Management by Objectives (MBO) is a result-centred, non-specialist, operational managerial process for the effective utilisation of the material, physical and human resources of the organisation by integration the individual with the organisation and the organisation with the environment.
At its best, management by objectives is a system that integrates the company goals of profit and growth with the managers needs to contribute to the company’s well-being and develop himself.
John Humble has defined – “Management by objectives as a dynamic system which integrates the company’s need to achieve its goals for profit and growth with the manager’s need to contribute and develop himself.”
1. Meaning and Definitions of Management by Objectives 2. Concept of Management by Objectives 3. Essentials 4. Features 5. Objectives 6. Measurability 7. Long-Range and Short-Range Objectives
8. Multiplicity 9. Process 10. Pre Requisites 11. Role 12. MBO in the Indian Context 13. Advantages 14. Weaknesses 15. Objections 16. Suggestions for Improvement.
Management by Objectives: Definitions, Concept, Objectives, Process, Steps, Prerequisites, Advantages and Weaknesses
- Meaning and Definitions of Management by Objectives
- Concept of Management by Objectives
- Essentials of Effective Management by Objectives
- Features of Management by Objectives
- Objectives of Management by Objectives
- Measurability of Management by Objectives
- Long-Range and Short-Range Management by Objectives
- Multiplicity of Management by Objectives
- Process of Management by Objectives
- Steps in the Process of Management by Objectives
- Prerequisites for Installing MBO Programme
- Role of the MBO Advertising
- MBO in the Indian Context
- Advantages of Management by Objectives
- Weaknesses of Management by Objectives
- Objections to Management by Objectives
- Suggestions for Improving the Effectiveness of MBO
Management by Objectives – Meaning and Definitions by George S. Ordiome, John Humble, Dale D. McConkey, Peter Drucker and Edward Sehleh
George S. Ordiome has written that “the system of management by objectives can be described as a process whereby the superior and sub-ordinate managers of an organisation jointly identify its common goals, define each individual’s major areas of responsibility in terms of results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members.”
John Humble has defined – “Management by objectives as a dynamic system which integrates the company’s need to achieve its goals for profit and growth with the manager’s need to contribute and develop himself.”
Further George Ordiome has also written and stressed the management by objectives is not merely a set of rules, a series of procedures or even a set method of managing, but it is a way of thinking about management.
Dale D. McConkey has written Management by Objectives as management by results and goal setting approach. He has emphasised that it is an approach to management planning and evaluation in which specific targets for a year, or some other length of time are established for each manager, on the basis of the results which each must achieve if the overall objectives of the company are to be realised.
At the end of this period, the actual results achieved are measured against the original goals, i.e., against the expected which each manager knows he is responsible for achieving. It is now a comprehensive management planning and control technique and is bound to affect the entire organisational structure, culture and style.
Again, it calls for regulating the entire process of managing in terms of meaningful, specific and variable objectives at different levels of management hierarchy. It moulds planning, organising, directing and controlling in a number of ways. It stimulates meaningful action for better performance and higher accomplishment. It is closely associated with the concept of decentralisation because decentralisation cannot work without the support of management by objectives.
The concept of ‘management by objectives’ was introduced by Peter Drucker in the year 1954 and it was later developed by various writers like John Humble, Dale McConkey, George Ordinorn; Edward Sehleh and Douglas McGregor. But even before 1954 this principle was emphasised by classical management writers like Henri Fayol, Urwick and Barnard. In the recent years, there has been an increasing emphasis on managing by objectives or results for accomplishing the objectives of an enterprise in a better way. Now, it has become a philosophy of managing in many enterprises and it has come to be recognised as the most dynamic and exciting thinking in the area of management.
Peter Drucker believes that “what the business enterprises needs is a principle of management that will give full scope to individual strength and responsibility and at the same time give common direction to vision and effort, establish team work and harmonise the goals of the individuals with the common organisational goals.
Further, he has emphasised that objectives are needed in every area where performance and results directly and vitally affect the survival and prosperity of the business. The performance that is expected of the manager must be derived from the performance goals of the business, his results must be measured by the contribution they make to the success of the enterprise.This in turn requires management by objectives and control by self-control.”
In U.S.A. in the year 1954, the General Electric Company gave the name of ‘Management By Objectives’ as Work Planning and Review’. The company laid out the elements of management by objectives in its extensive planning for reorganisation programme. The company stated that – “Decentralisation of managerial decision-making requires that objective goals and objective measurements of progress towards these goals be substituted for subjective appraisals and personal supervision.
Through a programme of objective measurements managers will be equipped to focus attention on the relevant trends and on the future. To the extent, therefore, that we are able to develop sound, objective measurements of business performance, our philosophy of decentralising authority and responsibility will be rendered more effective.”
Management by Objectives – Concept
The concept of management by objectives was introduced by Peter Drucker in 1954 and later developed by various writers like John Humble, Prof. Reddin, George Odirone, Edwards Schleh, and Douglas McGregor, it is significant to note that even many years before 1954 objectives were emphasised by classical management’s writer like Rayol, Urwrick, and Barnard.
Peter Drucker believes that what the business enterprise needs is a principle of management that will give full scope to individual strength and responsibilities and at the same time give common direction to vision and efforts to establish teamwork and harmonise the goal of the individual with the common organisational goals.
The only principle that can do this is the management by objectives. Peter Drucker emphasise that objectives are needed in every area where performance and results directly and vitally affect the survival and prosperity of the business.
The performance that is expected of the manager must be derived from the performance goals of the business, the result must be measured by the contribution they make to the success of the enterprise. This in terms requires management by objectives and control by self-control. ‘Management by objectives’ was called work planning in General Electric Company U.S.A. General Electric Company laid out the elements of managing by objectives in its extensive planning for reorganisational program in 1954.
Its manual pointed out that decentralisation of managerial decision making requires, that objective goals and objective measurements of progress towards these goals be substituted for objective appraisals and personal supervision. Through a program of objectives measurements, managers will be equipped to focus attention on the relevant trends on the future.
In recent years, management by objectives has become a philosophy of managing in many enterprises and it has come to be recognised as the most dynamic existing thinking in the area of management. John Humble define managing by objectives as a dynamic system which integrates the company’s need to achieve its goals for profit and growth with manager’s need to contribute and develop him/herself.
According to George Odirone, the system of management by objectives can be described as a process, whereby the superior and subordinate managers of an organisation jointly identify its common goals, define each individual’s major areas of responsibility in terms of expected results and use these measures as guides for operating that unit and assessing the contribution of each of its members. Odirone also stressed that MBO is not merely a set of rules, a series of procedures or even a set method of managing, but it is a way of thinking about management.
Management by objectives is also known as management by results and goals setting approach. Dale McConvey has preferred the term as management by results and has defined it as an approach to management planning and evaluation in which specific targets for a year or some length of time are established for each manager, on the basis of the results which each must achieve if the overall objectives of the company are to be realised.
At the end of this period, the actual results achieved are measured against the original goals, i.e., against the expected results which each manager is responsible for achieving. Management by objectives becomes comprehensive management planning and control technique and is bound to affect the entire organisational structure, culture, and style.
In management by objectives the whole emphasis is on attainment of the common objectives through the role played by the management. Management by objectives is not merely a set of rules, a series of procedures or even a set method of managing, but is a particular way of thinking about management.
MBO lays emphasis on the policy and achievement rather than personality. As a system, it is especially applicable to professional and managerial employees. It can extend as far down as first line supervisors and also cover many staff and technical positions.
Management by Objectives – Important Essentials of an Effective Management Objectives given by Peter F. Drucker
Peter F. Drucker has given the following important essentials of an effective management objective:
(1) Management objectives must be drawn from “What our business is, what it will be and what it should be.” They are the action commitments and not abstractions. With the help of this, the mission of a business can be carried out and the standard against which performance can be measured. Objectives are the fundamental strategy of a business.
(2) Management objectives must be operational in nature. It must be capable of becoming the basis, as well as the motivation, for work and achievement. It should be capable of being converted into specific targets and assignments.
(3) Management objectives when it is being considered must have multiple objectives rather than a single objective.
(4) It must be selective rather than encompass everything. It must make possible concentration of resources and efforts. It must winnow out the fundamentals among the goals of a business so that the key resources of men, money and physical resources can be concentrated.
(5) Management objectives is needed in all areas on which the success and survival of the business depends. The specific targets, the goals in any objective area, depend on the strategy of the individual business. But the areas in which objectives is required is the same for all business, as all business depend on the same factors for their survival.
Management by Objectives – Features: Superior Subordinate Participation, Quantifiable Goals, Focus on What must be Accomplished and Effective Results
1. Superior Subordinate Participation:
MBO requires the superior and the subordinate to recognize that the development of objectives is a joint effort. They must be jointly agree and write out their duties and areas of responsibility in their respective jobs.
2. Quantifiable Goals:
MBO is all about goals that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals—that are realistic and attainable.
3. Focus on what must be Accomplished:
MBO focuses special attention on what must be accomplished (goals) rather than how it is to be accomplished (methods). The superior and the subordinate mutually find out ways and means to achieve the goals that are mutually agreed upon. They mutually set the standards to be followed and decide the norms for evaluating performance.
4. Effective Results:
MBO paves the way for the attainment of goals by putting resources to best use.—with a single minded focus on attainable goals. Subordinates are allowed to think creatively and meet targets. When everyone is aware of what needs to achieved and how the performances is going to be evaluated and rewarded—the end result is superior performance
5. Consistent Support and Continued Blessings from Superior:
Superiors extend their help whenever and wherever needed. They offer necessary coaching and guidance from time to time. They keep all communication lines open. The whole focus is on getting results, through mutual support, help and cooperation.
Management by Objectives – General and Specific Objectives
Determination of objective is an integral part of the planning process. Plans relate to future (immediate future) or during a specific period of future span. Thus objectives are also determined as – (1) Intermediate or short-term and (2) long-term or “in-distant future.”
Managerial objective is defined by Terry as – “the intended goal which prescribed definite scope and suggests direction to efforts of a manager.” It enable the physical and mental work to be directed towards some goal or purpose thus stimulates action in the desired direction.
Objectives may thus be categorized as:
1. General or overall objectives and
2. Specific objectives.
1. General or Overall objectives:
Overall objectives of the business are determined by top management such as the chairman, the board of directors, and the chief executive.
These objectives are based on the following:
i. Nature of the Business:
Motive and method are two factors which can describe any organisation. In business organisation ‘Profit’ is a motive and ‘Sale Purchase’, ‘manufacture and sale’, ‘General Service and Sale’ are the methods to earn profit. A top executive must understand these two, more specially the second i.e. method because it is “method” that describes the nature of an enterprise. This nature is further based on customer behaviour and need as well as paying capacity.
According to “Peter Drucker” what is our business can best be answered by looking at it from outside i.e. from the view point of market and customer. Thus the top management which decides the method i.e. nature must have a broad vision so that future opportunities are not missed.
ii. Economic Contribution:
This entails supply of quality goods and services at moderate prices and suitable to the needs of the society i.e. customers. If is done it serves as a contribution to the economic satisfaction of the customers i.e. the human constitutes basic foundation. Unless the business provides opportunities for satisfaction of relevant human needs it cannot survive for long time.
iii. The Survival Objectives:
Peter Drucker stresses that the survival of a business primarily depends upon its ability to cover the costs of staying in business such as costs of replacement, obsolescence, uncertainty and market risks. The questions of survival depends on the financial strength of the company. The general business conditions as well as management skill. The economic and political environment have a changing tendency. The organisation must continue its profitable existence despite such changes. This survival, naturally, is the outcome of social satisfaction.
iv. The Growth Objective:
“Business should be a going concern” is the universal principle. This “Going nature” provides opportunities for growth. Such a growth is essential for any business if it wants to stand in the competitive world. Without growing, the concern may not be able to stand to the customers’ demands of product and / or services as they are constantly increasing.
Growth of business enables large scale production which, in turn, can be offered to customers at lower price. Growth also, creates promotional opportunities for the employees. This increase their morale and enhances integrity.
Thus “Growth” assumes status of important objective which should, at times, be achieved at the cost of immediate profits. This growth is, many times, affected by technological factors as well as political considerations and geographical area.
But, in nut shell “Growth” is one of the most important objectives.
v. Profit Objectives:
It is human tendency and psychology to expect returns for his / her investments. These returns are possible only if a surplus over all expenditure is earned. This surplus is a ‘profit.’ Thus objective of profit gathers prime importance. There is a differences in ‘earning profit’ and ‘profiteering.’ Earning profit is essential and thus it is a noble motto. But profiteering means squeezing the consumers, taking advantage of their helplessness which, many times, is artificially created.
Unless profit is earned and ploughed in the business, the business cannot grow. But then “Growth” is important objective which cannot be ignored. Naturally profit becomes important objective of any business concern. Most important thing regarding profit is that it should be moderate and reasonable. At no time it should be excessive.
There are charitable institutions who do not have profit motto. Their expenses are met from donations, grants, fees etc. As such when we talk about profit objective, we assume and all should assume that it is “moderate and reasonable profit.” The same time one should not forget that profit and rate of dividend is an indicator of efficiency and profitability of an organisation.
vi. Increasing Productivity Objective:
Quantum of profit directly depends upon the turnover of business. The more the turnover the more is the profit. This turnover is directly affected by production, which depends upon the productivity of the organisation. As we know that profit is a surplus over expenditure and cost occupy major portion of expenditure, all other expenses can be subjected to conservation but cost cannot be.
Lowering the cost is essential but it is equally important to see that reduction in cost is not by sacrificing the quality. Thus the only way available is increasing the productivity. If the productivity is increased cost controls become easy to be implemented. As such “growth,” “profit” and “productivity” are inter-dependent and therefore, important.
vii. Social Obligations Objectives:
Every business organisation has to fulfill their social obligations. These obligations extend to smooth and adequate supply of products at reasonable price. A reasonable, assured and regular return on investment by shareholders in the form of dividend is another such obligation. Regular payment of Govt. taxes, repayment of loans and advances is obligatory to any concern.
Paying adequate and satisfactory wages and salaries to the employees of the organisation is also an important obligation. To fulfill all these social obligations an organisations has to earn sufficient profits. Social obligation objective, thus, cannot be ignored.
2. Specific Objectives:
In addition to the above overall objectives more specific objectives must be evolved in each area such as marketing, production and so on.
For example, some of the specific objectives can be framed by answering the following questions:
i. What is the nature of the goods or services to be produced by the company?
ii. What is the extent of diversification into different groups of products that are desired to be manufactured by the organisation?
iii. What is the extent of geographical area of market to be covered i.e. will it be local, national or inter-national?
iv. What is the type of the company’s customers i.e., whether public or industry or Government or a combination?
These types of questions will have to be answered to arrive at more specific objectives. For example in the area of marketing apart from the overall marketing objectives regarding – (a) The natures of the business (b) The extent of diversifications or (c) The minimum return desired on investment, specific objectives should be involved in the areas of product, pricing, distribution and promotion. These specific objectives then must be integrated into the overall company objectives.
Thus there is a large variety of business objectives.
Drucker sets eight areas in which objectives of performance and results have to be set namely:
1. Market standing
4. Physical and financial resources
6. Manager performance and development
7. Worker performance and attitude and
8. Public responsibility
Drucker points out, real protest against the inclusion of the last three intangibles. The proper selection and blending of appropriate objectives can alone set the business-ship on the right course of continued profitable growth and increased contribution to society.
Management by Objectives – Measurability
The management objectives in every area of management should be specific and they should be capable of being verified. There can be no measure of effectiveness unless the manager is aware what is to be accomplished. If the objectives are not measurable, the efficiency and effectiveness of company’s operations cannot be measured. But, the thinking of the modern managers has changed.
They are of this opinion that the objectives should be stated in a useful performance and in measurable form. At present, the managers wants to know, not only that he should earn a profit, but also how much profit he should earn. Further, he also likes to know how much diversification he should achieve, how much he should pay the employees and how much research and development money he should spend. The answer to all these questions can be given if there is a system to describe the objectives in measurable units of performance.
Hierarchy of Management by Objectives:
The Management objectives of a company may be structured as follows:
The hierarchy as written above states that the objectives at the lower levels are the means for the higher levels. In a company we may have the objective at the highest level to earn a handsome and fair rate of return by manufacturing and marketing specialised machine tools. If we come down we will find the major objective followed by different departments focuses on designing and establishing the form of specialised machine tools.
Further, there may be intermediate objectives with manufacturing and assembling the major components and at the lower level, the objective of the individuals consists of performing the detailed work on the sub-component parts.
The Fig. 6.1 above indicates that the objective at various levels in a company are integrated and follow a logical sequence. There is the ‘end-means’ chain in the company. The objective at the top level provides the basis for setting the objective at the second level which in turn becomes the basis for objective at the third level and the goal at the fourth level is a means for the third level and so on.
The hierarchy of goals following the ‘end-means’ chain mentions two important aspects of the nature of objectives:
(1) Movement to lower levels of the organisational hierarchy results in narrowing the scope for goal setting at successive levels.
(2) The time perspective kept in view move down to lower levels of the organisational hierarchy. A worker may have goals for each day, the production manager may have for a year or so.
Management by Objectives – Long-Range and Short-Range Objectives
As business is a continuous activity, it has long-range and short-range objectives. Here, it is difficult to lay down the period which demarcates a short-range objective from a long- range objectives. Actually it varies from business to business. Normally, short-range objectives cover a period of one to two years. They are drawn for the immediate future.
Long-range objectives are uncertain for distant years than for immediate future. For Example – A business house makes a five year plan for its business. That means the operational plants for the fifth year are much more uncertain than those for the first and that of fourth year and so on. Short-range objectives to be realised during the first year of the long-range plan will be both comprehensive and specific, while long-range goals may require some modification.
Further, when you are setting the objectives and making the plans, the approach should be from the distant year to the present year and not the vice- versa. It is an important requirement of a good plan that what is to be done during the first year must provide a foundation for what is to be done during each successive year. Therefore, it can safely be said that short-range plans should be derived from the long-range plan.
Eminent authors of management are of this opinion that – “Short-range objectives are set-up to achieve the long-range objectives. They are cast in such a way that they are in harmony with the long-range objectives of the enterprise. They are more detailed and specific as compared to long-range objectives. Sound planning tries to maintain harmonious relationship between the short-range and long-range objectives.”
Management by Objectives – Multiplicity of Management by Objectives
In any organisation it will be incorrect to presume that there can be only one objective in that. Peter Drucker in his book has written the fallacy of single objective. His view is that “Much of today’s lively discussion of management by objectives is concerned with the search for the one right objective. This search is not only likely to be as unproductive as the quest for the philosopher’s stone; it does harm and misdirects. To manage a business is to balance a variety of needs and goals. And this requires multiple objectives.”
Peter Drucker has suggested the following eight key areas in which objectives must be set.
They are as follows:
(i) Marketing, (ii) Innovation, (iii) Human Organisation, (iv) Financial Resources, (v) Physical Resources, (vi) Productivity, (vii) Social Responsibility, and (viii) Profit Requirements.
Koontz and O’Donnell are also of the view, that major board enterprise objectives are normally multiple. They have stated that – “A business might include among its overall objectives a certain rate of profit and return on investment; emphasis on research to develop a continuing flow of proprietary products; developing publicity held stock ownership; financing primarily by earnings plough-back and bank debt; distributing products in foreign markets; assuring competitive prices for superior products, achieving a dominant position in an industry; and adhering, in all respects, to the values of our society.”
While analysing the multiplicity of Management Objectives Peter Drucker has said – “Management in key areas enable the management – (i) to organise and explain the whole range of business phenomena by such objectives, (ii) to test the objectives in actual experience, (iii) to predict behaviour, (iv) to appraise the soundness of decisions while they are still being made, and (v) to set managers on all levels to analyse their own experience and, as a result, to improve their performance.”
But some eminent management specialists are of this opinion that a manager cannot pursue effectively more than a few objectives. Peter Schleh, For example- is of the view that “no position should have more that two to five objectives.” He argues that “too many objectives before a manager tend to take the drive out of their accomplishment and may unduly highlight minor objectives to the detriment of major ones.”
However, the number two to five is arbitrary and is too few. It is the task of every manager to give priority to major objectives. He should be able to clearly distinguish between major and minor goals and between goals and means to accomplish goals. In many cases there is displacement of goals.
Organisations give priority to minor goals over major goals. Another most common form of displacement is that organisations reverse the priority between their objectives and means and they concentrate on means, i.e., rules and regulations, procedures and practices, etc. Such things must be avoided by the practicing manager.”
In brief, it can be said that “specific objectives must be set in major or key areas of business. It is not a wise thing to search for a single objective. Objectives of a business must be clearly laid down as they will be used as guides for setting goals for the various positions in the organisation. It is also true that a means for one position becomes a good for a lower position and so on.
If this end-means “chain relationship is analysed, it will clearly lead us to the major objectives of the business. Even the major objectives are means for sound future.” According to Peter Ducker – “Objectives are not fate- they are direction. They are not commands; they are commitments. They do not determine the future; they are means to mobilise the resources and energies of the business for making future.”
Management by Objectives – 4 Steps in the Process of MBO: Setting of Objectives, Revision of Organisational Structure, Establishing Check Points, Appraisal of Performance
The process of management by objectives is a never ending process. The process of MBO is continuous in nature therefore it only ensures concentration of efforts towards organisational objectives. It also helps in modifying objectives to suit the changed situation. It revolves around the setting up of organisational goals and the goals of various divisions and sub-divisions.
The steps in the process of MBO are as follows:
(1) Setting of Objectives.
(2) Revision of Organisational Structure.
(3) Establishing Check Points.
(4) Appraisal of Performance.
Step # 1. Setting of Objectives:
The first step is to establish verifiable objectives for the organisation and for various positions at various levels. For setting of objectives a detailed assessment has to be made of the various resources which are available and which are at the disposal of the manager. The study of the market and the market survey should be conducted to know what types of goods and services the community is in need of.
Proper forecasts should be made to estimate the demand and the business conditions in the country. This analysis will be helpful in assessing both long-range and short-range objectives. Further, an attempt must be made to set specific goals on which the survival and growth of the business depends. These are the important objectives which the top management will try to achieve.
In the big business enterprise it has been seen that the major activities of the enterprise are divided on some basis of departmentalisation. The top management determines the objectives of every department and each department sets its both long-range and short-range objectives with the approval of top management.
This process setting objectives is repeated at lower levels of management. At every stage and at each level, objectives are set in verifiable units so that the performance of each department and individual may be reviewed after the end of a particular period. When this process is complete, there will exist a meeting of minds of each superior and his sub-ordinates as to what is to be accomplished and why it is to be accomplished.
Step # 2. Revision of Organisational Structure:
When the goals for each individual are reorganised and re-arranged, there is a considerable change in the job descriptions of various positions. This will need a revision of the existing organisation structure. Further, the organisational charts and manuals must be suitably amended to depict the change brought by the introduction of management by objectives. The job descriptions of various jobs must indicate and fix their objectives, responsibilities and authority. They must lay down expressly and clearly the relationships with other job positions in the organisation.
Step # 3. Establishing Check Points:
While establishing check points American Management Association has stated that “Management by objectives ensures periodic meetings between the superior and the sub-ordinate to review the progress towards the accomplishment of targets of the sub-ordinate. For this, the superior must establish checkpoints or standards of performance for evaluating the progress of the sub-ordinate.
The standards should be defined quantitatively as far as possible and the sub-ordinate must understand them fully. This practice should be followed by every superior for each of his sub-ordinates and it should lead to key result analysis as targets or goals are represented in terms of results.
The key result analysis should be reduced into writing. It should contain the following information:
(a) The overall objectives of the job of the sub-ordinate.
(b) The key results he must achieve to fulfill his objectives.
(c) The long-term and short-term priorities of tasks he must adhere to.
(d) The scope and extent of assistance he may expect from his superior and related departmental managers and the assistance he must extend to other departments.
(e) The nature of information and reports he will receive to carry out self- evaluation.
(f) The standards by which his performance shall be evaluated.”
Step # 4. Appraisal of Performance:
Herbert, Emanuel and John. While making observation in their ‘Spilt Roles in Performance Appraisal’, Harvard Business Review, Jan. Feb. 1965 has written that – “Informal performance appraisal of sub-ordinate is done by his immediate superior almost every day, formal appraisal at periodic intervals, usually once or twice a year, does ensure that a thorough evaluation of a manager’s performance is being done atleast once or twice a year when the achievements are carefully analysed against the background of prevailing circumstances and given objectives. The design and format of the Performance Review Form will depend on the nature of an enterprise.
The important benefit of management by objectives is that it does away with the judgmental role of the supervisor. The performance of every individual is evaluated in terms of the standards or end-results clearly agreed to, by the superior and the subordinate.
Whenever MBO has been introduced, it has led to greater satisfaction, more agreement, greater comfort and less tension and hostility between the supervisors and the subordinates. Under MBO, the superior does not evaluate the individual concerned but his performance in terms of the standards set in advance. Moreover, the performance review is aimed to assist the sub-ordinate to improve his performance in the future. It also helps in setting goals for the period.”
Management by Objectives – Prerequisites for Installing MBO Programme
The installation of MBO programme will require a change in organisational culture and environment. The philosophy of MBO should be properly explained to everybody in the organisation. The purpose of installing this system may also vary from organisation to organisation.
Following are the prerequisites for installing MBO programme:
1. Defining Purpose:
The first thing for implementing MBO programme is to define its purpose. Different organisations may have different purposes to be achieved from MBO programme. Howell suggested three stage evaluation of MBO – management appraisal and development, improvement of productivity and profitability and long range planning. An organisation may like to use MBO for improvement of its productivity; another may use it for improving managerial efficiency. In the absence of a definite purpose MBO will not be a useful exercise.
2. Support from Top Management:
In order to succeed MBO programme must have the support of top management. The subordinates will implement this programme effectively only when they are sure of the sincerity of top management in pursuing it. MBO is a method of managing effectively; it is a continuous process and not a single time activity.
Managers will discuss with subordinates their targets and will regularly evaluate their performance. If the performance is lower than the predetermined standards then the causes of deviations are ascertained and corrective actions are taken. Top management will have to show a constant interest in MBO programme otherwise it is likely to fail.
3. Training for MBO Programme:
The success of any programme depends upon the knowledge of the persons implementing it. If they understand what they are implementing then others can be explained about the concept, philosophy and need for such a programme. The persons implementing MBO should be given proper training about the programme and its implementation. If people are not sure about the aims of the programme then they will find difficult to implement it. There is a need for structural change, behaviour change and attitude change for making the programme effective and successful.
In order to secure commitment of subordinates for the programme, there is a need for participation by everybody in the organisation. Subordinates should be made an integral part of this system. In case subordinates take MBO as any other method for evaluating their performance then it will not succeed. Subordinates should participate in setting their objectives and deciding their areas of accountability. The areas of participation, however, may vary according to the area of activity and the level of hierarchy. The type and extent of participation will vary from organisation to organisation.
In MBO system every individual decides and controls his own performance. The person working under such a system should regularly know his performance and standing. In case the performance is not as per the goals then required correctives will be undertaken. The feedback will help in learning and improving situations. There should be periodic counseling and appraisal interviews where superior helps the subordinate in knowing his good and bad points and making suggestions for future improvements.
Management by Exception (MBE):
Management by exception means that management should not concentrate on things of minor nature rather it should involve when there are exceptions. If the things are happening as per the decided standards, there is no need to inform the management, rather if there are minor deviations even it should be adjusted at lower levels. The management must be informed if there are significant deviations between the standards and actual performance.
For example, if quality control standards are set by a manager where variation of three percent is permissible in the standards then any deviation up to three percent should be looked into by the lower level management only. The manager need not be informed about it. But when the deviations increase beyond three percent then it must be brought to the notice of the manager concerned.
The management by exception is an important principle of organisational control. If top management is informed of small variations then it will distract its attention from important issues. So top management should be involved only in exceptional cases and not in cases involving insignificant changes.
A manager should devote his time and energy in planning and executing major decisions. It is a technique of separating important information from the unimportant information. The information which is critical for management control actions is sent to the manager. This helps in installing an effective control system.
Difference between MBO and MBE:
Management by exception is a control technique which helps in deciding what’s to be reported to the top management. Management by objectives on the other hand, is the philosophy of decentralisation and participative management. MBO helps subordinates in setting their goals and then making effects to achieve them. In MBE only exceptions are reported to the top executives so that they are able to devote their time and energy for important tasks. In MBO, the superiors regularly evaluate the performance of subordinates and take corrective measures whenever needed.
Management by Objectives – Role of the MBO Advertising
Introduction of Management by Objectives (MBO) represents a major change program. The need for planned change and the role of the change agent have been recognised for long. Various approaches to organisational development have also accepted the importance of process consultation and the role of third party intervention, both internal and external. MBO consulting is essentially a process consultation.
It accepts one of the underlying assumptions articulated by Schein that “problems will stay solved longer, and be solved more effectively, if the organisation solves its own problems; the consultant has a role in teaching diagnostic and problem-solving skills but he should not work on the actual concrete problem himself”.
Thus, MBO emphasises joint diagnosis as part of process consultation and generally requires intervention of internal change agents who work in close collaboration with the external change agent, that is, the consultant, wherever the latter is needed and available. Generally, the third party roles in the organisational setting have not been institutionalised, but it has been done, to some extent, in Managerial Grid and more so in MBO. For example, Blake and Mouton have provided a detailed description of the job of the OD Coordinator. This person is expected to coordinate the execution of the program through six phases.
To use to words of Blake and Mouton- “He is the key person in initiating, organising, programing and auditing activities. In many other ways, he sees to it that the effort does not bog down”. There is an important shift in the emphasis on the role of the change agent in the MBO program, particularly in the context of emphasis on the role of the line management in planning, implementation and review of the program.
Management by Objectives – In the Indian Context
MBO was introduced and implemented in around 50 industrial organisations of all shapes and sizes in the 1970s.
i. Public sector enterprises such as – the Bharat Heavy Electricals Limited (BHEL), Hindustan Copper Limited (HCL), Tamilnadu Dairy Development Corporation etc.
ii. Private sector units such as – Shaw Wallace, Glaxo, Blue Star etc.
iii. State government departments such as – Commissionarate of Industries in Gujarat, Directorate of Industries and Commerce in Tamil Nadu etc.
The emphasis was on corporate planning and control. The reaction to the MBO philosophy was mixed. Some organisations were very happy with its astounding results but it made little difference for some others.
Some of the reasons identified for failure of MBO:
i. The top management did not show adequate commitment in implementing the MBO philosophy.
ii. The managers at different levels in the organisation failed to interact with the subordinates to set achievable goals.
iii. There was no monitoring and feedback.
iv. The utility of MBO was underestimated. MBO was merely viewed as a tool for performance appraisal rather than a reinforcing strategy for interpersonal relations among managers at different levels.
v. Poor implementation – A potentially effective technique such as – MBO was not properly implemented due to factors such as – corporate culture, managerial skills, failure to recognise the issues relating to power and authority in the implementation process.
vi. Burdensome paperwork – There is much writing of goals, reviewing, rewriting, and documentation of results and reasons that takes away from the objectives or the real work. It is also criticised for being more time consuming than yielding benefits.
vii. Unrealistic quantification of objectives – Counting the number of sales calls is easier but valuing the rapport between a sales representative and his client is not.
viii. Individualistic orientation – Too much focus on objectives for departments and individuals within the department that the interdependence of persons and departments is lost sight of.
ix. Cultural differences – A management technique that works in one country may fail in another.
Management by Objectives – 6 Important Advantages
Management by objectives has been recognised not merely as a philosophy of management but also as an important system which aims at synchronizing the objectives of the individuals with the objectives of the organisation.
When this is used correctly, judiciously and in a systematic manner, it gives the following benefits:
(1) It leads to improvement in productivity – Management by objectives leads to the improvement in productivity due to the fact that management team concentrates on the important task of reducing costs and harnessing opportunities rather than dissipating energies on less important matters.
(2) Here, a greater sense of identification exists – In the objectives of the enterprise, controls are reckoned as tool of ‘Self-control’ rather than devises to be used against managers.
(3) Helps in locating weak and problem areas – Better management and improved communication and organisation structure helps in locating weak and problem areas.
(4) Better device for organisational control – This serves as a better device for organisational control and integration.
(5) It analyses training needs and opportunities – It provides a realistic means of analysing training needs and opportunities for growth on the basis of measurement of performance against accepted standards.
(6) It helps in stimulating the sub-ordinate’s motivation.
Management by Objectives – 5 Weaknesses
Despite of its acceptability in recent times, MBO technique has not yet acquired a final shape.
This system suffers from a number of weaknesses which are discussed as under:
1. Failure to Teach MBO Philosophy:
The success of MBO will depend upon its proper understanding by managers. When managers are clear about this concept only then they can explain to subordinates how it works, why it is being done, what will be the expected results, how it will benefit participants, etc. This philosophy is based on self-direction and self-control and aims to make managers professionals.
2. Failure to Give Guidelines for Goal Setters:
If the goal setters are not given proper guidelines for deciding their objectives then MBO will not be a success. The managers who will guide in goal setting should themselves understand the major policies of the company and the role to be played by their activity. They should also know planning premises and assumptions for the future. Failure to understand these vital aspects will prove fatal for this system.
3. Difficulty in Setting Goals:
The main emphasis in MBO technique is on setting objectives. The setting of objectives is not a simple thing. It requires lot of information for arriving at the conclusions. The objectives should be variable so that performance may be evaluated. Some objectives may not be variable, precaution should be taken in defining such objectives. The objectives should not be set casually otherwise MBO may prove liability for the business.
4. Emphasis on Short Term Objectives:
In most of the MBO programs there is a tendency to set short-term objectives. Managers are inclined to set goals for a year or less and their thrust is to give undue importance to short term goals at the cost of long term goals. They should achieve short term goals in such a way that they help in the achievement of long term goals also. There may be a possibility that short term and long term objectives may be incompatible because of specific problems. So proper emphasis should be given to both short term and long term objectives.
5. Danger of Inflexibility:
There is a tendency to strict to the objectives even if there is a need for modification. Normally objectives will cease to be meaningful if they are often changed; it will also be foolish to strive for goals which have become obsolete due to revised corporate objectives or modified policies.
Management by Objectives – Objections as Summarised by Legge
MBO is no longer as fashionable as it once was. Many companies in the West have abandoned it.
Legge has summarised the main objections to it under the heads of:
MBO tends to be introduced in crisis situations. In a crisis when resources are likely to be scarce and when departments have compelling claims upon them, such formulation may increase intra-organisational conflict.
Despite its emphasis on participation, MBO can degenerate into ‘pseudo- participation’. Lower levels of management are likely to devote their energies to subverting the system by transforming it into a form-filling ritual.
MBO may have limited relevance in situations where the production “technique or market condition makes it difficult to plan.
Management by Objectives – Suggestions for Improving the Effectiveness of MBO
The following factors can help make use of MBO programmes properly:
(a) Organizational Commitment:
The most effective way to implement MBO is to allow the top level managers to explain, coordinate and guide the programme. Without top management support and commitment, MBO cannot be implemented properly.
MBO is not a superfluous ritual which should be finished off, as quickly as possible. It calls for precise, concrete thinking. Managers should be given adequate training in MBO philosophy and procedures before the system is installed. They must be in a position to integrate the technique with the basic company philosophy.
(c) Adequate Time and Resources:
A well-conceived MBO programme cannot be installed overnight. It may take 3-5 years of operation before the MBO programme yields fruitful results. Implementing an MBO programme is quite often a time consuming process and manager must have the necessary time and resources to utilize it.
(d) Take Care of the Necessary Mechanics:
Setting goals is only a part of the story, goals must be supported by control activities, also. It is important to assign authority, responsibility for initiating and overseeing the MBO programme.
The persons who administer the programme must be endowed with sufficient power not only to punish but also to reward people promptly. It is always better to clarify responsibility and authority relationships, so that everyone in the organization understands what is expected in the MBO system.
(e) Timely Feedback:
The superior must offer timely feedback to subordinates while monitoring performance. He must indicate the areas where things have gone wrong and where performance improvements can take place.
There should be no attempt to put the subordinate down. Periodic reviews, proper counselling and allowing subordinates to commit mistakes and learn from the same would help a subordinate to learn slowly and steadily.
Be sensitive to the policies of implementing MBO. MBO redistributes power, and not all managers welcome this. If MBO is seen as a significant change, it will generate hostile reaction in the form of jokes, infighting and overt conflict.
MBO can also alter the status of an organization, influence decisions, affect budgets and promote the creation of coalitions to fight with it. MBO, as Odiorne pointed out, has failed in many organizations because managers quite often ignored these political considerations in the process of implementation.