Management by objectives

Management by Objectives (MBO) is a process of defining 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 choosing the course of action to be followed by them, they are
more likely to fulfill their responsibilities.

Features and Advantages

The basic principle behind Management by Objectives (MBO) is for employees to have a clear
understanding of the roles and responsibilities expected of them. They can then understand how
their activities relate to the achievement of the organization. MBO also places importance on
fulfilling the personal goals of each employee.

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. This increases employee job satisfaction and
commitment.
2. Better communication and Coordination – Frequent reviews and interactions
between superiors and subordinates help to maintain harmonious relationships within the
organization and also to solve many problems.
3. Clarity of goals
4. Subordinates have a higher commitment to objectives they set themselves than
those imposed on them by another person.
5. Managers can ensure that objectives of the subordinates are linked to the
organization's objectives.
Domains and levels
Objectives can be set in all domains of activities (production, marketing, 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.

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

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.

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.

When this approach is not properly set, agreed and managed by organizations, self-centered
employees might be prone to distort results, falsely representing achievement of targets that were
set in a short-term, narrow fashion. In this case, managing by objectives would be
counterproductive.

The use of MBO must 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 upon. Employees are often involved in this process, which can be
advantageous.
A saying around MBO -- "What gets measured gets done", ‘Why measure performance? Different
purposes require different measures’ -- 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.

Management by Exception is a "policy by which management devotes its time to

investigating only those situations in which actual results differ significantly from planned results.
The idea is that management should spend its valuable time concentrating on the more important
items (such as shaping the company's future strategic course). Attention is given only to material
deviations requiring investigation." [1]

It is not entirely synonymous with the concept of exception management in that it describes a
policy where absolute focus is on exception management, in contrast to moderate application of
exception management.

In Project Management, an implication of Management by Exception is that the project board

should meet when key decisions about the project should be taken, and not on regular intervals.
The Project Manager should produce an Exception Report to summon the board for such
meetings[2].

This type of management can be powerful when it is necessary to process lots of data in order to
make managerial decisions. The problem with this policy is that it can result in myopic behavior.
This behavior implies that lower management shifts its goal from running a successful business in
a real world environment, to feeding centralized auditors and managers with financial data which
will be interpreted as within. In this situation, a company manager might sell off assets like
equipment (vital to long run productivity) in order to manipulate accounting ratios used in
determining exception. Thus, lower management can in some cases dodge being marked as an
exception, to the long term detriment of the plant they are managing.

Definition:
Practice whereby only the information that indicates a significant deviation of
actual results from the budgeted or planned results is brought to the management's notice.
Its objective is to facilitate management's focus on really
important tactical and strategic tasks. In MBE, the decision that cannot be made at one
level of management is passed on to the next higher level.

Management by exception
administrative policy of focusing on those events deviating from an established standard. Management by
exception practices are established where it has been determined that only those events that deviate from a
standard are significant. For example, only those creditors having outstanding accounts for more than 45
days will receive a second billing notice.

Six phases of MBE:

>Assignment of values.

>projection of meaningful measurements.

> Make observation

>comparison of actual values with expected performance

>reporting the balance to management

>decision making

Advantages of MBE:-

>availability of time

>opportunity to use talent

>Increase of confidence and motivation

>uses the best knowledge

>it helps to identify problems before they become big.

>better organizational cohesiveness and achievement of objectives

Disadvantages:

• MBE is not puzzle solving.

• You must have the truth

• You must stay in touch with your people Management by

walking around

Basic values

• Don’t give up the big play on defense: Big mistakes are the worst outcome
• Swarm to the ball: The bigger the problem, the more people it involves

• Effective feedback allows controllers to improve.

Basic approach

• Modeling is fun: Define norms based on historic averages

• Sorting is not fun: Use computer system to identify exceptions

• Finish what you start: Use computer system to communicate exceptions, track follow-up

Intermediate approach

• What does he think he’s doing? Evaluate understanding of business through analysis of
variances.

• Why don’t you ever say anything good? Find positive exceptions, too.

Advanced approach

• Back to piece work? Combine with flex budgets and incentive pay

Limitations

• It’s not puzzle solving

• You gotta have the truth

• You gotta stay in touch with your people (no Gap/Zap result)