People Innovation Excellence

Management by Objective

Management by Objectives

By: Novita, S.Kom, MBA

Management by objectives (MBO) is a technique used by organizations to set goals. It is a process aimed at the integration of individual and organization goals. MBO may be defined as a system of management set up to help in planning, organizing, problem solving, motivating, and other important managerial activities. It involves the participation of subordinates and their managers in setting and clarifying the goals for subordinates.

George Odiorne (a leading MBO consultant) defines MBO 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, and use these measures as guides for operating the unit and assessing the contribution of each of its members.” The goals of this approach include improved performance, more communication and participation, higher morale and job satisfaction, and a better understanding of the organization’s objectives at all levels.

MBO approaches goal setting on the assumption that people have higher-level needs for competence and achievement, and want to satisfy these higher-level needs in their work. In addition, people will work harder and perform better if they participate in setting the goals they are to achieve. In line with this, management must create a climate that encourages self-development by individuals.

The Purposes of MBO Programs

There are two underlying reasons for implementing MBO in an organization. One is to clarify the organization’s goals and plans at all levels; the other is to gain better motivation and participation from the organization’s members. MBO is a way to increase the clarity of organizational planning and give subordinates more knowledge and understanding of their jobs. MBO may be used to identify organizational goals at all levels and to encourage participation in setting the standards that will be used to evaluate subordinate performance. Participation in the goal-setting process allows managers to control and monitor performance by measuring performance and results against the objectives subordinates helped to set.

Douglas McGregor suggested a modified approach to MBO under the concept of “management by integration and self-control.” According to McGregor, the MBO concept could be used to provide a mutual opportunity for managers and subordinates to define and agree upon areas of responsibility, specific performance goals, and the terms of the expected outcomes. He suggested that managers should establish performance goals after reaching agreement with their superior about major job responsibilities. Then accomplishments would be appraised after a short period, usually six months. After this self-appraisal in cooperation with the superior, another set of performance goals would be established. McGregor aimed at getting organization members to commit to the goals by the “creation of conditions such that the members of an organization can achieve their own goals best by directing their efforts toward the success of the enterprise.” He advocated this concept for appraising performance because it shifted the emphasis from weakness and criticism to an analysis of strength and potential. In this application of MBO, the supervisor’s role is one of counseling, coaching, or process consultation.

The MBO Process

Although practitioners have different ways of implementing MBO, most of them emphasize the need for a commitment by top management. As with the overall OD program, MBO starts at the top of the organization and works its way down. The MBO program of Bridgestone Corporation’s tire plant in Tennessee begins with the president proposing a preliminary policy statement to the executive committee. The committee draws up a final presidential policy statement that is presented to the department managers.

The department managers, working with their superiors, draw up detailed implementation plans for their departments based on the president’s policy statement. As the Bridgestone example, the MBO process begins with the top management team studying the operating system. From this study, the team sets up broad measures of organizational performance. Goal-setting sessions are then held at the various organizational levels, one at a time, moving from the top down. Within divisions and at each successive level, the goals are more specifically defined. Management by objectives may be described as a process consisting of a series of five interrelated steps (see Figure 12.2):

Step 1.

The subordinate proposes to the manager a set of goals for the upcoming time period that are congruent with the goals set at the next-higher level. The proposal sets forth specific goals and performance measures.

Step 2.

The subordinate and the manager jointly develop specific goals and targets. These must be specific, measurable objectives for each area of responsibility.The subordinate and the manager must mutually agree upon the goals. The major responsibility, of course, lies with the subordinate. The objectives should include both performance goals and personal career goals.

Step 3.

There is a period of performance in which the individual involved attempts to accomplish the individual goals.

Step 4.

The manager feeds back results to the subordinate and gives appropriate rewards for performance. This individual performance review involves an appraisal and discussion of accomplishments and of variations in overall performance compared with targets.

Step 5.

The outcome of the performance review is the basis for setting new performance goals and recycling the goal-setting process.

MBO is a continuing self-renewal process. How long a complete cycle takes depends on the MBO program, but most programs have quarterly reviews of objectives with a major review and new objectives set annually. Quarterly reviews facilitate quick solutions of problems and allow for considering changes in the situation. The central focus of any MBO program is the development of an agreement between supervisor and subordinate about objectives and targets.

As with other OD interventions, such as team building, MBO programs are set up in many organizations independently of an OD program. Yet MBO and goal setting are processes that many OD specialists introduce into organizations. To be used as an OD intervention, MBO should include (1) a team approach to setting and reviewing targets, (2) real participation by subordinates in setting goals, with an emphasis on mutually agreed upon goals, (3) mutual trust between subordinate and manager, and (4) a real concern for personal career goals as well as for organizational goals. With such a team orientation, MBO logically follows team and inter team building in an OD program. When MBO is used in this sense, it can provide individual satisfaction and motivation, and increased organizational attainment.

Many of the guidelines used for setting objectives are the same as the ones used in other types of goal-setting programs. The subordinate and the manager should make the goals as precise and specific as possible. There must be agreement and acceptance of the objectives by both the individual and the manager. The interactions between manager and subordinate also provide a counseling and coaching opportunity and in this way provide for management development. The specific steps in the MBO process may differ among organizations and OD practitioners, but the goals are similar. They include better performance and better understanding of organization objectives at every level of the organization. For an example of how one company, Boehringer Mannheim Corporation, installed MBO, see the following OD in Practice.

Criticisms of MBO

Implementing MBO is expensive and time-consuming, and usually entails great effort. Because of these factors, the use of MBO has traditionally been limited to managerial and professional employees. Obtaining benefits whose value exceeds the costs is more difficult with employees performing routine work at the lower levels of an organization.

Some MBO programs encounter difficulties because management does not recognize that proper implementation of MBO requires improved managerial skills and competence. Critics question whether joint goal-setting among un-equals is possible, and whether subordinates at lower levels are free to select their objectives.

In some applications, MBO may be too quantitative, and setting objectives as explicitly as possible may not be functional. In other MBO programs, communication may come from the top dictating to the bottom instead of open communication and mutual goal setting. There is also a danger that MBO will focus only on certain aspects of the job (such as sales) and ignore other areas (for example, customer satisfaction.) MBO is used widely in organizations; in one study of Fortune 500 companies, 86 percent reported using or having used MBO. However, 11 percent reported that they were not using MBO at the time of the survey, mirroring somewhat an industry trend toward discontinuing MBO programs. In the past, MBO received a good deal of publicity, and expectations rose to unrealistic levels. It is still a widely used goal-setting process, though this is not always immediately apparent, because sometimes it is designated by another name, such as target setting.

The MBO technique includes a multitude of different types of programs, and many OD practitioners are uncertain whether it should be considered an OD intervention. Some critics feel that MBO is a manipulative approach and, therefore, should not be classified as an OD intervention, whereas others feel that OD and MBO are mutually compatible. Some OD authorities feel not only that OD and MBO fit together, but that it is impossible to have one without the other. They contend that the need to have goal setting at all levels is one of the major assumptions of organization development, and therefore that MBO is a legitimate OD intervention. Some practitioners believe that properly designed MBO programs, based upon McGregor’s ideas, can have positive results. Others believe that MBO can be improved by placing more emphasis upon individual goals and examining the underlying assumptions of motivation within these programs. There also should be an emphasis on mutual goal setting, and frequent feedback and interaction between superior and subordinate. Research evidence suggests that MBO programs can be made more effective by cutting down on the paperwork. In summary, MBO programs, when implemented correctly, can systematically engage individuals in target setting and performance improvement.

The Results of MBO

Many different types of organizations have tried MBO. One difficulty in appraising their approaches is that MBO has become an all-purpose term implying many different things in many different settings. In a study of 87 organizations using MBO, the researchers concluded that there are at least 10 different approaches to MBO, ranging from motivational to coercive.

Most research on MBO programs has reported mixed results. Some studies show that MBO has improved organizational performance, whereas others show inefficiency and weakness in application. Although the research on MBO is not conclusive, the findings are generally favorable. Several studies have concluded that goal setting results in improved performance and motivation. Moreover, managers working under MBO programs were more likely to have taken specific actions to improve performance than were those who continued with the traditional performance appraisal approach. Other evidence suggests that MBO is associated with positive attitudes toward the work situation, and that participation of subordinates in decision-making can improve performance and job satisfaction.

In a two-part study at Purex Corporation, MBO reversed production rates from a 0.4 percent per month decline to an increase of 0.3 percent per month. In a follow-up study, however, the participants felt that the program overemphasized production, was used as a whip, and did not involve all levels of management. This chapter has focused on what individuals, work teams, and organizations can do through OD goal-setting programs to improve performance. The next chapter deals with improving work processes for individuals and work teams through such interventions as job design, self-managed work teams, and total quality management.

Management by objectives is widely used in organizations but with mixed success. The failure of MBO programs is due in part to unrealistic expectations by management and in part to improper implementation. Despite some negative reports, MBO incorporates very sound techniques and should not be overlooked as an OD goal-setting technique.​

David, Fred. R. 2013. Strategic Management, 14th edition. Pearson.

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