14 Management by Objectives

Tejinder Sharma

1. Learning outcomes

After studying this module, you shall be able

  • To know the concept and meaning of Management By Objectives (MBO).

  • To understand the process of MBO.

  • To elaborate benefits, limitations and prerequisites for installing MBO programme.

2 Concept and meaning of Management by Objectives

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.Management by Objectives (MBO) is the most widely accepted philosophy of management today. It is a demanding and rewarding style of management. It concentrates attention on the accomplishment of objectives through participation of all concerned persons, i.e., through team spirit.

The process of setting objectives in the organization to give a sense of direction to the employees is called as Management by Objectives.

According to Peter Drucker, MBO is a comprehensive managerial system that integrates many key managerial activities in a systematic manner, consciously directed towards the effective and efficient achievement of organizational objectives.”

According to Chakraborty, “MBO is a result-integrated, non-specialist, operational managerial process for the effective utilization of material, physical, and human resources of the organization by integrating the individual with the organization and organization with the environment.”

According to George S. Ordiorue, “The system of management by objectives can be described as a process whereby the superior and subordinate managers of an organization 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.”

According to Koontz and Weihrich, “Management by objectives is a comprehensive managerial system that integrates many key managerial activities in a systematic manner and that is consciously directed toward the effective and efficient achievement of organizational and individual objectives.”

According to John Humble, MBO is “a dynamic system which seeks to integrate the company’s needs to clarify and achieve its profits and growth goals with the manager’s need to contribute and develop himself. It is a demanding and rewarding style of managing a business.”

MBO provides specific objectives for each succeeding level (i.e., divisional, departmental, individual in the organisation). In other words MBO is a process by which objectives cascade down through the organisation as depicted in Fig 17.7.

In MBO goals are expected to be SMART, i.e.

  • Specific

  • Measurable

  • Achievable

  • Realistic, and

  • Time bound.

3. Characteristics of MBO

I. Goal Orientation: MBO focuses on the determination of unit and individual goals in line with the organizational goals. These goals define responsibilities of different parts of the organisation and help to integrate the organisation with its parts and with its environment.

II. Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals. However, it is examined both by the superior and the subordinate that goals are realistic and attainable. In brief, the goals are to be decided jointly through the participation of all.

iii. Systems Approach: MBO is bound to have relationship with every management technique. Certain degree of overlapping is there. Infact, often MBO provides the stimulus for the introduction of new techniques of management and enhances the relevance and utility of the existing once.

iv. Optimization of Resources: The ultimate aim of MBO is to secure the optimum utilization of physical and human resources of the organisation. MBO sets an evaluative mechanism through which the contribution of each individual can be measured.

v. Simplicity and Dynamism: MBO is a non-specialist technique and it can be used by all types of managers. At the same time it is capable of being adopted by both business and social welfare organizations. MBO applies to every manager, whatever his function and level, and to any organisation, large or small.

vi. Operational: MBO is an operational process which helps to translate concepts into practice. MBO is made operational through periodic reviews of performance which are future-oriented and which involve self-control.

vii Multiple Accountability: Under MBO, accountability for results is not centralized at particular points. Rather every member of the organisation is accountable for accomplishing the goals set for him. Multiple centers of accountability discourage ‘buck-passing’ and ‘credit-grabbing’. MBO establishes a system of decentralized planning with centralized control.

viii. Periodic review of performance: The performance review is held regularly, normally once a year. It emphasizes initiatives and active role by the manager who is responsible for achieving objectives.

ix. Provide guidelines: Objectives in MBO provide guidelines for appropriate system and procedures. Resource allocation, delegation of authority etc., are determined on the basis of objectives.

4. Process of MBO

 

Process of Management by Objectives (MBO)

1. Setting of Organisational Purpose and Objectives: The first step in MBO process is to analyze the purpose or mission of the organization. This exercise is undertaken at the top level. The mission of the organization will be converted into goals for a given period, it may be for a quarter, half year, a year, 5 years or more. In many cases objectives are set to coincide with the completion of a project or with an annual budget. This may not be desirable. Some goals may be set for a short period while some may be for a longer period. Generally as we go downward in the Hierarchy the period for objective setting is short. At the operative level the objectives may be for a week or a month.

Objectives should:

  • Be verifiable
  • Indicate the time frame within which they are to be achieved
  • Indicate associated cost involved
  • Indicate quantity and quality aspects of the expected achievements
  • Help in promoting personal and professional growth and development
  • Get duly communicated to all who are concerned with it
  • Align short-term objectives to medium and long-term objectives; and
  • Give due importance to the views of individuals expected to contribute in the achievement of objectives at the time of setting objectives

2. Key Result Areas: Organizational objectives and planning premises together provide the basis for the identification of key result areas (KRAs). It may be emphasized that KRAs are derived from the expectations of various stakeholders and indicate the priorities for organizational performance. KRAs also indicate the present state of an organization‟s health and the top management perspective for the future.

3. Setting Subordinates’ Objectives: The organizational objectives are achieved through individuals. Therefore, each individual manager must know in advance what he is expected to achieve. Every manager in the managerial hierarchy is both superior and subordinate except the person at the top level and the lowest level. The process of objective setting begins with superior‟s proposed recommendations for his subordinate‟s objectives. In turn, the subordinate states his own objectives as perceived by him. Thereafter, the final objectives for the subordinate are set by the mutual negotiation between superior and subordinate.

4. Matching Resources with Objectives: When objectives are set carefully, they also indicate the resource requirement. In fact, resource availability becomes an important aspect of objective setting because it is the proper application of resources which ensures objective achievement. Therefore, there should be matching between objectives and resources. By relating the objectives, a superior manager is better able to see the need and economy of allocating resources.

5. Performance Appraisal: Appraisal aspect of MBO tries to measure whether the subordinate is achieving his objective or not. If not, what are the problems and how these problems can be overcome? Appraisal is undertaken as an on-going process. It is not taken merely to punish the non-performer or to reward it promptly.

For monitoring performance and progress the followings are required:

 

Ø Identifying ineffective programs by comparing performance with pre- established objectives,

 

Ø Using zero based budgeting,

 

Ø Applying MBO concepts for measuring individual and plans, o Preparing long and short range objectives and plans,

 

Ø Installing effective controls, and

 

Ø Designing sound organizational structure with clear, responsibilities and decision making authority at appropriate level.

6. Recycling: Though appraisal is the last aspect of MBO process., it is used as an input for recycling objectives and other actions. Objectives are neither set at the top and communicated to the bottom nor are they set at the bottom and go up. Objective setting is a joint process through interaction between superior and subordinate. Therefore, what happens at each level may affect other levels also.

5. Advantages of MBO

a.Better management of organizational activities: MBO helps in better managing the organizational resources and activities. Resources and activities are put in such a way that they result into better performance. There are five basic assumptions about what improves performance:

i. Clarity of objectives.

ii. Role clarity- including the areas of authority and responsibility which leads to improved performance and helps the manager to appreciate his own contributions as well as contributions of others who are directly related to him.

iii Periodic feedback of performance provide opportunities for taking stock of the situation and planning future course of action.

iv Participation by managers in the management process leads to achievement of objectives.

v. Realisation that there is always scope for improvement of performance in every situation.

b. Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces goals that identify desired/expected results. Goals are made verifiable and measurable which encourage high level of performance. They highlight problem areas and are limited in number. The meeting is of minds between the superior and the subordinates. Participation encourages commitment. This facilitates rapid progress of an Organisation. In brief, formulation of realistic objectives is me benefit of MBO.

c. Raises Employee morale: Participative decision-making and two way communications encourage the subordinate to communicate freely and honestly. Participation, clearer goals and improved communication will go a long way in improving morale of employees.

d. Employee Satisfaction: MBO provides greatest opportunity for personnel satisfaction. This is possible because of two closely-related phenomena: participation in objective setting and rational performance appraisal. When the individuals are involved in objective setting they derive satisfaction because of the feeling that they are important to the organization.

e. Facilitates effective planning: MBO programmes sharpens the planning process in an organization. It compels the managers to think of planning by results.

f. Increased the level of motivation in personnel: MBO leads to increase the level of motivation in employees as every personnel enjoy his work freely and honestly.

g. Basis for Organizational Change: MBO stimulates organizational change and provides a framework and guidelines for planned change, enabling the top management to initiate, plan, direct and control the direction and speed of change. In any organization, change is required because of change in external factors or in internal factors or changes taking place in both the factors simultaneously.

h.Management by Objectives facilitates effective control: One of the main features of MBO is the continual monitoring of progress. This allows everyone to measure their performance against the standards that have been put in place. It is those clear standards that allow everyone to work towards a very identifiable set of goals, all allowing for better control.

i.Management by Objectives facilitates personal leadership: MBO helps everyone within the organization, but it gives mangers in particular the opportunity to display their leadership skills. Keeping the entire group focused will paint a manager in a very positive light and make them more likely to advance within the company.

j. Executive Development: The MBO strategy is a kind of self-discipline whereby shortcomings and development needs are easily identified. It stresses upon a long term perspective and self-development. MBO releases potential by providing opportunities for learning innovation and creativity. It encourages initiative and growth by stretching capabilities of executives.

6. Disadvantages of MBO

1. One is that the development of objectives can be time consuming, leaving both managers and employees less time in which to do their actual work.

2. Increased Paper Work: MBO programmes introduce ocean of paper-work such as training manual, newsletters, instruction booklets, questionnaires, performance data and report into the organization.

3. Reward-punishment approach: MBO is a pressure oriented programme. It is based on reward-punishment approach.

4. Problems in objective setting: MBO requires verifiable objectives against which performance can be measured. However, setting such objectives is difficult at least in some areas.

5. Inflexibility: MBO represents the danger of inflexibility in the organization, particularly when the objective needs to be changed. In a dynamic environment, a particular objective may not be valid for ever.

6. Frustration: Sometimes MBO creates frustration among managers. Two reasons may be behind that:

a. Improper implementation of MBO programme in organization can create chaos

b. Arousing of high expectation due to introduction of MBO particularly in young and junior managers.

7. Lack of Appreciation: Lack of appreciation of MBO is observed at different levels of the organization. This may be due to the failure of the top management to communicate the philosophy of MBO to entire staff and all departments.

8. Increase comparison among employees: 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.

9. Focus is only on short-term goals: MBO tends to focus on short-term goals that can be measured by year‟s end. As a result, workers may be tempted to achieve short-term goals at the expense of long-term ones.

7. Prerequisites for installing MBO programme

i. Purpose of MBO :Organisation should be very clear about the purpose for which it is being implemented. Howell has suggested a three-stage evaluation of MBO:

 

• Management appraisal and development
• Improvement of the productivity and profitability
• Long-range planning

MBO primarily for immediate improvements in productivity and profitability. If the purpose of MBO is not precisely defined and particular techniques in MBO suitable to the purpose are not emphasized, there is every possibility that MBO does not produce the results are anticipated.

ii. Top Management Support: Superior and subordinate interaction is an important factor in any programme of MBO. If the attitude of top management is positive, the MBO will be a success otherwise its success is doubtful. This is due to the fact that if a subordinate feels that his superior‟s perception is not positive towards MBO, his approach also shows a positive trend. Top management support is necessary in introducing MBO due to the following responsibility:

a) Discussing the objectives already set with each subordinate,

b) Evaluating progress made in achieving these objectives,

c) Assisting and supporting the subordinate by removing obstacles and hindrances in the way of accomplishing his work.

iii. Training for MBO: An important prerequisite of implementing MBO programme is to introduce a training programme for those who are operating under it. A systematic training is required in the organization for disseminating the concepts and philosophy, and need for MBO. If the people in the organization are not clear about the reasons for which the MBO programme is being implemented in the organization, they will fear and may show their resistance because people tend to show fear to what they do not understand. This fear can lead to suspicion and mistrust which in turn, undermines people‟s enthusiasm which is very important during the initial stages of MBO. A major type of training in MBO should be in the area of inter-group and inter-personal relationship because MBO entails a lot of such elements.

iv. Participation: MBO requires involvement of each individual in the programme. It refers to the commitment on the part of the subordinate. Being a part of the programme the subordinate should not perceive that the technique used by the superior is to control his performance. This may avoided by encouraging the subordinate to play a meaningful role in the preliminary phases leading to actual writing of the objectives. Subordinates role should include:

a. Identification of accountable areas of his job,

b. Determination of mutually agreeable performance measures,

c. Identification of the present performance level.

v. Feedback for self-direction and Self-control: In MBO system a man directs and controls his own performance. Everybody knows what he is to achieve and how well he is achieving them. He also knows „where he stands‟ and „where he is going‟ so the the may overcome shortcoming of his performance  and  may  make  necessary  adjustments  to  achieve  the  desired  results  on  his  own.

Feedback under MBO may take two forms:

1. The individual should get periodic report on where he stands on an overall performance basis. This is required specially when he asks for help from his superior.

2. Feedback is necessary at the time of periodic counselling and appraisal interview.

vi. Total Attack: The utility of MBO will be effective if it must be carried all the way down to the first line of the organization.

vii. Tie with Compensation: One of the most effective aspects of MBO is to tie MBO system with the compensation programme of the organization. Salary/wages must be lined with the objectives attained by the subordinates.

viii. Limited Commitment: MBO creates a competitive climate in the organization because it generates commitment. If not within limits this commitment will create competitive rivalry with respect to claims on scare resources of the organization. Therefore, it requires inter-departmental cooperation and integration of efforts.

8. Summary

MBO is a system for achieving organizational objectives, enhancement of employee commitment and participation. Therefore, its process should facilitate translation of basic concepts into management practices. Despite of its various benefits, it is not without problems and weaknesses. MBO is generally taken as panacea for all problems or magic wand which can deliver everything. As we all know now, MBO is a philosophy rather than mere a technique. As such, its installation requires a basic change in the organizational culture and environment. Many of the organizations are designed so at to undermine the MBO philosophy.

 

References:

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  • Bombay, 1985.
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  • publishing, New York.
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