Management by objectives

Definition:
Management by objectives (MBO), also known as management by results (MBR), is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to achieve them. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book The Practice of Management According to George S. Odiorne, the system of management by objectives can be described as a process whereby the superior and subordinate 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 contribution of each of its member The process of setting objectives in the organization to give a sense of direction to the employees is called as Management by Objectives. It refers to the process of setting goals for the employees so that they know what they are supposed to do at the workplace. Management by Objectives defines roles and responsibilities for the employees and help them chalk out their future course of action in the organization. Management by objectives guides the employees to deliver their level best and achieve the targets within the stipulated time frame. A management system in which the objectives of an organization are agreed upon so that management and employees understand a common way forward. Management by objectives aims to serve as a basis for (A)greater efficiency through systematic procedures, (B)greater employee motivation and commitment through participation in the planning process, and (C) planning for results instead of planning just for work. In management by objectives practice, specific objectives are

determined jointly by managers and their subordinates, progress toward agreed-upon objectives is periodically reviewed, end results are evaluated, and rewards are allocated on the basis of the progress. The objectives must meet five criteria: they must be (1) arranged in order of their importance, (2) expressed quantitatively, wherever possible, (3) realistic, (4) consistent with

the organization's policies, and (5) compatible with one another. Suggested by the management guru Peter Drucker (1909-2005) in early 1950s, management by objectives enjoyed huge popularity for some time but soon fell out of favor due to its rigidity and administrative burden. Its emphasis on setting clear goals, however, has been vindicated and remains valid.

Features and advantages

Unique features and advantages of the MBO process
Behind the principle of Management by Objectives (MBO) is for employees to have a clear understanding of the roles and responsibilities expected of them. Then they can understand how their activities relate to the achievement of the organization's goal. Also places importance on fulfilling the personal goals of each employee. 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. This 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 organization and also to solve many problems. 3. Clarity of goals 4. Subordinates tend to have a higher commitment to objectives they set for themselves than those imposed on them by another person. 5. Managers can ensure that objectives of the subordinates are linked to the organization's objectives.

Management by Objectives
Peter Drucker outlined the five-step process for MBO. Each stage has particular challenges that need to be addressed for the whole system to work effectively.

These steps are explained below: 1. Set or Review Organizational Objectives MBO starts with clearly defined strategic organizational objectives (see our article onMission 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 organizationwide 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. Repeat the Cycle Having gone through this five-stage process, the cycle begins again, with a review of the strategic, corporate goals in the light of performance and environmental monitoring. 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. Tip 1: Implemented on a team level, MBO shows itself in clear team briefing, in effective goal setting, in successful use of reviews, in effective delegation and in the giving and receiving of feedback. These are many of the key techniques needed for effective team management. Tip 2: Implemented on an organizational level, MBO needs the full commitment of the organization, and an underlying system for tracking goals and performance. Because goals must be transmitted from level to level with agreement, goal transmission can inevitably be slow. Full implementations of MBO can therefore be slow and difficult, particularly if non-accountingbased goals are included. This is perhaps why MBO has evolved into the idea of the Balanced Scorecard: MBO on its own may too-easily slip into being nothing more than a financial management mechanism. Tip 3: MBO is essentially a managerial process. Don't use it as a substitute for goodleadership: The two should work together! Tip 4: There's so much more to motivating people than using MBO! Take our How Good Are Your Motivation Skills? self-test to find out which aspects of team motivation you can improve on.

Need for Management by Objectives (MBO)

The Management by Objectives process helps the employees to understand their duties at the workplace. KRAs are designed for each employee as per their interest, specialization and educational qualification. The employees are clear as to what is expected out of them. Management by Objectives process leads to satisfied employees. It avoids job mismatch and unnecessary confusions later on. Employees in their own way contribute to the achievement of the goals and objectives of the organization. Every employee has his own role at the workplace. Each one feels indispensable for the organization and eventually develops a feeling of loyalty towards the organization. They tend to stick to the organization for a longer span of time and contribute effectively. They enjoy at the workplace and do not treat work as a burden. Management by Objectives ensures effective communication amongst the employees. It leads to a positive ambience at the workplace. Management by Objectives leads to well defined hierarchies at the workplace. It ensures transparency at all levels. A supervisor of any organization would never directly interact with the Managing Director in case of queries. He would first meet his reporting boss who would then pass on the message to his senior and so on. Every one is clear about his position in the organization. The MBO Process leads to highly motivated and committed employees. The MBO Process sets a benchmark for every employee. The superiors set targets for each of the team members. Each employee is given a list of specific tasks.

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.

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 under-emphasizes 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. It sometimes ignores the prevailing culture and working conditions of the organization. 4. More emphasis is being laid on targets and objectives. It just expects the employees to achieve their targets and meet the objectives of the organization without bothering much about the existing circumstances at the workplace. Employees are just expected to perform and meet the deadlines. The MBO Process sometimes do treat individuals as mere machines. 5. The MBO process increases comparisons between individuals at the workplace. Employees tend to depend on nasty politics and other unproductive tasks to outshine their fellow workers. Employees do only what their superiors ask them to do. Their work lacks innovation, creativity and sometimes also becomes monotonous. 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, 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.

Arguments against
MBO has its detractors and attention 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 key principles 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. An effective management goes a long way in extracting the best out of employees and make them work as a single unit towards a common goal. The term Management by Objectives was coined by Peter Drucker in 1954.