Management By Objectives

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Management by Objectives (MBO) was first suggested by Peter Drucker in 1954 and popularised through the efforts of George Odiorne, John Humble and others. MBO is a comprehensive management system based on measurable and participatively set objectives.

Odiorne defined MBO as:

“A process whereby the superior and the subordinate managers of an enterprise jointly identify its common goals, define each individual’s major areas of responsibility in terms of the results expected of him, and use these measures as guides for operating the unit and assessing the contributing of each of its members.”

MBO emphasises integrating external control (by the manager) and self−control (by the employee). Theoretically, MBO applies to any manager and employee, no matter what level or function, and to any organisation, regardless of size. It would work just as well in a three−person office as in a large corporation. Drucker points out that while no manager can direct all activities of a large organisation, a manager who can control results with MBO can manage even the largest organisation.

A fundamental principle of MBO is its emphasis on the participation and involvement of subordinates — a give−and−take negotiation of objectives between manager and employee. This is where the biggest — and most frequent — gaps between MBO theory and practice appear, with the process being perverted by either domineering (“Here are the objectives I have written for you”) or passive managers (“I’ll go along with whatever objectives you have set for yourself”).

The Manager’s Role

The manager’s role is:

The MBO process

Step 1: Set Objectives

A hierarchy of challenging, fair and internally consistent objectives is essential for MBO to work correctly. All objectives should be in writing and filed for reference and use during the periodic reviews (Step 3) and the performance appraisal (Step 4). Objective setting in MBO starts at the top of the managerial pyramid and filters down, one layer at a time.

Step 2: Develop Action Plans

The next step is to identify the “Hows” which complement the “Whats” of the objectives. As well as the steps of a plan that will accomplish the objective, managers must also ensure that their people have the necessary skills to carry out the plan. Higher managers are responsible for ensuring that their organisation’s plans do not overlap or work at cross−purposes.

Step 3: Carry out Periodic Reviews

As the plans are being implemented, attention turns to monitoring performance. The MBO process recommends that reviews be carried out three, six and nine months into the annual cycle. These periodic reviews allow those responsible for the objectives to check progress, give feedback and assess whether the objectives are still valid in the light of changing circumstances.

Step 4: Carry out Performance Appraisal

At the end of the annual MBO cycle, performance is appraised against the original objectives. The appraisal should concentrate on results — not excuses or personalities — and then look towards the future to develop the individual. The results of this session are often linked to pay increases and promotions. Giving constructive feedback is an essential skill in the MBO process. The cycle repeats itself annually.

Implementing MBO

A common practice in introducing MBO is to start at the top and to include the next level down in each subsequent year. Implementing MBO in the whole organisation at one go often causes confusion, frustration and failure. Even a medium-sized organisation can take five or more years to evolve a full−blown MBO system that integrates planning, control, appraisal and reward.

Strengths and Limitations of MBO

Although MBO has many strengths — and has been influential in helping to bridge the gap between an individual’s needs and the goals of an organisation — it does have several drawbacks. MBO’s strengths and limitations are summarised in Table 1.


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