Management by Objectives

What is MBO?

Every large organisation has problems coordinating the activities of all the employees. There is a danger that they are more interested in their own targets rather than those of the firm as a whole. Such problems often increase with the size of a firm.It becomes more difficult to keep in constant and personal contact with people and to check on what they are doing.

Originator of MBO was Peter Drucker.1973: Management, Tasks, Responsibilities and Practice.He wrote: A manager in the first place, sets objectives. He determines what the objectives should be. He determines what the goals in each area of the business should be. He decides what has to be done to reach these objectives. He makes the objectives effective by communicating to people whose performance is needed to attain them.

It is not enough to establish objectives. At the same time a system must be established to let people see for themselves, how they are performing against the targets set. By delegating power in this way bosses no longer need to check regularly on what each employee is doing.

From mission to MBO

Corporate aim or mission is the overall reason for the firm’s existence. This is written in the mission statement. E.g. the lowest cost producer in
Europe or the best in the industry.The mission is a general target, it is meant to inspire, to motivate. But it lacks the specific information for planning. To plan properly the firm needs to turn the mission into a corporate objective. This will specify exactly what the firm wants to measure, how much of an increase it wants and when it wants to achieve the target. For example: The firm might set out to increase profits by 20 % over a five year period. The firm then has to turn this overall objective into more detailed targets for individual departments and managers.To achieve the corporate objective all the different functional managers (such as marketing, finance, operation and human resources) must have their own target. E.g. the marketing objective might be to increase sales, whilst the operations department tries to reduce costs. These functional objectives lead to further targets within each business area. To increase sales, for example, the marketing manager might decide to increase the level of promotional activities, to reduce costs the operations manager might aim to reduce the number of reject products. Every time an objective is set, the next level of managers must decide how this is to be fulfilled. If everyone meets their targets successfully then the firm will achieve its overall objective. Once managers have agreed their objectives, it is possible to develop appropriate strategies.

The strategy is the plan which shows how to fulfil the objective. If for example, the objective is to generate 23 % of sales from new products, the strategy might be to invest more heavily in research and development.

How does MBO work?

An MBO system is based on mutually agreed objectives. A manager will discuss with subordinates what needs to be achieved in their particular section of the firm. They will agree specific targets for each subordinate. For the MBO system to work effectively it is important that the objectives are agreed by the subordinates and not simply imposed on them. It is good practice, therefore, to allow staff to set objectives for themselves subject to the superiors approval. They are likely to be much more committed to them because they will feel they own these targets themselves.

Advantages of MBO

  • Each manager knows exactly what he has to do ( Example with E-mails, priorities)
  • MBO-System acts as a motivator. Herzberg said that responsibility is a vital motivator.
  • Peter Drucker believed that the most effective way to give people a sense of responsibility for their working lives was to make them decide for themselves how to achieve their objectives.
  • The targets act as a control mechanism for the organisation. Everyone’s performance can be judged against the targets.
  • MBO ensures that employees in every department are all working towards common goals. MBO allows delegation to be achieved in a coordinated way.

Problems of MBO

MBO system sounds appealing in theory, in practice it can become bureaucratic and time consuming. Managers and subordinates can spend hours in meetings trying to agree targets which may be unrealistic anyway. Setting targets does not guarantee that they are achieved. In some cases, companies introduce MBO but individual managers are unwilling to delegate fully to their subordinates. This results in frustration as the executive feels they will be held responsible for something they do not fully control. Another problem is that the objectives can become out of date and inappropriate very quickly. (Environment changes rapidly). With new competitors, new product offerings, new technology and new legislation the world in which a firm operates can be very dynamic. Targets may soon become irrelevant. Consequently some managers think it is more important to set out the general direction the firm wants to move in. Not try to be too specific about the exact route. Much better, some say, to let the managers react for themselves to the situation in which they operate.

The features of a good objective A good objective should be:

Specific – this means it must be clear what the firm is trying to achieve. For example, mangers may want to increase sales, increase profit or increase customer satisfaction.

Measurable – this means that all objectives should include a quantifiable element. For example, the firm might aim to increase profit by 30 %. This means that the managers can easily check whether the target has been achieved.

Agreed – targets need to be agreed by the different people who are involved in the process. There is no point imposing a target on someone.

Realistic – a target should always be achievable. If you set an objective which cannot be achieved people will not be motivated by it. It may even discourage them, because they know the target can never be reached anyway. To work well employees must believe that their efforts can be successful.

Time specific – all objectives should state quite clearly when they should be achieved. Managers need to know exactly how long they have so that they can plan accordingly.

MBO – an evaluation

The aim of management by objectives is to coordinate the decisions of all the different parts of the firm. This is needed to bring about a consistent approach and ensure that a workforce of perhaps 50.000 people is all heading in the same direction. It can also form part of a regular appraisal system in which managers and workers meet to review performance and set new targets. However, in recent years MBO has been rejected in many organisations because it can act as a constraint on management thinking. Once certain targets have been set, managers may only focus on these areas of their job and may neglect other business opportunities which present themselves. Given the increasing pace of change targets can quickly become out of date, which limits the value of the system.

An even more issue is that MBO may cause problems in business with a weak corporate culture. In the 1980s and 1990s, many large financial businesses such as Prudential found severe problems with sales staff. In the pursuit of their sales objectives, the staff had been miss-selling private pension plans to people who would have been better off staying in the state pension scheme. The employees short-term pursuit of their objectives led the companies into years of bad publicity and very expensive refunds to customers. Management by objectives can give the green light to short-termist decision making unless a positive long-term vision is clearly in place.

Key terms
Mission statement – a statement of the firm�s overall reason for its existence.
Objective � a quantifiable target which helps to coordinate activities Short-termist � pursuing an objective without considering the longer term impact

Strategy – a plan which shows how to achieve an objective