Management by objectives

System of performance appraisal having the following characteristics: (1) each manager is required to take certain prescribed actions and to complete certain written documents; and (2) the manager and subordinates discuss the subordinate's job description, agree to short-term performance targets, discuss the progress made towards meeting these targets, and periodically evaluate the performance and provide the feedback.

Management by Objectives (MBO) is a process in which a manager and an employee agree upon a set of specific performance goals, or objectives, and jointly develop a plan for reaching them. The objectives must be clear and achievable, and the plan must include a time frame and evaluation criteria. For example, a salesperson might set a goal of increasing customer orders by 15 percent in dollar terms over the course of a year.

MBO is primarily used as a tool for strategic planning, employee motivation, and performance enhancement. It is intended to improve communication between employees and management, increase employee understanding of company goals, focus employee efforts upon organizational objectives, and provide a concrete link between pay and performance. An important factor in an MBO system is its emphasis on the results achieved by employees rather than the activities performed in their jobs.

Implementing an Mbo Program

To be successful, an MBO program should be part of a small business's overall system of planning and goal setting. The first step in implementing MBO is to establish long-range company goals in such areas as sales, competitive positioning, human resource development, etc. A small business owner may find it helpful to begin by defining the company's current business and looking for emerging customer needs or market trends that may require adaptation. Such long-range planning provides a framework for charting the company's future staffing levels, marketing approaches, financing needs, product development focus, and facility and equipment usage.

The next step in establishing an MBO system is to use these long-range plans to determine company-wide goals for the current year. Then the company goals can be broken down further into goals for different departments, and eventually into goals for individual employees. As goal-setting filters down through the organization, special care must be taken to ensure that individual and department goals all support the long-range objectives of the business. Ideally, a small business's managers should be involved in formulating the company's long-range goals. This approach may increase their commitment to achieving the goals, allow them to communicate the goals clearly to employees, and help them to create their own short-range goals to support the company goals.

At a minimum, a successful MBO program requires each employee to produce five to ten specific, measurable goals. In addition to a statement of the goal itself, each goal should be supported with a means of measurement and a series of steps toward completion. These goals should be proposed to the employee's manager in writing, discussed, and approved. It is the manager's responsibility to make sure that all employee goals are consistent with the department and company goals. The manager also must compare the employee's performance with his or her goals on a regular basis in order to identify any problems and take corrective action as needed.

Formulating goals is not an easy task for employees, and most people do not master it immediately. Small business owners may find it helpful to begin the process by asking employees and managers to define their jobs and list their major responsibilities. Then the employees and managers can create a goal or goals based upon each responsibility and decide how to measure their own performance in terms of results. In the Small Business Administration publication Planning and Goal Setting for Small Business, Raymond F. Pelissier recommended having employees create a miniature work plan for each goal. A work plan would include the goal itself, the measurement terms, any major problems anticipated in meeting the goal, a series of work steps toward meeting the goal (with completion dates), and the company goal to which the personal goal relates.

Small business owners may also find it helpful to break down employee goal setting into categories. The first category, regular goals, would include objectives related to the activities that make up an employee's major responsibilities. Examples of regular goals might include improving efficiency or the amount and quality of work produced. The second category, problem-solving goals, should define and eliminate any major problems the employee encounters in performing his or her job. Another category is innovation, which should include goals that apply original ideas to company problems. The final category is development goals, which should include those goals related to personal growth or the development of employees. Dividing goal setting into categories often helps employees think about their jobs in new ways and acts to release them from the tendency to create activity-based goals.

Another requirement for any successful MBO program is that it provide for a regular review of employee progress toward meeting goals. This review can take place either monthly or quarterly. When the review uncovers employee performance that is below expectations, managers should try to identify the problem, assign responsibility for correcting it, and make a note in the MBO files.

Small Business Owner Involvement

Given that MBO represents an unusual way of thinking about job performance for many employees, small business owners may find it best to introduce MBO programs gradually and to include a formal training component. A small business's managers can be introduced to MBO through a classroom seminar taught by the small business owner or by an outside consultant. Either way, it is important that the managers be allowed to express any doubts and reservations they may have, and that the training include preparation of an actual goal by each participant. When MBO is brought back to the small business, it may be best to start slowly, with each employee only preparing a few goals. This approach will allow employees to learn to prepare goals that are achievable, develop ways to measure their own performance, and anticipate problems that will prevent them from attaining their goals.

Another factor determining the success of MBO programs is the direct involvement of the small business owner. Pelissier noted that the small business owner needs to champion the MBO system from the beginning, as well as set an example for the company's managers, in order for it to succeed. Since managers have a natural tendency to focus their attention upon their own functions rather than on the goals of the overall organization, it can be difficult to educate them about MBO. It is also important for the small business owner to remain patient during the implementation phase: in fact, Pelissier claimed that it may take three to four years before an MBO program creates quantifiable results in a small business. As David Dinesh and Elaine Palmer indicated in their article for Management Decision, partial implementation is one of the major potential problems associated with MBO programs.

Implemented correctly, however, MBO can provide a number of benefits to a small business. For example, MBO may help employees understand how their performance will be evaluated and measured. In addition, by allowing them to contribute to goal setting, it may increase the motivation and productivity of a small business's employees. MBO also stands to provide a small business's employees with the means to prioritize their work on a daily basis. Although employee performance evaluation is still a complex task under an MBO system, MBO can also provide an objective basis for evaluation. However, it is important to note that an employee's failure to meet preestablished goals can be attributed to many things besides personal failure. For example, the failure to meet goals could result from setting the wrong objectives, not taking into account company restrictions that may impinge upon performance, establishing an improper measures of progress, or a combination of all of these factors.

Overall, establishing an MBO system in a small business may be difficult, but it is usually worth it. The most difficult aspect of implementing MBO may be simply getting people to think in terms of results rather than activities. Even when an MBO system is implemented well, a small business may encounter problems. For example, employees may set low goals to ensure attainment. Similarly, managers' objectives may focus on the attainment of short-term rather than long-term goals. Finally, employees and managers alike may fall victim to confusion and frustration. Some of the most common reasons for the failure of an MBO program include a lack of involvement among the top management of a small business, inadequate goal setting on a company-wide basis, implementation of an MBO system that occurs too rapidly, or the failure to instruct a company's managers and employees in the basics of MBO. But even though establishing an MBO program may be problematic, it can also offer significant rewards to small businesses.

Further Reading:

Bateman, Thomas S., and Carl P. Zeithaml. Management: Function and Strategy. Homewood, IL: Irwin, 1990.

Dinesh, David, and Elaine Palmer. "Management by Objectives and Balanced Scorecard: Will Rome Fall Again?" Management Decision. July-August 1998.

Pelissier, Raymond F. Planning and Goal Setting for Small Business. Washington, D.C.: Small Business Administration, n.d.

This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (January 2008)

Management by Objectives (MBO) is a process of agreeing upon objectives within an organization so that management and employees agree to the objectives and understand what they are in the organization.

The term "management by objectives" was first popularized by Peter Drucker in his 1954 book 'The Practice of Management'.^[1]

The essence of MBO is participative goal setting, choosing course of actions and decision making. An important part of the MBO is the measurement and the comparison of the employee’s actual performance with the standards set. Ideally, when employees themselves have been involved with the goal setting and the choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.

Contents 1 Features and Advantages 1.1 Unique features and advantage of the MBO process 2 Domains and levels 3 Practice 4 Limitations 5 Arguments Against 6 See also 7 References

Features and Advantages

Unique features and advantage of the MBO process

The principle behind Management by Objectives (MBO) is to create empowered employees who have clarity of the roles and responsibilities expected from them, understand their objectives to be achieved and thus help in the achievement of organizational as well as personal goals.

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 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 enterprise and also solve many problems faced during the period.
3. Clarity of goals – With MBO, came the concept of SMART goals^[2] i.e. goals that are:
   1. Specific
   2. Measurable
   3. Achievable
   4. Relevant, and
   5. Time bound.

The goals thus set are clear, motivating and there is a linkage between organizational goals and performance targets of the employees.

The focus is on future rather than on past. Goals and standards are set for the performance for the future with periodic reviews and feedback.

In some sectors (Healthcare, Finance etc.) many add ER to make SMARTER, The ER can have many meanings including

• E=End-minded R=Ritualistic^[3]
• E=Energizing, Exciting and Ethical Goals or E=Evaluate R=Reviewed and Resourced or R= Redo Goals^[4][5] or Recorded ^[6]
• E=Ecological - consider 'whole' self R=Reasons and Reward ^[7]

Domains and levels

Objectives can be set in all domains of activities (production, 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.^[8]

3. 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.^[9]

4. It did not address the importance of successfully responding to obstacles and constraints as essential to reaching a goal. The model didn’t adequately cope with the obstacles of:

• Defects in resources, planning and methodology,
• The increasing burden of managing the information organization challenge,
• The impact of a rapidly changing environment, which could alter the landscape enough to make yesterday’s goals and action plans irrelevant to the present.^[10]

When this approach is not properly set, agreed and managed by organizations, in self-centered thinking employees, it may trigger an unethical behavior of distorting the system of results and financial figures to falsely achieve targets that were set in a short-term, narrow, bottom-line fashion.^{[11][dubious – discuss]}

The use of MBO needs to 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, based upon a more strategic picture being available to employees. Engagement of employees in the objective setting process is seen as a strategic advantage by many ^[12]

A saying around MBO and CSF's -- "What gets measured gets done" ^[13]-- 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.

Arguments Against

MBO has its detractors, notably among them W. Edwards Deming, who argue that a lack of understanding of systems commonly results in the misapplication of objectives^[14].

One trap is not differentiating between common and special cause. Deming had a simple demonstration to illustrate Common Cause Variation. He would suspend a funnel over a table and cover the table with a paper, marking the point on the paper above which the funnel was suspended. He would then repeatedly drop a marble into the funnel, which would roll and eventually come to rest some distance from the point under the funnel, and each time he would mark the resting point. Eventually, it could be seen that the resting points were distributed around the point under the funnel and a circle could be drawn representing a boundary where predictably all marbles would come to rest. This distribution is attributable to common cause. A manager could set an objective, saying that marbles should be as close to the point under the funnel as possible, and easily express this objective using the SMART(ER) criteria. With an understanding of common cause, it is possible to calculate the probability of a marble meeting the objective, but the objective itself does not change the quality inherent to the system. Unfortunately, it is human nature to assume that there is something better about random events that meet arbitrary objectives, and assign their superiority to a non-existent special cause^[15]. For example, the manager might say that the person who dropped the marble that met the objective was more diligent than the person whose drop did not; it is likely that the two are indistinguishable and no such special cause exists.

This does not mean that there is no way to meet objectives. Deming concluded his demonstration by lowering the funnel over a fresh sheet of paper and dropping another series of marbles through it. This is a systemic change that results in a change in the system's quality, the reduction of the boundary radius. This change could potentially meet the objective set by the manager, but is also the basis of a second trap; a single SMART(ER) objective is not necessarily the best criteria for judging the fitness of potential solutions. There are numerous cases of employees meeting their managers' objectives by contravening policy, regulations, ethical considerations and laws^[16][17]. 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 stressed the point that a leader must have an understanding of systems because there is a third trap, incorrectly assuming that improving a component of the system always improves the whole system. A business system is usually made up of interdependent components. A simple example of this is a hypothetical factory that makes products from raw materials, with its two components being a stocking facility for raw materials and an assembly facility for making products from raw materials. The manager of this factory has noted that production is 100 units a day on average, but the stock room holds enough raw materials to make 150 units a day. Seeing this as wasteful, the manager sets the objective that stock must be reduced. The problem is that the 150 units of raw materials may coincide with an upper control limit of production. If the assembly facility produces its average of 100 units a day with a assembly process that varies from 50 to 150 units a day, the assumed beneficial reduction of raw materials will also cause a detrimental reduction of productivity, as the factory will no longer have the raw materials on hand to make up for the days when the system fails to produce. A leader with an understanding of systems could observe the interdependence and make adjustments to the assembly process that would allow the reduction of stock. A manager using only objectives would likely blame the assembly team of slipping when in fact they had made no change at all. Deming points out that Drucker also warned managers that a systemic view was required ^[18] and felt that Drucker's warning went largely unheeded by the practitioners of MBO.

A more fundamental and authoritative critique comes from Walter A. Shewhart / W. Edwards Deming, the fathers of Modern Quality Management, for whom MBO is the opposite of their founding Philosophy of Statistical Process Control^[19].

See also

• Decision making software

References

1. ^ Drucker, Peter F., "The Practice of Management", 1954. ISBN 0060110953
2. ^ S.M.A.R.T. defined at LearnMarketing.net
3. ^ http://turnontolife.wordpress.com/2008/08/04/goal-setting-make-smart-goals-smarter-part-2/ Goal Setting
4. ^ http://www.articledashboard.com/Article/Achieve-Your-New-Year-s-Resolution-With-SMARTer-Goal-Setting/728068
5. ^ http://www.selfgrowth.com/articles/achieve_goal_setting_success.html
6. ^ http://www.brianmac.co.uk/plan.htm
7. ^ http://www.sportsmind.com.au/Article-SMARTER-Goals.php Corporate Coaching
8. ^ A Foundation of Goal Management Practice in Government: Management by Objective
9. ^ The Woman's Guide to Management Success by Cannie J, 1979 ISBN 0139617639
10. ^ The Goal of Management; from MBO to Deming to Project Management and Beyond
11. ^ Castellano, Joseph F.; Kenneth Rosenzweig, Harper A. Roehm (Summer, 2004). "How corporate culture impacts unethical distortion of financial numbers: managing by Objectives and Results could be counterproductive and contribute to a climate that may lead to distortion of the system, manipulation of accounting figures, and, ultimately, unethical behavior". Management Accounting Quarterly. http://findarticles.com/p/articles/mi_m0OOL/is_4_5/ai_n6276425/pg_1. Retrieved 13 November 2006. 
12. ^ Handy Understanding Organizations (Penguin Business) (3rd Edition) (Paperback)
13. ^ Behn, R.D. (2003), ‘Why measure performance? Different purposes require different measures’, Public Administration Review, 63:5, 586-606
14. ^ Deming, W. Edwards, "Out of the Crisis", The MIT Press, 1994, ISBN 0262541165
15. ^ Taleb, Nassim Nicholas, "Fooled by Randomness", 2008, Random House, ISBN 1400067936
16. ^ Egan, Timothy (February 4, 2005). "Tapes Show Enron Arranged Plant Shutdown". The New York Times. http://www.nytimes.com/2005/02/04/national/04energy.html?ex=1107666000&en=01449ebf62df572e&ei=5070. Retrieved 2009-06-26. 
17. ^ Rogue Trader: Timeline of Events -
18. ^ Drucker, Peter, "Management Tasks, Responsibilities, Practices", Harper & Row, 1973
19. ^ Statistical Process Control: the Founders' Way - www.statistical-process-control.org

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