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MBO is one of the rational school of

management's successful products.

Management by objectives (MBO) is a systematic and organized


approach that allows management to focus on achievable goals and to
attain the best possible results from available resource.

It aims to increase organizational performance by aligning goals and


subordinate objectives throughout the organization. Ideally,
employees get strong input to identify their objectives, time lines
for completion, etc. MBO includes ongoing tracking and feedback in
the process to reach objectives.

Management by Objectives (MBO) was first outlined by Peter


Drucker in 1954 in his book 'The Practice of Management'. In the
90s, Peter Drucker himself decreased the significance of this
organization management method, when he said: "It's just another
tool. It is not the great cure for management inefficiency...
Management by Objectives works if you know the objectives, 90% of
the time you don't."
Core Concepts
According to Drucker managers should "avoid the activity trap",
getting so involved in their day to day activities that they forget
their main purpose or objective. Instead of just a few top
managers, all managers should:
• participate in the strategic planning process, in order to
improve the implement ability of the plan, and
• Implement a range of performance systems, designed to
help the organization stay on the right track.
Managerial Focus
MBO managers focus on the result, not the activity. They delegate
tasks by "negotiating a contract of goals" with their subordinates
without dictating a detailed roadmap for implementation.
Management by Objectives (MBO) is about setting yourself
objectives and then breaking these down into more specific goals or
key results.
Main Principle
The principle behind Management by Objectives (MBO) is to make
sure that everybody within the organization has a clear
understanding of the aims, or objectives, of that organization, as
well as awareness of their own roles and responsibilities in achieving
those aims. The complete MBO system is to get managers and
empowered employees acting to implement and achieve their plans,
which automatically achieve those of the organization

Drucker's typology of Organisational Goals clarified tensions


created by the varying interpretations of goal statements from
different stakeholders. In addition, organisations have to come to
terms with contradictory sub-goals and make trade-offs between
them. His typology distinguished between the following eight
tangible and intangible objectives:

1. Market standing

The organisation's position in the market (quality and market share):


e.g. to become the quality leader in market x.

2. Innovation

The value of new product development: e.g. to develop two new


products over the next 12 months.

3. Productivity

The level of output: e.g. to increase production of product x by 25%.


4. Physical and financial resources

The nature and extent of resources in product development and


production: to reduce the cost of raw materials by 15%.

5. Profitability

Profit and return on investment: to increase profit by 7%

6. Manager performance and development

Managerial output, growth, activities, and style; to send all managers


to at least one quality management training program

7. Worker performance and attitudes

Individual output, turnover, absenteeism, satisfaction and moral: to


reduce turnover to less than 6% per year

8. Public responsibility

The organisation's use of natural resources and contribution to the


public good: to reduce the use of energy by 2%

'Management by Objectives' takes these high level corporate


objectives and translates them into a cascade of key tasks, key
results, performance standards and areas of activity. Drucker
emphasised the importance of verifying the quality of objectives:
work improvement plans matched key tasks with action plans and
target dates; control data required to assess progress and
performance; regular performance reviews scheduled to discuss
current situation and define appropriate next steps. Ducker's
planning & control cycle concluded with career development reviews
to assess employees' current performance, outline career paths and
determine training and development needs.
Features and Advantages

Unique features and advantage of the MBO process

The principle behind Management by Objectives (MBO) is to create


empowered employees who have clarity of the roles and
responsibilities expected from them, understand their objectives to
be achieved and thus help in the achievement of organizational as
well as personal goals.

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

Well to be supposed if yet this management by objectives has


certain advantages as well as disadvantages, it is a virtual technique
for effective management and it takes around 5 years to get mbo
yielding results.

Domains and levels

Objectives can be set in all domains of activities (production,


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.

4. It did not address the importance of successfully responding to


obstacles and constraints as essential to reaching a goal. The model
didn’t adequately cope with the obstacles of:

• Defects in resources, planning and methodology,


• The increasing burden of managing the information
organization challenge,
• The impact of a rapidly changing environment, which could alter
the landscape enough to make yesterday’s goals and action
plans irrelevant to the present.

When this approach is not properly set, agreed and managed by


organizations, in self-centered thinking employees, it may trigger an
unethical behaviour of distorting the system of results and financial
figures to falsely achieve targets that were set in a short-term,
narrow, bottom-line fashion.

Where to Use MBO

The MBO style is appropriate for knowledge-based enterprises when


your staffs are competent. It is appropriate in situations where you
wish to build employees' management and self-leadership skills and
tap their creativity, tacit knowledge and initiative

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.

Management by Objectives (MBO) is also used by chief executives


of multinational corporations (MNCs) for their country managers
abroad.

Case in Point MBO in Action at Intel


A Manager's Guide at Intel provides the following directions.
1. Start with a few well-chosen overriding objectives.
2. Set your subordinates objectives that fit in with your
overriding objectives.
Allow your subordinates to set their own key results to enable them
to meet their objectives.