Management by objectives - Wikipedia, the free encyclopedia

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Management by objectives
From Wikipedia, the free encyclopedia

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.[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 employees actual performance
with the standards set. Ideally, when employees themselves have been involved with the goal setting and
choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.
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 members.[2]

Contents
1 Five steps of MBO process
2 Features and advantages
3 Domains and levels
4 Practice
5 Limitations
6 Arguments against
7 See also
8 References

Five steps of MBO process

The MBO process consists of five steps:
1. Review organizational objectives: The manager gains a clear understanding of organizational's overall
objectives.
2. Set worker objectives: The manager and worker meet to agree on worker objectives to be reached by
the end of normal operating period.
3. Monitor progress: At periodic intervals during the normal operating period, the manager and worker
check to see if the objectives are being reached.
4. Evaluating performance: At the end of normal operating period, the worker's performance is judged
by the extent to which the worker reached the objective.
5. Give reward: Rewards given to the worker are based on the extent to which the objectives were
reached.

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Features and advantages

Behind the principle of 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 help to maintain harmonious relationships within the organization and also to solve
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.
6. Common goal for whole organization means it is a directive principle of management.

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.
Managers must determine the mission and the strategic goals of the enterprise. The goals set by top-level
managers are based on an analysis of what can and should be accomplished by the organization within a
specific period of time. The functions of these managers can be centralized by appointing a project manager
who can monitor and control activities of the various departments. If this cannot be done or is not desirable,
each managers contributions to the organizational goal should be clearly spelled out.

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 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

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Management by objectives - Wikipedia, the free encyclopedia

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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.
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.
A saying around MBO "What gets measured gets done", Why measure performance? Different purposes
require different measures is perhaps the most famous aphorism of performance measurement; therefore,
to avoid potential problems SMART and SMARTER objectives need to be agreed upon in the true sense
rather than set.

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.[3] Additionally, Deming
stated that setting production targets will encourage workers to meet those targets through whatever means
necessary, which usually results in poor quality.[4]
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 [5] and felt that Drucker's warning went largely unheeded by the
practitioners of MBO.

See also
Decision making software

References
1. ^ Drucker, Peter F., "The Practice of Management", in 1954. ISBN 0-06-011095-3
2. ^ Odiorne, George S., "Management by Objectives; a System of Managerial Leadership", New York: Pitman
Pub., 1965.
3. ^ Deming, W. Edwards, "Out of the Crisis", The MIT Press, 1994, ISBN 0-262-54116-5
4. ^ Demings 14 Points and Quality Project Leadership (http://www.pmhut.com/demings-14-points-and-qualityproject-leadership) J. Alex Sherrer, March 3, 2010
5. ^ Drucker, Peter, "Management Tasks, Responsibilities, Practices", Harper & Row, 1973

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