Rakesh Kumar and Venu Prasad H D

Management by Objectives

The concept of MBO was developed by Peter .F. Drucker way back in early 1950's as a method of Performance appraisal in his book "The Practice of Management". It is based on the setting of clear and measurable objectives, and the use of these objectives to evaluate and review performance that is by assessing how far the objectives have been achieved. Earlier it was considered as a tool of performance appraisal but over a period of time it has undergone a lot of change and now it is not only a tool for Performance Appraisal but also a tool for improving managerial efficiency by setting your self objectives and then breaking these into more specific goals or objectives.

As defined by Koontz and Weihrich "objectives or goals are the ends toward which an activity is aimed. It is not only the end point of planning but also the end toward which organizing, staffing, leading and controlling are aimed".

Assessing the above definition we find that objectives are a part of each function of management and hence MBO has a greater role to play at the organizational and also the individual level. According to Drucker the main principle behind MBO, is to make sure that everybody within the organization has a clear understanding of the aims and objectives of the organization and making them aware of their roles and responsibilities in achieving those aims and objectives.

Definition:

With this preliminary idea of MBO now we can define it as, "A comprehensive managerial system that integrates many key managerial activities in a systematic manner and is consciously directed toward the effective and efficient achievement of organizational and individual objectives." --- Koontz and Weihrich.

The term MBO as such came into existence because in the 60's, 70's and 80's it seemed like a good thing to manage work efforts by goals, hence the term "management by objectives" has been used. The idea was to improve management and work productivity in general by being more defined about the intended outcomes

MBO managers focus on the result, not the activity. They delegate the tasks by "negotiating a contract of goals" with their subordinates without dictating a detailed road map for implementation.

Principles of Management by Objectives (As Given by Peter.F. Drucker)

1. Establish a set of top level strategic Goals /Objectives.

2. Cascading of organizational Goals /Objectives that are supported by lower level definitive objectives and action plans.

3. Develop an organizational role and mission statement, as well as specific objectives and action plans for each member, often in a manner that involves participative decision-making.

4. Establish key results and/or performance standards for each objective.

5. Periodically measure/assess the status or outcome of the Goals /Objectives.

From a simplistic view, if you start out with a goal in mind, you are more likely to reach it.

Assessment of the above principles:

   Although the above principles seem practical and even common sense, but the MBO theory didn't survive very actively because of its weakness and its assumption that becoming more defined about the traditionally broad objectives would lead to performance improvement, Drucker himself accepted this criticism. To overcome these weaknesses focus was shifted to the goal definition process in the 80's which became popularly known as the acronym SMART. It is nothing but managing by "smart" goals or smart objectives and you will achieve them.

SMART stood for the characteristics of:

• Ø Specific
• Ø Measurable
• Ø Actionable
• Ø Reasonable
• Ø Time-bound

One of the greatest impressions of having SMART goals is that they are pointed; they have an edge, often a sense of energy created by specificity, the time limits and the measurement aspect. Comparatively Non Smart goals are more bureaucratic with only broad objectives set at the top level.

Setting Objectives

As defined earlier "objectives are the ends towards which an activity is aimed"

The one thing an MBO system should provide is focus. So objectives should be precise and their number should be small. Most people disobey this rule, try to focus on everything, and end up with no focus at all.

For 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. As mentioned by Andy grove who practices MBO in Intel "A manager's job should be based on a task to be performed in order to attain the company's objectives... the manager should be directed and controlled by the objectives of performance rather than by his boss."

The managers of the various departments or sections of an organization should know not only the objectives of their unit but should also actively participate in setting specific objectives at the sub unit level. These subunit levels are regarded as the KEY RESULT AREAS by Drucker. This type of review mechanism enables leaders to measure their managers especially in the key result areas.

The eight Key Result Areas as mentioned by Drucker where managers must pursue clear objectives are: 

• Ø Marketing
• Ø Innovation
• Ø Human organization
• Ø Financial resources
• Ø Physical resources
• Ø Productivity
• Ø Social responsibility
• Ø Profit requirements

In recent years however opinion has moved away from the idea of placing managers into a formal rigid system of objectives. Today, when maximum flexibility is essential, achieving the objectives rightly is important.

For effective implementation of MBO balance between management and employee empowerment has to be achieved and this should be done by practicing managers and not by management philosophers. And also MBO creates a link between top managements strategic thinking and the strategy's implementation lower down. MBO is achieved through self control, the tool of effectiveness. Today the worker is a self manager, whose decisions are of decisive importance or results.

MBO Process

The Five step MBO Process (As given by Drucker in 1954)

• Ø Organizational objectives reviewed
• Ø Employee objectives Set
• Ø Progress Monitored
• Ø Performance Evaluated
• Ø Achievers Reviewed
• Ø MBO for the next operating period begins

Modified MBO proces (Anonymous)

• Ø Step: 1 Decide vision mission or overall objectives of the organisation. Here the objectives are general and not specific
• Ø Step: 2 Employees and subordinates discuss and derive specific objectives from the broader one.
• Ø Step: 3 Superior and employees discuss on "how to accomplish the results and when?"
• Ø Step: 4 Superior and subordinates agree on specific measurable performance objectives for the subordinate for a
• Ø Step: 5 Superior and subordinate discuss and review resources available and those required to accomplish the stated objectives.
• Ø Step: 6 Superior and subordinate discuss and review programs and actions plans to accomplish the objectives.
• Ø Step: 7 Superior and subordinate discuss and review the performance indicators that should be compared with actual performance
• Ø Step: 8 Superior and subordinates meet periodically to jointly evaluate progress (overall level of performance compared to

Weakness of MBO model

1. It emphasizes on setting of goal your goals daily which is very vogue

2. It underemphasized the importance of the environment or context in which the goals were set. That context included everything from the availability and quality of resources, to relative buy-in by leadership and stake-holders.

 As an example of this influence, 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. That's a whopping 50% difference in performance based upon whether the CEO effectively drives the program!

3. It didn't address the importance of successfully responding to obstacles and issues as essential to reaching a goal.

The model also did not adequately cope with the following obstacles

• Defects in resources, planning and methodology
• The increasing burden of managing information i.e. Managing Information System
• The impact of a rapidly changing environment. We have to learn from the proverb that "we cannot be in today's business with yesterdays skills" if this proverb is to be followed then we shall have to change our goals everyday in order to cope with the changing conditions. This model does not adequately address this problem.

Benefits of MBO: (As per Koontz and Weihrich)

• Improvement of managing through results oriented planning.
• Clarification of organizational roles and structures as well as delegation of authority according to the results expected of the people occupying the roles.
• Encouragement of commitment to personal and organizational goals.
• Development of effective controls that measure results and lead to corrective actions

Summary

All organizations do have objectives sometimes people do follow the process of MBO, but still they fail to achieve efficiency and effectiveness. The reason being they often fail to identify their key activities which bring out most of the result or output. Failure of the managers to teach their subordinates the philosophy of MBO is also one of the reasons for its failure.

MBO is more of a philosophy, in practice it is not easily achievable because of the weaknesses mentioned earlier understanding this philosophy an applying in practice is not a easy task and even some of its concepts are contradictory.

For Example: MBO managers focus on results rather than the activity how to achieve this results is left to the subordinates. As per Pareto's 80:20 principle, 80% percent of your results comes from 20% of your key activities, and most of the times subordinates fail to identify these key activities and thy try to focus on all other key activities and they try to focus on all other activities ultimately with no focus or result. Hence subordinates should be guided in identifying these key activities and they have to be motivated towards self control and self direction for better implementation of MBO.

Conclusion:

Besides all the weaknesses MBO is an essential part of planning and managing, besides being used as a performance appraisal tool there are other managerial subsystems that can be integrated into the MBO process to make t more effective.

The subsystems include

• Human resource planning and development
• Career planning
• The reward system
• Budgeting etc...

References:

Koontz H and Weihrich Heinz(2005). ‘Management: A Global Perspective' eleventh

edition, Tata McGraw Hill India Company, New Delhi.

Hicks and Gullet (1976). ‘Organizations: theory an behaviour'. McGraw Hill India Company, New Delhi.

One Minute Manager, by Spencer Johnson and Ken Blanchard, 2000.

http://www.1000ventures.com/

www.managepro.com