiding the uncomfortable truth about their organisation's condition. MBO received a boost when it was declared to be an integral part of “The HP Way”, the widely acclaimed management style of Hewlett-Packard, a computer company. At every level within Hewlett-Packard, managers had to develop objectives and integrate them with those of other managers and of the company as a whole. This was done by producing written plans showing what people needed to achieve if they were to reach those objectives. The plans were then shared with others in the corporation and coordinated.

Key Concepts of Management by Objectives (MBO)
The core concept of MBO is planning, which means that an organization and its members are not merely reacting to events and problems but are instead being proactive. MBO requires that employees set measurable personal goals based upon the organizational goals. For example, a goal for a civil engineer may be to complete the infrastructure of a housing division within the next twelve months. The personal goal aligns with the organizational goal of completing the subdivision. MBO is a supervised and managed activity so that all of the individual goals can be coordinated to work towards the overall organizational goal. You can think of an individual personal goal as one piece of a puzzle that must fit together with all of the other pieces to form the complete puzzle: the organizational goal. Goals are set down in writing annually and are continually monitored by managers to check progress. Rewards are based upon goal achievement.

Features of MBO
A discussion of various definitions of MBO brings out the following features:
1. MBO is not merely a technique but a philosophy to management. A technique is applicable only in specified areas but a philosophy or approach guides and influences every aspect of management. MBO is an approach which includes various techniques of better management.
2. In this approach various objectives of the organization and of individuals are collectively decided by superiors and subordinates. These objectives become the targets which are to be achieved by various persons in the organization. The review of objectives is also done collectively.
3. The corporate, departmental and individual objectives are used as a yardstick to measure performance. A comparison of targets and actual results will enable managers to judge the performance of subordinates and top level will similarly assess the performance of managers.
4. MBO provides for a regular review of performance. This review is normally held once in a year. It emphasizes initiative and active role by the manager who is responsible for achieving the objectives. The review is future oriented and provides a basis for planning and corrective actions.
5. The objectives in MBO provide guidelines for appropriate system and procedures. The degree of delegation of authority, fixation of responsibility, allocation of resources etc. can be decided on the basis of objectives of various individuals. These objectives also become a basis of reward and punishment in the organization.

The Management by Objectives Principles(MBO)
The basic steps that are common in all the processes of management by objective (MBO) are:
1. Central goal setting: defining and verifying organizational objectives is the first step in MBO process. Generally these objectives are set by central management of the organization but it does so after consulting other managers. Before setting of these objectives, an extensive assessment of the available resources is made by the central management. It also conducts market service and research along with making a forecast. Through this elaborate analysis, the desired long run and short run objectives of the organization are highlighted. The central management tries to make these objectives realistic and specific. After setting these goals it is the responsibility of the management that these are known to all members and are also under stood by them.
2. Development and individual goal setting : After organization objectives are established by the central management, the next step is to establish the department goals. The top management needs to discuss these objectives with the heads of the departments so that mutually agreed upon objectives are established. Long range and short range goals are set by each department in consultation with the top management. After the department goals are established, the employees work with their managers to establish their own individual goals which relate with the organization goals. These participative goals are very important because It has been seen that employees become highly motivated to achieve the objectives established by them. These objectives for individuals should be specific and short range. These should indicate the capability of the unit of the individual. Through this process all the members of the organization become involved in the process of goal setting.
3. Revision of job description : In the process of MBO resetting individual goals involves a revision of job description of different positions in the organization which in turn requires the revision of the entire structure of the organization. The organization manuals and charts may also have to be modified to portray the changes that have been introduced by the process of MBO. The job description has to define the objectives, authority and responsibility of different jobs. The connection of one job with all other jobs of the organization also needs to be established clearly.
4. Matching goals : The establishment of objectives can not be fruitful unless the resources and means required to achieve these objectives are provided. Therefore the subordinates should be provided required tools and materials which enables them to achieve the objectives efficiently and effectively. Resource requirements can be measured precisely if the goals are set precisely. This makes the process of resource allocation relatively easy. Resource allocation should be made after consulting the subordinates.
5. Freedom implementation: The task team of manager and his subordinates should be given freedom in deciding the way to utilize their resources and the way to achieve their objectives. There should be very little or no interference by the seniors as long as the team is working with in the framework of organization policies.
6. Establishing check points: The process of MBO requires regularly meetings between the managers and their subordinates to discuss the progress achieve in the accomplishment of the objective established for the subordinates. For this purpose the mangers need to establish the standards of performance or check points to evaluate the progress of their subordinates. These standards need to be specified as for as possible quantitatively and it should also be ensured that these are completely understood by the subordinates. This practices needs to be followed by all managers and these should lead to an analysis of key results has the targets are represented in terms of the results. The analysis of key results should be recorded in writing and it generally contains information regarding :

• (i) The overall objectives related with the job of subordinates.
• (ii) The key results which must be achieved by the subordinate to fulfill his objectives.
• (iii) The long term and short term priorities, a subordinate needs to adhere to.
• (iv.) The extent and scope of assistance expected by a subordinate from his superior and other departmental managers and also the assistance, the subordinates is required to extend to other departments of his organizations.
• (v.) Nature of information and the reports receive by the subordinate to carry out self evaluation.
• (vi.) The standards use to evaluate the performance of the subordinate.
  

7. Performance appraisal : An informal performance appraisal is generally conducted in routine by the manager, a periodic review of performance of the subordinates should also be conducted. Periodic reviews are required as the priorities and conditions change constantly and need to be monitored constantly. These reviews help the mangers as well as the subordinates to modify the objectives or the methods whenever require. This significantly increases the chances of achieving the goals and also ensures that no surprises are found at the time of final appraisal. Periodic performance appraisal needs to be based on measurable and fair standards so that these are completely understood by the subordinates and there are also aware of the degree of performance required at each step.
8. Counseling : Periodic performance review helps the subordinates in improving his future performance.

Management By Objectives steps (see Figure 1.)
Peter Drucker has developed five steps to put Management By Objectives into practice:
1. Determine or revise the organizational objectives: Strategic organizational objectives are the starting points of management by objectives.These objectives stem from the mission and vision of an organization. If an organization has not formulated these yet, it does not make sense to carry out the next steps.
2. Translating the organizational objectives to employees: In order to make organizational objectives organization-wide, it is important that these are translated to employee level. For efficiency reasons, Peter Drucker used the acronym SMART (Specific, Measurable, Acceptable, Realistic and Time-bound). The element Acceptable is crucial in management by objectives as this is about agreement on the objectives between the employees and the organization.The management by objectives principle does not allow management to determine the objectives by themselves. According to management by objectives, objectives should be clearly recognizable at all levels and everyone should know what their responsibilities are in this. Communication is also an important item for consideration when it comes to expectations, feedback and to giving rewards for objectives that have been achieved.
3. Stimulate the participation of employees in the determining of the objectives: The starting point is to have each employee participate in the determining of personal objectives that are in line with the objectives of the organization. This works best when the objectives of the organization are discussed and shared throughout all levels of the organization so that everyone will understand why certain things are expected of them. In this way, everyone can make their own translation of what their contribution can be to the objectives. This approach increases the involvement and commitment of the objectives. Instead of simply following expectations of managers and executives, everyone in an management by objectives approach will know what is expected of them. By broadening the decision making process and responsibility throughout the organization, people are motivated to solve the problems they are faced with in an intelligent manner and they are given the information they need so that they can be flexible in the changing circumstances. This participatory process ensures that personal objectives with respect to general team objectives, department objectives, business unit objectives and ultimately organizational objectives are made clear.
4. Monitoring of progress: Because the goals and objectives are SMART, they are measurable. If they cannot be measured, a system will have to be set up in which a monitoring function is activated when the objectives are deviated from. Detection must be timely so that large problems can be prevented. On the other hand, it is important that the agreed objectives do not cause abnormal behavior of employees for example. For instance, when a service call must be handled within seven minutes and as a result employees finish these calls after 6 minutes and 59 seconds to meet this requirement. There are always exceptions to a rule and these situations should always be supervised. In Management By Objectives, employees are not supported by their management through annual performance reviews. Management By Objectives is about growth and development. Each objective comprises mini objectives and it is about supporting these in small steps in the form of coaching by managers or executives. Create a clear path with sufficient evaluation moments so that growth and development can be monitored accurately.
5. Evaluate and reward achievements: Management By Objectives has been designed to improve performance at all levels within an organization. A comprehensive evaluation system is therefore essential. As goals and objectives have been SMART formulated, they make the evaluation of processes very easy. Employees are evaluated and rewarded for their achievements in relation to the set goals and objectives.This also includes accurate feedback. Management By Objectives is about about why, when and how objectives can be achieved.

Figure 1. source: Communication Thoery

Need for Management by Objectives (MBO)

• The Management by Objectives process helps the employees to understand their duties at the workplace.
• KRAs are designed for each employee as per their interest, specialization and educational qualification.
• The employees are clear as to what is expected out of them.
• Management by Objectives process leads to satisfied employees. It avoids job mismatch and unnecessary confusions later on.
• Employees in their own way contribute to the achievement of the goals and objectives of the organization. Every employee has his own role at the workplace. Each one feels indispensable for the organization and eventually develops a feeling of loyalty towards the organization. They tend to stick to the organization for a longer span of time and contribute effectively. They enjoy at the workplace and do not treat work as a burden.
• Management by Objectives ensures effective communication amongst the employees. It leads to a positive ambiance at the workplace.
• Management by Objectives leads to well defined hierarchies at the workplace. It ensures transparency at all levels. A supervisor of any organization would never directly interact with the Managing Director in case of queries. He would first meet his reporting boss who would then pass on the message to his senior and so on. Every one is clear about his position in the organization.
• The MBO Process leads to highly motivated and committed employees.
• The MBO Process sets a benchmark for every employee. The superiors set targets for each of the team members. Each employee is given a list of specific tasks.

Advantages of Management by Objectives (MBO)

• MBO forces the managers not simply to plan activities but plan for results. The managers define the objectives while formulating plans. When once goals are set up clearly, they act as incentives and standards for control purposes.
• MBO enables the managers to concentrate on really important and profit influencing tasks instead of on tasks which could have little impact on overall results.
• MBO makes clear organizational goals and structures. It identifies the key result areas and make individuals who are in-charge of them responsible for the attainment of goals.
• Employees commit themselves to perform the work assigned to them as agreed and expected. They know their objectives clearly and also know how to move towards its achievements. Thus they need not wait for any instructions, directions, guidance from their superiors.
• It helps to develop effective control. Control involves establishing own standards, evaluating performance and taking necessary remedial action if there are any deviations. The well defined objectives serve as the best standard for effective control.
• It helps the management to formulate better management training programs on the basis of performance reviews.
• Since the subordinates participate and are directly involved in setting goals, there is a greater commitment on their part for performance. People become willing and enthusiastic masters of their own fate.
• MBO helps in more effective planning. Actionable objectives are established with planning, and result-oriented planning makes real sense. It forces managers to think of planning by results, rather than merely planning activities. To achieve given results, the managers are also required to give full consideration to the question of the personnel and the resources needed.
• MBO aids in developing effective controls: The standards/yardsticks or reach-points are laid down for measurement of performance, through which actual performance can be measured and deviations corrected in time. Through these standards, performance measurement of different cadres of people can be possible.
• MBO provides more confidence to the management in managing its task, the reason being that the management is more sure of what it wants to do and where it wants to go. It can, therefore, communicate in a better way with different rungs of organizational hierarchy. Better communication is an important benefit of M.B.O.

Limitations of Management by Objectives (MBO)
Management by objectives has the following limitations:

• It presupposes fixing of individual goals and responsibilities. But all work in an organisation is a group effort where activities are so closely interrelated that no single individual can be blamed or rewarded, for any end result.
• It is difficult to make comparative ratings of individuals because each individual's goals are different from those of others in terms of complexity, etc.
• It is difficult to appraise and identify potential. MBO only deals with performance on the present job.
• The method is extraordinarily time-consuming.
• MBO presumes a certain level of trust throughout the hierarchy. But the organisational life teaches people to be cautious. This inhibits honest dialogue and appropriate goal setting.
• MBO is less applicable to routine worker-level jobs, such as an assembly line. In these kinds of situations more traditional performance appraisal tends to'be used. The technique is especially suitable for managerial, professional, and sales people and those who work independently.

Management by Objectives (MBO): Application in Practice
There are endless ways to exercise management by objectives. One must simply find specific goals to aim for in an organization or business. Many noteworthy companies have used MBO. The management at the computer company Hewlett-Packard (HP), has said that it considers the policy a huge component of its success. Many other corporations praise the effectiveness of MBO, including Xerox, DuPont, Intel, and countless others. Companies that use MBO often report greater sales rates and productiveness within the organization. Objectives can be set in all domains of activities, such as production, marketing, services, sales, R&D, human resources, finance, and information systems. Some objectives are collective, and some can be goals for each individual worker. Both make the task at hand seem attainable and enable the workers to visualize what needs to be done and how. In the MBO paradigm, managers determine the mission and the strategic goals of the enterprise. The goals set by top-level managers are based on an analysis of what can and should be accomplished by the organization within a specific period of time. The functions of these managers can be centralized by appointing a project manager who can monitor and control activities of the various departments. If this cannot be done or is not desirable, each manager's contributions to the organizational goal should be clearly spelled out. 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. The mnemonic S.M.A.R.T. is associated with the process of setting objectives in this paradigm. "SMART" objectives are:

• Specific
• Measurable
• Agreed/Achievable/Attainable
• Realistic/Responsible/Receivable
• Time-bound

The aphorism "what gets measured gets done", is aligned with the MBO philosophy.

Management by Objectives (MBO): Potential for Misuse
MBO easily can be misused and often is. What is supposed to be a system that allows for dialogue and growth between boss and subordinate with a view to achieving results often degenerates into a system in which the boss puts constant pressure on the subordinate to produce results and forgets about using MBO for commitment, desire to contribute, and management development. Sometimes even well intentioned managers misuse MBO because they do not have the interpersonal skills or knowledge of human needs to keep their appraisal sessions from becoming critical, chewing-out periods. Finally, many managers have a tendency to see MBO as a total system that, once installed, can handle all management problems. This has led to forcing issues on the MBO system that it is not equipped to handle and that frustrate whatever good effects it might have on the issues with which it is designed to deal.

See Also

Management by Exception
Crisis Management
Management by Wandering Around (MBWA)

Further Reading

• Management by Whose Objectives? HBR
• Use S.M.A.R.T. goals to launch management by objectives plan TechRepublic
• Expectation Issues in Management by Objectives Programs Marlow, Edward; Schilhavy, Richard
• Difference Between MBO and MBE Keth