Date: 29/09/2019

MANAGEMENT BY OBJECTIVE (MBO)

1. Introduction To MBO:
Management by objectives (MBO) is a strategic management model that aims to improve the
performance of an organization by clearly defining objectives that are agreed to by both
management and employees. According to the theory, having a say in goal setting and action
plans encourages participation and commitment among employees, as well as aligning
objectives across the organization.

2. History Of MBO:
In 1954 Peter Drucker first used the term "Management By Objectives" in his book “The
Practice of Management”. While the basic ideas of MBO were not original to Drucker, they
pulled from other management practices to create a complete “system”. The idea draws on
the many ideas presented in Mary Parker Follett's 1926 essay, "The Giving of Orders". After
the term and idea were brought up, Drucker's student, George Odiorne, continued to develop
the idea in his book “Management Decisions by Objectives”, published in the mid-1960s

3. Concept and Framework:

Management by objectives at its core is the process of employers/supervisors attempting to
manage their subordinates by introducing a set of specific goals that both the employee and
the company strive to achieve in the near future, and working to meet those goals
accordingly.

There are 5 basic steps

MEM QM SAMIA ISMAIL BAIG

Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

4. SMART Goals:

5. Features of MBO:
Following are some of the features of MBO.

5.1. Philosophy Of Management:

MBO is not a technique of management to be applied in selective areas of performance. It is a
philosophy of management that affects management thinking. It is the way an organization
works in all divisions and levels. It, thus, cuts across all boundaries; vertical and horizontal.

5.2. Participation:
MBO involves managers at all levels (superiors and subordinates) to set the overall goals.
Goals at each level are set with the participation of managers at lower levels. This ensures
greater commitment to goals and their optimum attainment. Every manager sets his
objectives and evaluates his performance.
This clarifies his relationship with superiors, peers and subordinates and the whole process of
management revolves around the participative objective-setting.

5.3. Integration:
When goals are framed with participation of superiors and subordinates, it ensures integration
of objectives across organizational levels and functional areas. This provides focus to
managerial activities in a unified direction and leads to effective attainment of goals.
MBO integrates objectives at various levels (corporate, departmental and individual). It
integrates organizational objectives with resources, sub-systems and the external
environment.

5.4. Links Objectives to Performance:

The goals set standards of performance against which actual performance is measured.
Discrepancy is removed through techniques of control. Planning and control are, thus, the
heart of MBO. It also helps in introducing system of rewards and penalties as everything is
linked to performance.
MEM QM SAMIA ISMAIL BAIG
Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

5.5. Continuity:
MBO is a continuous process of periodic evaluation of employees’ performance. It involves
improvement in their performance and modification of the goals (if need be). The
performance is usually reviewed annually. It thus, provides a basis for corrective action and
future planning.

6. Elements of MBO:
MBO has the following elements:

6.1. Commitment:
MBO is a means to achieve organizational goals effectively. It should be clear about the
purpose for which it is implemented. Management development, improved productivity and
long-term planning is the purpose of MBO. Effective MBO requires commitment of
managers to organizational and individual objectives. A periodic review of the objectives is
done so that changes can be made and managers are committed to these objectives.

6.2. Top Management Support:

The MBO system usually starts with goals framed by top managers in consultation with
subordinates. This inspires commitment throughout the organizational hierarchy. Goals set by
top managers are the basis for setting goals at middle and lower levels. Goals set at different
levels are compatible with each other and contribute to overall organizational goals.

6.3. Individual Goals:

Goals are set for individuals with their consultation to make them know their contribution to
the overall goals. This is done keeping in view their abilities and capacities to achieve the
goals.

6.4. Participation:
MBO involves participation of subordinates in the goal-setting process initiated by managers
at the upper level. More the participation, more is the efficiency in achieving the goals.

6.5. Autonomy:
After framing the goals, managers and subordinates work to achieve them. If subordinates
have the freedom to make procedures and programs within the organizational policies to
achieve the goals, their participation in the goal-setting process will be more effective.

6.6. Review:
Managers and subordinates periodically review their performance, discuss the problems in
achieving objectives and find ways to resolve them.

7. Objectives of MBO:
MBO aims at the following objectives:

7.1. It promotes participation in the goal-setting process.

7.2. It facilitates fast and effective decision-making.
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Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

7.3. It coordinates individual goals with organizational goals.

7.4. It improves communication amongst managers and subordinates.
7.5. It serves as the basis for control by setting objective standards of performance.
7.6. It increases organizational efficiency by specifying priorities and outcomes at each level.
7.7. It defines individual responsibilities by clearly specifying the expectations of all those
who are involved in the MBO process.

8. Process of MBO:
The following sequence of steps is followed in the process of MBO:

8.1. Develop Overall Goals:

Overall organizational goals relate to the mission/purpose of the organization. Earning a
return of 15% on capital, for example, is the goal of the organization. These goals are set in
the light of company’s strengths and weaknesses (internal environment) and external
opportunities and threats (external environment). They are the strategic goals and define the
purpose of organizational existence.
They are based on important decisions about management perception of organizational
growth; whether expansion or diversification, vertical integration or horizontal integration,
growth in manufacturing, trading or services etc.

8.2. Establish Specific Goals:

Specific goals are set for departments, sub-units and individuals in the organizational
hierarchy. Goals are framed by managers for their respective departments (production,
marketing etc.), keeping in view the overall goals, in consultation with managers at lower
levels who establish goals for their units in participation with their lower-level managers.
This is done so that individuals know the boundaries and constraints within which they have
to work. In this process, they offer constructive suggestions to the superiors for framing the
overall objectives. Thus, there is a series of superior-subordinate relationships where final
objectives for subordinates are framed by negotiations between the superior and the
subordinates.
The strategic goal of earning a return of say 15%, can be achieved if manager of sales
department increases sales by 50,000 units per annum. The sales manager consults regional
sales managers and plans to increase the sales by 25,000 units in northern and southern
regions respectively, who further plan sales in consultation with the district sales managers.
This process of setting goals at each next (lower) level is the second step in the process of
MBO, where the goal-setting process begins with the top management in consultation with
the lower level managers and employees. Thus, the framers of plans and those who
implement the plans, together frame the objectives capable of being achieved.

8.3. Devise Action Plans:

Action plan is a description of what is to be done, when, where, and by whom, in order to
achieve a goal. These plans are devised to achieve the goals. Specific key areas (areas of
critical importance as performance in these areas affects growth and development of the
company) are determined which require attention in terms of allocation of resources.

MEM QM SAMIA ISMAIL BAIG

Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

These areas reflect the expectations of stakeholders and, thus, set priorities for organizational
performance.

These areas are:

 Profitability,
 Market standing,
 Innovation,
 Productivity
 Worker performance
 Financial and physical resources
 Manager performance, and
 Public responsibility
These plans are usually formulated at lower levels in consultation with the superiors. They
determine the problems in achieving the goals, ways to overcome the problems and allocate
resources over areas (objectives) which can be achieved most feasibly. Though these key
areas best reflect organizational performance, they may change subject to environmental
changes.

8.4. Self-Control:
MBO helps in maintaining self-control. As people have autonomy to plan their goals, they
ensure that performance is in conformity with the goals.

8.5. Appraisal of Performance:

The success of plans is ensured through periodic review of performance where problems are
identified and solutions are sorted out; and if the need arises, goals are altered for the next
MBO cycle. After the organizational and individual goals are defined and initiated, managers
periodically assess the performance of subordinates to ensure that actual and planned
performances are in conformity with each other.
The MBO approach encourages self-appraisal, where subordinates review their performance
under the expert guidance of superiors. This encourages commitment and they work hard
towards the organizational goals. Appraisal also includes praise and recognition for positive
performance and identification of areas where employees need to develop their skills and
knowledge.
However, appraisal is not done to punish the non-performers and reward those who perform
well. It ensures that everything goes according to plans and there is no deviation in
performance. Appraisal is used for recycling the MBO process. If objectives are successfully
achieved, they form the basis for the next MBO cycle. This cycle represents objective setting
action planning —> performance. The performance is reviewed which provides the basis for
objective setting and action planning.

9. Approaches to MBO:
There are two approaches to MBO:

9.1. Top-down Approach:

Objectives are framed by top executives and communicated to lower levels for their
suggestions. Superiors and subordinates together review the suggestions and arrive at
MEM QM SAMIA ISMAIL BAIG
Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

mutually accepted goals. Thus, each superior frames the objectives by inviting suggestions
from subordinates, assesses them and frames the objectives for each level of the
organizational hierarchy. The objectives are, thus, set by top management though
subordinates are actively involved in the goal-setting process.
For example, managers of the marketing department aim to increase the sale by say, 80,000
units. This goal will be set by the marketing manager in consultation with regional sales
managers. Each of the four regional managers agree to promote sales in their regions
(Northern, Eastern, Southern and Western) by 20,000 units each, in consultation with district
sales managers. This process continues till goals are set for each unit at different
organizational levels (in this case, at the functional level, regional level and district level).

9.2. Bottom-up Approach:

Individuals frame the objectives, send them to the superiors for their approval, modification
and acceptance. After making necessary changes, the superiors send them further up to their
superiors for approval. The process continues till the top management approves these
objectives. These are communicated to the departmental managers who set goals for their
respective departments.
In this approach, goals are proposed at the lower level (operating goals) by the operating /
lower-level managers. Based on these, goals are developed at the tactical level and then at the
strategic level. Though goal-setting process starts at the lower level, it is in tune with the
guidelines framed by top managers at the strategic level.
Thus, the top-down approach starts with framing objectives at the top level and their
acceptance by subordinates at lower levels and the bottom-up approach starts with laying
objectives by the individuals at lower levels and their acceptance by the top level executives.
Both these approaches are complementary to each other and can be adopted depending on
nature of the organization, nature of employees and size of the organization.
However, MBO emphasizes that goals are neither set at top levels and communicated to
lower levels nor set at the bottom level and communicated to upper levels for acceptance. In
actual practice, either of the two approaches represents a blend of setting objectives as a joint
process through constant interaction between the superiors and subordinates. Every level
affects the other levels. The outcome at each level becomes the basis for addition/
modification at other levels and the final objectives represent the consensus of people at all
levels.

10. Limitations of MBO:

The limitations of MBO can be:

10.1. Limitations Inherent in the Approach:

10.1.1. Resources (Time, money and effort):

Not all superiors and subordinates have knowledge about the concept of MBO and, therefore,
have to acquire the skill to learn to work collectively in the goal-setting process. This requires
time, money and effort by superiors and subordinates. These problems arise only at the initial
stages of MBO. Once the members learn to work in participation with each other, these
problems disappear.

MEM QM SAMIA ISMAIL BAIG

Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

10.1.2. Illusionary approach:

The approach seems to be an illusion as setting of overall and individuals goals presupposes
that if each individual completes his part of the job, it will lead to accomplishment of overall
goals. It ignores the fact that goals of individuals may differ from each other and there is,
thus, need to study the impact of one individual goal on the other. Individual goal setting
should also be considered along with group-goal setting.

10.2. Limitations Arising out of Implementation of the Approach:

10.2.1. Improper use:

MBO is setting goals by managers and subordinates jointly and assessing the performance of
subordinates. It does not emphasize on the ways of accomplishing the goals. Success cannot
be achieved unless the procedures, schedules and programs are devised in a manner that
every employee knows not just what to do but also how to do.

10.2.2. Lack of knowledge:

For MBO to be effective managers and employees should have complete knowledge of the
organization structure, goals and policies but, unfortunately not all employees have this
knowledge. If goals are set without rational and scientific understanding of the organization
structure and strategic goals, the planning process may fail.

10.2.3. Ignores long-run perspective:

Critics assert that MBO generally sets short-term goals, usually one year, and unless
managers foresee the suitability of these goals to achieve the long-term objectives, the
technique does not serve its purpose. Goals must adjust to the changing environment in future
because every time there is a change, it is not easy, in fact, not possible to change the
objectives.

10.2.4. Zeigarnik effect:

The psychologist, B. Zeigarnik introduced this effect which refers to the force which drives a
person for accomplishment of goals. People with high Zeigarnik effect feel committed
towards the organization and work actively towards organizational goals to satisfy their ego
and psychological needs. People with low Zeigarnik effect, on the other hand, do not feel
committed towards these goals. MBO will be ineffective if the organization has people with
low Zeigarnik effect.

10.2.5. Conflict of opinion:

Organizations may not be able to co-ordinate overall goals with individual goals if superiors
and subordinates do not mutually agree to the goal setting process.

10.2.6. Lack of top management support:

Where implementation of MBO program is left solely to lower-level managers, without the
involvement of top management, the program may not be effectively implemented.

MEM QM SAMIA ISMAIL BAIG

Organizational System (REPORT) IM-064/2018-19
 Date: 29/09/2019

10.2.7. Flexibility to change:

MBO program may require changes in the organization structure and operational policies.
Managers may be hesitant to change the objectives in the light of changing environment due
to intensive change in organizational premises, policies and practices. If managers do not
readily modify their current structure and practices, the MBO program may not be successful.

10.2.8. Not a Panacea:

MBO is often considered a panacea for organizational problems but it is not so. Despite the
best designed structure of MBO, there may arise problems amongst employees or superior-
subordinate relationships (because of improper leadership styles or motivational skills).
Overall organizational performance may not, therefore, be according to planned standards.

11. Conclusion:
MBO is used for different purposes. Some Organizations use MBO to clarify the
Employee’s job, others use it to motivate employees while still other organizations apply
MBO as a Performance control mechanism to check performance. In this way MBO
process is directly related to all the major functions of management. Thus, MBO is a
result-oriented and rational philosophy. It permits management by results in place of
management by crisis. Many Organizations both in the private sector and public sector
have benefited a lot through the application of MBO.

12. Reference:
12.1. https://en.wikipedia.org/wiki/Management_by_objectives
12.2. https://hbr.org/2003/01/management-by-whose-objectives
12.3. https://www.investopedia.com/terms/m/management-by-objectives.asp
12.4. http://www.yourarticlelibrary.com/project-reports/management-project-reports/project-
report-on-management-by-objectives-mbo/88731
12.5. https://greaterphoenix.score.org/blog/smart-smart-goals-%E2%80%93-recipe-success

MEM QM SAMIA ISMAIL BAIG

Organizational System (REPORT) IM-064/2018-19