MANAGEMENT BY OBJECTIVES

(MBO)
Peter Drucker

The father of modern corporate management and often considered to be the worlds
influential corporate guru. His ideas and thoughts revolutionized corporate
management in the later half of the 20th century.
Ducker questioned why in both the classical and human relations schools of
management, effectiveness was automatically considered to be a natural and expected
outcome.
According to him, effectiveness was more important than efficiency and was the
foundation of every organization.
He thereby developed Management by Objectives (MBO) through his 1954 book
The Practice of Management. MBO deals with a certain type of interaction, specific
to a manager and his employee. MBO is based on the thinking that various
hierarchies within companies need to be integrated. There was a need for
commitment, responsibility and maturity. There was a need for a common challenge.
Here MBO becomes a process by which the objectives of an organization are agreed
to and decided between the management and the employees, this way the employees
understand what is expected of them and help set their own individual goals.
Therefore they attain both their personal goals and the organizations targets.

Management by Objectives (MBO)

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.
The term management by objectives was first popularized by Peter Ducker in his
1954 book The Practice Management.
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 fulfil their
responsibilities.
According to George S. Odiorne, 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 its individuals 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.
Can be defined as a process whereby the performance goals and objectives are set by
each subordinate in collaboration with his superior at the start of the appraisal period.

MBO is a Process
o A process of consisting of a series of interdependence and interrelated steps:
The formation of clear, concise statements of objectives
The development of realistic action plans for their attainment,
The systematic monitoring and measuring of performance and achievement, and
The taking of corrective actions necessary to achieve the planned results.

The Five-Step MBO Process

Start of MBO Process

Set Organizational
Objectives

Reward
Performance

Cascade Objectives to
Employees

Evaluate
Performance

Monitor

Every level of management in the organization participates in the strategic planning

process and creation of performance systems. The managers of the firm are expected to
participate in the strategic planning process to ensure the effectiveness in the implementing of
the plan. The managers are expected to apply a range of performance systems, designed to help
in the effective functioning of the organization.
An MBO system calls for each level of managers to identify their goals for every area
they are responsible for. These goals are shared then with their individual units. Shared targets
guide individuals in fulfilling their role. The role of the management now is to monitor and
evaluate performance. The focus is on future rather than on past. They check progress frequently

and over a set period of time. There is external and internal control in this system with routine
assessments. An evaluation is done to understand as to which extent the goals have been met.
An important aspect of the MBO approach is this agreement between employees and
managers regarding performance which is open to evaluation. The principle is that when
employees are involved with the goal setting and choosing the course of action to be followed by
them, they are more likely to fulfil their responsibilities. There is a link between organizational
goals and performance targets of the employees.

THE MBO PROCESS

Define Organisational
Goals

Defining Employee
Objectives and
Organisational
Objectives

Reporting &
Reviewing

Providing Feedback

Performance
Evaluation &
Review

Continuous
Monitoring of
performance and
progress

MBO is a Philosophy
o Reflects a Proactive way of managing that is
Result Oriented
Emphasizes accomplishments rather than inputs
Encourages participation at all levels of and organisation
o Objectives setting and participative management are integrally linked by:
Allowing employees to participate in the setting of objectives.
Encouraging everyone to work towards accomplishment of general organisational
objectives.
MBO Framework
o MBO provides the basis for making functional budget estimates.
o Evaluation of MBOs provides a way to communicate purpose & accomplishments to the
public.
o MBO provides a way to involve and motivate staff.
Four Basic Principles
1. Unity of management action is more likely to occur when there is pursuit of a common
objective.
2. Greater the focus on results on a time scale, greater the likelihood of achieving them.
3. Greater the participation in setting meaningful wok with accountable results, greater the
motivation for completing it.
4. Progress can only be measured in terms of what one is trying to make progress towards.
Three Constituent Processes
1. Participative Decision Process
2. Goal Setting
3. Objective Feedback
GOAL ACHIEVEMENT MANAGEMENT
o Goals
o Objectives
o Management mechanism
Policies
Programs

Actions
Criteria

The Test of SMART Objectives/ MBO Goals

o Every objective must meet these criteria:
Is it Specific?
Is it Measurable?
Is it Achievable?
Is it Realistic?
Is it Time Bound?
MBO Includes Evaluation
o Preliminary evaluation may call for adjusting objectives.
o Performance evaluation focuses on how well employees accomplish their specific unit
objectives.
o Evaluation includes assessment of how to improve. Evaluation catalogues yearly
accomplishment.
Limitations of MBO
o Presupposes fixing of individual responsibilities.
o It is difficult to make comparative ratings of individuals because each individual goals are
different from others.
o Time consuming.
o Presumes a certain level of trust throughout the hierarchy.
o Less applicable in routine jobs.
Advantages of MBO
o
o
o
o

Effective Planning & Control.

Reveals organisational deficiencies.
Elicits peoples commitment.
Demonstrates objectivity and reduces element of judgement.
Objectives are discussed before being agreed upon.
There is participation in setting of goals, deciding the action course and in making
decisions.
There is increased motivation and job satisfaction.
Relationships between the managers and those under them improve.
There is better communication within the organisation and increased coordination.

Managers can ensure that objectives of the subordinates are linked to the
organizations objectives.
Objectives can be set at all levels and in various departments.
Objectives can be set individually for each department especially in promotion,
marketing, and financial planning.
MBO can be applied in any organisation.
Traits of MBO can be found in industries like the electronic media where
performance objectives are carefully established and monitored, particularly in the
areas of promotion, marketing and financial planning.
In an MBO system, employees are more self-directed than boss-directed.

Disadvantages of MBO

It has to be systematically done.

There is more importance given to the setting of the goals than on the actual
outcome or course of action.
It may lead to polarization f efforts, whereby, people or departments are not
motivated to look beyond their own targets and help others.
It does not take into consideration, the environment I which the goals are set, like
available resources, stake holders, etc.
To avoid potential problems SMART and SMARTER objectives need to be
agreed upon.
There is no stimulation of innovation.
Managers start believing in the concept of an ideal employee and evaluate their
subordinates based on what they expect they should be.
Targets can be misreported and objective setting may become counter-productive
to the organization.
Quality of gaols set may be poorer or too unrealistic.
It is time-consuming to implement and difficult to maintain.

Reasons for Failure of MBO

o Absence of a fully committed and involved top management.
o Dictatorial rather than participatory development of management objectives.

Motivation Theory McGregor

Author: Jim Riley

Last Updated: Sunday23 September, 2012

McGregor Theory X & Theory Y

Introduction
McGregor
He developed two theories of human behaviour at work: Theory X and Theory Y.
He did not imply that workers would be one type or the other. Rather, he saw the two
theories as two extremes with a whole spectrum of possible behaviours in between.
THEORY X workers could be described as follows:
Individuals who dislike work and avoid it where possible.
Individuals, who lack ambition, dislike responsibility and prefer to be led.
Individuals who desire security.
The management implications for Theory X workers were that, to achieve organisational
objectives, a business would need to impose a management system of coercion, control and
punishment.

THEORY Y workers were characterised by McGregor as:

Consider effort at work as just like rest or play.
Ordinary people who do not dislike work. Depending on the working conditions,
work could be considered a source of satisfaction or punishment.
Individuals who seek responsibility (if they are motivated)
The management implications for Theory X workers are that, to achieve organisational
objectives, rewards of varying kinds are likely to be the most popular motivator. The challenge
for management with Theory Y workers is to create a working environment (or culture) where
workers can show and develop their creativity.