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The concept of MBO is closely connected with the concept of planning. The process of planning implies the existence of objectives and is used as a tool/technique for achieving the objectives. Modern managements are rightly described as 'Management by Objectives' (MBO). This MBO concept was popularized by Peter Drucker. It suggests that objectives should not be imposed on subordinates but should be decided collectively by a concerned with the management. This gives popular support to them and the achievement of such objectives becomes easy and quick Management by Objectives (MBO) is the most widely accepted philosophy of management today. It is a demanding and rewarding style of management. It concentrates attention on the accomplishment of objectives through participation of all concerned persons, i.e., through team spirit. MBO is based on the assumption that people perform better when they know what is expected of them and can relate their personal goals to organizational objectives. Superior subordinate

participation, joint goal setting and support and encouragement from superior to subordinates are the basic features of MBO. It is a result-oriented philosophy and offers many advantages such as employee motivation, high morale, effective and purposeful leadership and clear objectives before all concerned per-sons. MBO is a participative and democratic style of management. Here, ample a scope is given to subordinates and is given higher status and positive/participative role. In short, MBO is both a philosophy and approach to management. MBO concept is different from MBC (Management by Control) and is also superior in many respects. According to the classical theory of management, top management is concerned with objectives setting, directing and coordinating the efforts of middle

level managers and lower level staff. However, achievement of organizational objectives is possible not by giving orders and instructions but by securing cooperation and participation of all persons. For this, they should be associated with the management process. This is possible in the case of MBO and hence MBO is different from MBC and also superior to MBC. MBO is an approach (to planning) that helps to overcome these barriers. MBO involves the establishment of goals by managers and their subordinates acting together, specifying responsibilities and assigning authority for achieving the goals and finally constant monitoring of performance. The genesis of MBO is attributed to Peter Drucker who has explained it in his book 'The Practice of Management'.


According to George Odiome, MBO is "a process whereby superior and subordinate managers of an Organisation jointly define its common goals, define each individual's major areas of responsibility in terms Of results expected of him and use these measures as guides for operating the unit and assessing the contribution of each of its members." According to John Humble, MBO is "a dynamic system which seeks to integrate the company's needs to clarify and achieve its profits and growth goals with the manager's need to contribute and develop himself. It is a demanding and rewarding style of managing a business."


For many people working in modern business environments, it's hard to remember a time when non-managerial employees weren't involved with, and interested in, corporate strategy and goals. We are regularly reminded about the corporate mission statement, we have strategy meetings where the "big picture" is revealed to us, and we are invited to participate in some decisions. And we're aware of how our day-to-day activities contribute to these corporate goals. This type of managing hasn't been around forever: It's an approach called Management by Objectives; a system that seeks to align employees' goals with the goals of the organization. This ensures that everyone is clear about what they should be doing, and how that is beneficial to the whole organization. It's quite easy to see why this type of managing makes sense when the parts work in unison the whole works smoothly too. And by focusing on what you're trying to achieve, you can quickly discriminate between tasks that must be completed, and those that are just a waste of valuable time.

BACKGROUND Management by Objectives was introduced by Peter Drucker in the 1950s and written about in his 1954 book, The Practice of Management. It gained a great deal of attention and was widely adopted until the 1990s when it seemed to fade into obscurity. Partly, the idea may have become a victim of its own success: It became so much a part of the way business is conducted that it no longer may have seemed remarkable, or even worthy of comment. And partly it evolved into the idea of the Balanced Scorecard, which provided a more sophisticated framework for doing essentially the same thing.


the five-step process for MBO shown in figure 1, below. Each stage has particular challenges that need to be addressed for the whole system to work effectively.


1. Set or Review Organizational Objectives MBO starts with clearly defined strategic organizational objectives (see our article on Mission and Vision Statements for more on this.) If the organization isn't clear where it's going, no one working there will be either. 2. Cascading Objectives Down to Employees To support the mission, the organization needs to set clear goals and objectives, which then need to cascade down from one organizational level to the next until they reach the everyone. To make MBO goal and objective setting more effective, Drucker used the SMART acronym to set goals that were attainable and to which people felt accountable. He said that goals and objectives must be:

Specific Measurable Agreed (relating to the participative management principle) Realistic Time related Notice the "A" in SMART is "agreed." This is sometimes referred to as "achievable" but, with MBO, agreement about the goals is a critical element: It's not enough for the goals and objectives to be set at the top and then handed down. They must flow, or trickle, down through various stages of agreement. The only goal that is going to be met is one that is agreed on. How much easier is it to get

buy in when the person responsible for achieving the goal had a hand in developing it?

For each objective, you need to establish clear targets and performance standards. It's by using these that you can monitor progress throughout the organization. These are also important for communicating results, and for evaluating the suitability of the goals that have been set.

3. Encourage Participation in Goal Setting Everyone needs to understand how their personal goals fit with the objectives of the organization. This is best done when goals and objectives at each level are shared and discussed, so that everyone understands "why" things are being done, and then sets their own goals to align with these. This increases people's ownership of their objectives. Rather than blindly following orders, managers, supervisors, and employees in an MBO system know what needs to be done and thus don't need to be ordered around. By pushing decision-making and responsibility down through the organization, you motivate people to solve the problems they face intelligently and give them the information they need to adapt flexibly to changing circumstances. Through a participative process, every person in the organization will set his or her own goals, which support the overall objectives of the team, which support the objectives of the department, which support the objectives of the business unit, and which support the objectives of the organization.

In an MBO system, employees are more self-directed than boss-directed. If you expect this type of independent performance from employees, you have to give them the tools they need.

Once you have established what it is that someone is accountable for, you must provide the information and resources needed to achieve results. You must also create a mechanism for monitoring progress towards the goals agreed.

4. Monitor Progress Because the goals and objectives are SMART, they are measurable. They don't measure themselves though, so you have to create a monitoring system that signals when things are off track. This monitoring system has to be timely enough so that issues can be dealt with before they threaten goal achievement. With the cascade effect, no goal is set in isolation, so not meeting targets in one area will affect targets everywhere. On the other hand, it is essential that you ensure that the goals are not driving adverse behavior because they have not been designed correctly. For instance, a call centre goal of finishing all calls within seven minutes might be useful in encouraging the staff to handle each call briskly, and not spend unnecessary time chatting. However, it might be that customers' calls were becoming more complex, perhaps because of a faulty new product, and call centre operators were terminating the call after 6 minutes 59 seconds in order to meet their target, leaving customers to call back, frustrated. In this situation, the monitoring process should pick up the shift in the goal environment and change the goal appropriately. Set up a specific plan for monitoring goal performance (once a year, combined with a performance review is not sufficient!) Badly-implemented MBO tends to stress the goal setting without the goal monitoring. Here is where you take control of performance and demand accountability. Think about all the goals you have set and didn't achieve. Having good intentions isn't enough, you need a clear path marked by accountability checkpoints. Each goal should have mini-goals and a method for keeping on top of each one.

5. Evaluate and Reward Performance MBO is designed to improve performance at all levels of the organization. To ensure this happens, you need to put a comprehensive evaluation system in place. As goals have been defined in a specific, measurable and time-based way, the evaluation aspect of MBO is relatively straightforward. Employees are evaluated on their performance with respect to goal achievement (allowing appropriately for changes in the environment.) All that is left to do is to tie goal achievement to reward, and perhaps compensation, and provide the appropriate feedback. Employees should be given feedback on their own goals as well as the organization's goals. Make sure you remember the participative principle: When you present organization-wide results you have another opportunity to link individual groups' performances to corporate performance. Ultimately this is what MBO is all about and why, when done right, it can spur organization-wide performance and productivity.

When you reward goal achievers you send a clear message to everyone that goal attainment is valued and that the MBO process is not just an exercise but an essential aspect of performance appraisal. The importance of fair and accurate assessment of performance highlights why setting measurable goals and clear performance indicators are essential to the MBO system.

MBO focuses on the determination of unit and individual goals in line with the organizational goals. These goals define responsibilities of different parts of the organisation and help to integrate the organisation with its parts and with its environment. MBO seeks to balance and blend the long term objectives (profit, growth and survival of the firm with the personal objectives of key executives. It requires that all corporate, departmental and personal goals will be clearly defined and integrated. 2. Participation: The MBO process is characterized by a high degree of participation of the concerned people in goal setting and performance appraisal. Such participation provides the opportunity to influence decisions and clarify job relationships with superiors, subordinates and peers. It also helps to improve the motivation and morale of the people and results in role clarity. Participative decision-making is a prerequisite of MBO. MBO requires all key personnel to contribute maximum to the overall objectives. 3. Key Result Areas: The emphasis in MBO is on performance improvement in the areas which are of critical importance to the organisation as a whole. By identification of key result areas (KRAs), MBO ensures that due attention is given to the priority areas which have significant impact on performance and growth of the organisation.

Goals of all key personnel are properly harmonized and they are required to make maximum contribution to the overall objectives. Key and sub Key areas are identified for each function as shown in the following example: Finance (Key Area) Sub-Key Areas: (a) Cash flow (b) Dividend Policy (c) Debt-equity Ratio (d) Sources of Funds The role of each department towards the Key and sub-Key areas 15 also specified. 4. Systems Approach: MBO is a systems approach of managing an organisation. It attempts to integrate the individual with the organisation and the organisation with its environment. It seeks to ensure the accomplishment of both personal and enterprise goals by creating goal congruence. 5. Optimization of Resources: The ultimate aim of MBO is to secure the optimum utilization of physical and human resources of the organisation. MBO sets an evaluative mechanism through which the contribution of each individual can be measured.

6. Simplicity and Dynamism: MBO is a non-specialist technique and it can be used by all types of managers. At the same time it is capable of being adopted by both business and social welfare organizations. MBO applies to every manager, whatever his function and level, and to any organisation, large or small. 7. Operational: MBO is an operational process which helps to translate concepts into practice. MBO is made operational through periodic reviews of performance which are future-oriented and which involve self-control. 8. Multiple Accountability: Under MBO, accountability for results is not centralized at particular points. Rather every member of the organisation is accountable for accomplishing the goals set for him. Multiple centers of accountability discourage 'buck-passing' and 'credit-grabbing'. MBO establishes a system of decentralized planning with centralized control. 9. Comprehensive: MBO is a 'total approach'. It attaches equal importance to the economic and human dimensions of an organisation. It combines attention to detailed micro-level, short range analysis within the firm with emphasis on macro-level, long range integration with the environment.

Superior-subordinate participation: MBO requires the superior and the subordinate to recognize that the development of objectives is a joint project/activity. They must be jointly agree and write out their duties and areas of responsibility in their respective jobs. Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals. However, it is examined both by the superior and the subordinate that goals are realistic and attainable. In brief, the goals are to be decided jointly through the participation of all. Joint decision on methodology: MBO focuses special attention on what must be accomplished (goals) rather than how it is to be accomplished (methods). The superior and the subordinate mutually devise methodology to be followed in the attainment of objectives. They also mutually set standards and establish norms for evaluating performance. Makes way to attain maximum result: MBO is a systematic and rational technique that allows management to attain maximum results from available resources by focussing on attainable goals. It permits lot of freedom to subordinate to make creative decisions on his own. This motivates subordinates and ensures good performance from them. Support from superior: When the subordinate makes efforts to achieve his goals, superior's helping hand is always available. The superior acts as a coach and provides his valuable advice and guidance to the subordinate. This is how MBO facilitates effective communication between superior and subordinates for achieving the objectives/targets set.

Objectives are described as the results to be achieved by an organization. Managerial objectives may be defined as the goals which are predetermined, which have a defined scope and the methodologies that suggest direction to the efforts of managerial personnel.

In order to achieve the managerial objective the management should clearly define and effectively communicate these objectives to all the concerned people. The objectives should be formulated in such a way that they are attainable with the available resources as the objectives reflect or determine the ultimate goals of the organization.

Importance of managerial objectives is as follows: They provide a basis for the performance. They establish identity of the enterprise. They provide direction to organized effort. They help in uplifting the morale and motivate employees. They provide basis for decision making. They provide a basis for control.

The objectives of management can be classified as economic objectives, human objectives, social objectives and organic objectives.

Economic Objectives Profit earning Every business organization is established with a motto to sell or make goods and services to attain a substantial profit. So it is inevitable for an organization to face the uncertainties in a business cycle, change in demand pattern, fluctuation in money markets, changing outlook of customers. All these have to be managed so that the organization earns profit and in turn the organization should share its profits with the society. Production of goods When an organization is established to earn profits, for doing so it has to produce goods by optimal utilization of resources like men, money, material and machinery which could lead to the increase in efficiency and getting higher productivity with minimum effort and the goods so produced are sold in the market. The customer satisfaction is the factor which decides the economic growth of the organization. Creating markets All the goods produced have to be sold, for doing so the objective of an organization is to open up new markets, penetrate into existing markets, increasing the market share. The businessmen look for new consumers for increasing their sales and also to retain customers by supplying better quality of goods at reasonable prices.

Technological improvement - As the markets are highly competitive and the products are pushed into market to meet the needs of customer, to retain the place in market it is evident that the businessmen should always strive to upgrade the technologies used for production and change to the new market environment and should be in a position to produce and offer good quality goods with lower prices.

Human Objectives

Employees welfare Though the basic objective of earning profit could be possible only when the employees are committed to work as they help in increasing the profit of the firm. So, that management has a responsibility towards the employees to look after then by providing all possible benefits to employees and help in increasing the quality of living standards of the employees

Satisfaction of customers The consumer should be provided with good quality products at reasonable prices. The aspirations and perceptions of the customers have to be given prime importance as the business is meant for consumers and their satisfaction should be the main objective of the business. So responsibility to consumers means that we have to set up and maintain the quality and service in addition to lower price tag.

Shareholders satisfaction As the organization grows in size it is difficult to individually finance the running of the organization. So these organizations have shareholders who contribute and invest in the companies. For this, the management should give reasonable return on the money invested by the shareholders and there should be a provision to make the shareholders aware of developments and profits earned, so that we can have a satisfied shareholder.

Social Objective Availability of goods The business organizations should ensure the supply of products to meet the requirements of the society. The firm should make a study to know the demand and accordingly the production and supply of goods should be done. So business organization should ensure that goods are available in market in order to meet the demand. Quality of goods and services One of the basic responsibilities of the businessmen is to supply quality goods and services to customers at reasonable prices. Cooperation with government The government has fixed priorities for the execution of policies for the growth and development of the nation. The businessmen should be reliable to the government agencies while paying tax dues and other liabilities, by doing so businessmen cooperate with the government in helping to achieve the objective of establishing socialistic pattern of society. Creating job opportunities Every business can help the society by creating new job opportunities. The business expansion will help the firm in gaining more profits and also employment to the unemployed. Natural resources Efforts should be made by the businessmen to put the insufficient natural resources to the best possible use. Wastage of any such resource is a loss to the firm and to the nation.

Organic objectives

Survival In case of cut throat competition, profits become very low. Organizations tend to operate very carefully and survival becomes in such cases, their survival becomes crucial objective.

Growth As the business objective, it tends to merge with other firms or take over them to gain profits on large scale and to attract more customers.

Recognition The business organizations attain recognition in society by providing better customer service, increasing market share and by caring for environment and society.


Goal setting: The first phase in the MBO process is to define the organizational objectives. These are determined by the top management and usually in consultation with other managers. Once these goals are established, they should be made known to all the members. In setting objectives, it is necessary to identify "Key-Result Areas' (KRA). Manager-Subordinate involvement: After the organizational goals are defined, the subordinates work with the managers to determine their individual goals. In this way, everyone gets involved in the goal setting. Matching goals and resources: Management must ensure that the subordinates are provided with necessary tools and materials to achieve these goals. Allocation of resources should also be done in consultation with the subordinates. Implementation of plan: After objectives are established and resources are allocated, the subordinates can implement the plan. If any guidance or clarification is required, they can contact their superiors. Review and appraisal of performance: This step involves periodic review of progress between manager and the subordinates. Such reviews would determine if the progress is satisfactory or the subordinate is facing some problems. Performance appraisal at these reviews should be conducted, based on fair and measurable standards.

1. Develops result-oriented philosophy: MBO is a result-oriented philosophy. It does not favor management by crisis. Managers are expected to develop specific individual and group goals, develop appropriate action plans, properly allocate resources and establish control standards. It provides opportunities and motivation to staff to develop and make positive contribution in achieving the goals of an Organisation. 2. Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces goals that identify desired/expected results. Goals are made verifiable and measurable which encourage high level of performance. They highlight problem areas and are limited in number. The meeting is of minds between the superior and the subordinates. Participation encourages commitment. This facilitates rapid progress of an Organisation. In brief, formulation of realistic objectives is me benefit of M[BO. 3. Facilitates objective appraisal: NIBO provides a basis for evaluating a person's performance since goals are jointly set by superior and subordinates. The individual is given adequate freedom to appraise his own activities. Individuals are trained to exercise discipline and self control. Management by self-control replaces management by domination in the MBO process. Appraisal becomes more objective and impartial. 4. Raises employee morale: Participative decision-making and two-way communication encourage the subordinate to communicate freely and honestly. Participation, clearer goals and improved communication will go a long way in improving morale of employees. 5. Facilitates effective planning: MBO programmes sharpen the planning process in an Organisation. It compels managers to think of planning by

results. Developing action plans, providing resources for goal attainment and discussing and removing obstacles demand careful planning. In brief, MBO provides better management and better results. 6. Acts as motivational force: MBO gives an individual or group, opportunity to use imagination and creativity to accomplish the mission. Managers devote time for planning results. Both appraiser and appraise are committed to the same objective. Since MBO aims at providing clear targets and their order of priority, employees are motivated. 7. Facilitates effective control: Continuous monitoring is an essential feature of MBO. This is useful for achieving better results. Actual performance can be measured against the standards laid down for measurement of performance and deviations are corrected in time. A clear set of verifiable goals provides an outstanding guarantee for exercising better control. 8. Facilitates personal leadership: MBO helps individual manager to develop personal leadership and skills useful for efficient management of activities of a business unit. Such a manager enjoys better chances to climb promotional ladder than a non-MBO type.


Time-consuming: MBO is time-consuming process. Objectives, at all levels of the Organisation, are set carefully after considering pros and cons which consumes lot of time. The superiors are required to hold frequent meetings in order to acquaint subordinates with the new system. The formal, periodic progress and final review sessions also consume time. Reward-punishment approach: MBO is pressure-oriented programme. It is based on reward-punishment psychology. It tries to indiscriminately force improvement on all employees. At times, it may penalize the people whose performance remains below the goal. This puts mental pressure on staff. Reward is provided only for superior performance. Increases paper-work: MBO programmes introduce ocean of paper-work such as training manuals, newsletters, instruction booklets, questionnaires, performance data and report into the Organisation. Managers need information feedback, in order to know what is exactly going on in the Organisation. The employees are expected to fill in a number of forms thus increasing paper-work. In the words of Howell, "MBO effectiveness is inversely related to the number of MBO forms. Creates organizational problems: MBO is far from a panacea for all organizational problems. Often MBO creates more problems than it can solve. An incident of tug-of-war is not uncommon. The subordinates try to set the lowest possible targets and superior the highest. When objectives cannot be restricted in number, it leads to obscure priorities and creates a sense of fear among subordinates. Added to this, the programme is used as a 'whip' to control employee performance.

Develops conflicting objectives: Sometimes, an individual's goal may come in conflict with those of another e.g., marketing manager's goal for high sales turnover may find no support from the production manager's goal for production with least cost. Under such circumstances, individuals follow paths that are best in their own interest but which are detrimental to the company. Problem of co-ordination: Considerable difficulties may be encountered while coordinating objectives of the Organisation with those of the individual and the department. Managers may face problems of measuring objectives when the objectives are not clear and realistic. Lacks durability: The first few go-around of MBO are motivating. Later it tends to become old hat. The marginal benefits often decrease with each cycle. Moreover, the programme is deceptively simple. New opportunities are lost because individuals adhere too rigidly to established goals. Problems related to goal-setting: MBO can function successfully provided measurable objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence over the people who use it (d) greater emphasis on quantifiable and easily measurable results instead of important results and (e) over-emphasis on short-term goals at the cost of long-term goals. Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the Organisation. This may be due to the failure of the top management to communicate the philosophy of MBO to entire staff and all departments. Similarly, managers may not delegate adequately to their

subordinates or managers may not motivate their subordinates properly. This creates new difficulties in the execution of MBO programme.


Support From All: In order that MBO succeeds, it should get support and cooperation from the management. MBO must be tailored to the executive's style of managing. No MBO programme can succeed unless it is fully accepted by the managers. The subordinates should also clearly understand that MBO is the policy of the Organisation and they have to offer cooperation to make it successful. It should be a programme of all and not a programme imposed on them. Acceptance Of MBO Programme By Managers: In order to make MBO programme successful, it is fundamentally important that the managers themselves must mentally accept it as a good or promising programme. Such acceptances will bring about deep involvement of managers. If manages are forced to accept NIBO programme, their involvement will remain superfluous at every stage. The employees will be at the receiving-end. They would mostly accept the lines of action initiated by the managers. Training Of Managers: Before the introduction of MBO programme, the managers should be given adequate training in MBO philosophy. They must be in a position to integrate the technique with the basic philosophy of the company. It is but important to arrange practice sessions where performance objectives are evaluated and deviations are checked. The managers and subordinates are taught to set realistic goals, because they are going to be held responsible for the results. Organizational Commitment: MBO should not be used as a decorative piece. It should be based on active support, involvement and commitment of managers. MBO presents a challenging task to managers. They must shift their capabilities from planning for work to planning for accomplishment of specific goals. Koontz

rightly observes, "An effective programme of managing by objective must be woven into an entire pattern and style of managing. It cannot work as a separate technique standing alone." Allocation Of Adequate Time And Resources: A well-conceived MBO programme requires three to five years of operation before it provides fruitful results. Managers and subordinates should be so oriented that they do not look forward to MBO for instant solutions. Proper time and resources should be allocated and persons are properly trained in the philosophy of MBO. Provision Of Uninterrupted Information Feedback: Superiors and subordinates should have regular information available to them as to how well subordinate's goal performance is progressing. Over and above, regular performance appraisal sessions, counseling and encouragement to subordinates should be given. Superiors who compliment and encourage subordinates with pay rise and promotions provide enough motivation for peak performance.

1. Awasthappa, k Human Resource and Personnel Management published by Tata McGraw-Hill publishing company limited, New Dehli. 2. Armstrong, Michael(1988),A Handbook of Personnel Management Practice, Published by Kogan,London. 3. Rensis likert, The Human Organisation:Its Management andValueMcGrawHill Book Company, New York. 4. 5. 6. 7. Yoder Dale, Personnel Management and Industrial Relations1967. KS Khotari,Research Methodology. R.K.Sur and Sanjiv Verma,Organizational Behaviour. Shashi K Gupta and Rosy Joshi,Organizational Behaviour.

WEBSITES: 1. 2. 3. 4. 5. http://www.managament 6.

1. Introduction 2. Definitions Of Management By Objectives 3. Management By Objectives (MBO) 4. Five Steps Of Management By Objectives 5. Characteristics Of MBO 6. Features Of MBO 7. Management Objectives 8. Steps In Management By Objectives Planning 9. Advantages 10.Limitations Of Management By Objectives MBO 11.How To Make MBO Effective? 12.Conclusion 13.Bibliography