Management by objectives

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Management by Objectives (MBO) is a process of agreeing upon objectives within an organization so that management and employees agree to the objectives and understand what they are in the organization.

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

Contents 1 The MBO Process 1.1 Unique features and advantage of the MBO process 2 Domains and levels 3 Practice 4 Limitations 5 Arguments Against 6 References

[edit] The MBO Process

[edit] Unique features and advantage of the MBO process

The principle behind Management by Objectives (MBO) is to create empowered employees who have clarity of the roles and responsibilities expected from them, understand their objectives to be achieved and thus help in the achievement of organizational as well as personal goals.

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 increases employee job satisfaction and commitment.
2. Better communication and Coordination – Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the enterprise and also solve many problems faced during the period.
3. Clarity of goals – With MBO, came the concept of SMART goals^[2] i.e. goals that are:
   1. Specific
   2. Measurable
   3. Achievable
   4. Relevant, and
   5. Time bound.

The goals thus set are clear, motivating and there is a linkage between organizational goals and performance targets of the employees.

The focus is on future rather than on past. Goals and standards are set for the performance for the future with periodic reviews and feedback.

In some sectors (Healthcare, Finance etc.) many add ER to make SMARTER, The ER can have many meanings including

• E=End-minded R=Ritualistic^[3]
• E=Energizing, Exciting and Ethical Goals or E=Evaluate R=Reviewed and Resourced or R= Redo Goals^[4][5] or Recorded ^[6]
• E=Ecological - consider 'whole' self R=Reasons and Reward ^[7]

[edit] Domains and levels

Objectives can be set in all domains of activities (production, 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.

[edit] 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

[edit] 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 underemphasizes 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 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.^[8]

3. Companies evaluated their employees by comparing them with the "ideal" employee. Trait appraisal only looks at what employees should be, not at what they should do.^[9]

4. It did not address the importance of successfully responding to obstacles and constraints as essential to reaching a goal. The model didn’t adequately cope with the obstacles of:

• Defects in resources, planning and methodology,
• The increasing burden of managing the information organization challenge,
• The impact of a rapidly changing environment, which could alter the landscape enough to make yesterday’s goals and action plans irrelevant to the present.^[10]

When this approach is not properly set, agreed and managed by organizations, in self-centered thinking employees, it may trigger an unethical behavior of distorting the system of results and financial figures to falsely achieve targets that were set in a short-term, narrow, bottom-line fashion.^{[11][dubious – discuss]}

The use of MBO needs to be carefully aligned with the culture of the organization. While MBO is not as fashionable as it was before the 'empowerment' fad, 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, based upon a more strategic picture being available to employees. Engagement of employees in the objective setting process is seen as a strategic advantage by many ^[12]

A saying around MBO and CSF's -- "What gets measured gets done" ^[13]-- 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.

[edit] Arguments Against

MBO has its detractors, notably among them W. Edwards Deming, who argue that a lack of understanding of systems commonly results in the misapplication of objectives^[14].

One trap is not differentiating between common and special cause. Deming had a simple demonstration to illustrate Common Cause Variation. He would suspend a funnel over a table and cover the table with a paper, marking the point on the paper above which the funnel was suspended. He would then repeatedly drop a marble into the funnel, which would roll and eventually come to rest some distance from the point under the funnel, and each time he would mark the resting point. Eventually, it could be seen that the resting points were distributed around the point under the funnel and a circle could be drawn representing a boundary where predictably all marbles would come to rest. This distribution is attributable to common cause. A manager could set an objective, saying that marbles should be as close to the point under the funnel as possible, and easily express this objective using the SMART(ER) criteria. With an understanding of common cause, it is possible to calculate the probability of a marble meeting the objective, but the objective itself does not change the quality inherent to the system. Unfortunately, it is human nature to assume that there is something better about random events that meet arbitrary objectives, and assign their superiority to a non-existent special cause^[15]. For example, the manager might say that the person who dropped the marble that met the objective was more diligent than the the person who's drop did not; it is likely that the two are indistinguishable and no such special cause exists.

This does not mean that there is no way to meet objectives. Deming concluded his demonstration by lowering the funnel over a fresh sheet of paper and dropping another series of marbles through it. This is a systemic change that results in a change in the system's quality, the reduction of the boundary radius. This change could potentially meet the objective set by the manager, but is also the basis of a second trap; a single SMART(ER) objective is not necessarily the best criteria for judging the fitness of potential solutions. There are numerous cases of employees meeting their managers' objectives by contravening policy, regulations, ethical considerations and laws^[16][17]. Point 7 of Deming's 14 Points 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 stressed the point that a leader must have an understanding of systems because there is a third trap, incorrectly assuming that improving a component of the system always improves the whole system. A business system is usually made up of interdependent components. A simple example of this is a hypothetical factory that makes products from raw materials, with its two components being a stocking facility for raw materials and an assembly facility for making products from raw materials. The manager of this factory has noted that production is 100 units a day on average, but the stock room holds enough raw materials to make 150 units a day. Seeing this as wasteful, the manager sets the objective that stock must be reduced. The problem is that the 150 units of raw materials may coincide with an upper control limit of production. If the assembly facility produces its average of 100 units a day with a assembly process that varies from 50 to 150 units a day, the assumed beneficial reduction of raw materials will also cause a detrimental reduction of productivity, as the factory will no longer have the raw materials on hand to make up for the days when the system fails to produce. A leader with an understanding of systems could observe the interdependence and make adjustments to the assembly process that would allow the reduction of stock. A manager using only objectives would likely blame the assembly team of slipping when in fact they had made no change at all. Deming points out that Drucker also warned managers that a systemic view was required ^[18] and felt that Drucker's warning went largely unheeded by the practitioners of MBO.

A more fundamental and authoritative critique comes from Walter A. Shewhart / W. Edwards Deming, the fathers of Modern Quality Management, for whom MBO is the opposite of their founding Philosophy of Statistical Process Control^[19].

[edit] References