MBO

Dr Nandita Mishra

• What is MBO?

• 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 resources.

• 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."

• 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.

• 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 implementability 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.

• Where to Use MBO• The MBO style is appropriate for

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

• Inspiring Culture

• 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.• Start with a few well-chosen overriding

objectives. • 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.

The Jazz of Innovation: 11 Practice Tips• Setting Objectives• For Management by Objectives (MBO) to be effective, individual

managers must understand the specific objectives of their job and how those objectives fit in with the overall company objectives set by the board of directors.

• The managers of the various units or sub-units, or sections of an organization should know not only the objectives of their unit but should also actively participate in setting these objectives and make responsibility for them.

• The review mechanism enables leaders to measure the performance of their managers, especially in the key result areas: marketing; innovation; human organization; financial resources; physical resources; productivity; social responsibility; and profit requirements

• Balance between Management and Employee Empowerment• The balance between management and employee empowerment has to be

struck, not by thinkers, but by practicing managers. Turning their aims into successful actions, forces managers to master five basic operations:

• setting objectives, • organizing the group, • motivating and communicating,• measuring performance, and • developing people, including yourself.• These Management by Objectives (MBO) operations are all compatible with

empowerment, if you follow the main principle of decentralization: telling people what is to be done, but letting them achieve it their own way. To make the principle work well, people need to be able to develop personally. Further, different people have different hierarchy of needs and, thus, need to be managed differently if they are to perform well and achieve their potential

• Empowerment recognizes "the demise" of the command-and-control system, but remains a term of power and rank. A manager should view members of his or her team much as a conductor regards the players in the orchestra, as individuals whose particular skills contribute to the success of the enterprise. While people are still subordinates, the superior is increasingly dependent on the subordinates for getting results in their area of responsibility, where they have the requisite knowledge. In turn, these subordinates depend on their superior for direction and "above all, to define what the 'score' if for the entire organization, that is, what are standards and values, performance and results."

• Individual Responsibility• Management by Objectives (MBO) creates a link between

top manager's strategic thinking and the strategy's implementation lower down. Responsibility for objectives is passed from the organization to its individual members. It is especially important for knowledge-based organizations where all members have to be able to control their own work by feeding back from their results to their objectives.

• Management by objectives is achieved through self-control, the tool of effectiveness. Today the worker is a self-manager, whose decisions are of decisive importance for results.

• In such an organization, management has to ask each employee three questions:

• What should we hold you accountable for?• What information do you need?• What information do you owe the rest of us?

• Managing for Results• The only place where meaningful management results

can be won is the outside world. • Managing for results is expansion of Management by

Objectives (MBO) into the marketplace. It is the theory and practice of how to produce results on the outside, in the market and economy.

• To achieve results, you should develop a solid, sound, customer-focused, and entrepreneurial strategy, aimed at market leadership, based on innovation, and tightly focused on decisive opportunities..

• Leadership-Management Synergy• To maximize your long-term success you should

strive to be both a manager and a leader and to synergize their functions. Merely possessing management skills is no longer sufficient for success as an executive in today's business world. You need to understand the differences between managing and leading and know how to integrate the two roles to achieve organizational success .

• The basic principle behind Management by Objectives (MBO) is for employees to have a clear understanding of the roles and responsibilities expected of them. They can then understand how their activities relate to the achievement of the organization. MBO also places importance on fulfilling the personal goals of each employee.

Some of the important features and advantages of MBO are:

• Motivation – Involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment.

• Better communication and Coordination – Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the organization and also to solve many problems.

• Clarity of goals• Subordinates have a higher commitment to objectives

they set themselves than those imposed on them by another person.

• 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.

• 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, self-centered employees might be prone to distort results, falsely representing achievement of targets that were set in a short-term, narrow fashion. In this case, managing by objectives would be counterproductive.

• The use of MBO must 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 upon. Employees are often involved in this process, which can be advantageous.

• 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.

• 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 objectives. 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.