Management by Objectives (MBO) – Definition, Advantages and Disadvantages

Many approaches have been utilized to integrate individual and group goals with overall goals of the organization of an enterprise. Management by Objectives (MBO) is basically a process whereby the superior and subordinate managers of an enterprise jointly (i) identify its common goals, (ii) define each individuals major areas of responsibility in terms of results expected of him, and (iii) use these measures as guides for operating the unit (or enterprise) and assessing the contribution of each of its members. The goals are jointly established by the manager and his subordinates and agreed upon in advance. These goals emphasize either output variables or intervening variables, or some combination of both. At the end of the pre-decided time period, the subordinate’s performance is reviewed in relation to preset goals. Both superior and the subordinate participate in this review/evaluation. If, after evaluation it is found that there is some discrepancy between the work planned (to be done) and the work accomplished, steps are suggested to overcome the problems or make necessary adjustments in the original plan. This sets the stage for the determination of objectives for the next period. To conclude. Management by Objectives (MBO) implies managing by properly identifying the objectives of an organization.

Management by Objectives (MBO)

Development of the MBO Concept

The term “Management by Objectives” was introduced and popularized by Peter Drucker, who stated that, “Objectives are needed in every area where performance and results directly and vitally affect the survival and prosperity of the business.” In addition, he emphasized the importance of participative goal setting, selfcontrol, and self-evaluation. But Drucker’s idea of MBO was not adopted in its entirety, and MBO was not practiced as a way of managing. Rather, selected aspects were taken and applied to performance appraisal.

  1. The Appraisal Approach. McGregor called attention to the shortcomings of conventional appraisal programs, which focused mainly on personality traits. The manager, mistrusting the validity of the appraisal instrument, resisted because he did not like to judge other human beings like physical objects. Consequently, McGregor suggested anew appraisal format, utilizing Drucker’s MBO concepts. In this approach, the subordinate sets his short-term performance goals for himself. These goals are then discussed further with his superior. Later, the individual’s performance is evaluated against these goals, but it is primarily self-appraisal. The MBO approach to appraisal was certainly a step in the right direction. However, it dealt with only a small (although important) part of the managerial job.
  2. Integrating Objectives. In the middle 1960’s, behavioral scientists became interested in the MBO philosophy. They saw MBO as a way of integrating individual and organizational objectives, in which the individual becomes an active participant in the managerial process. Moreover, the underlying premise is not that top management “knows best,” but rather, that individuals at all levels are capable of contributing to the success of the organization. Consequently, participation is a key aspect of this orientation. Another characteristic of this MBO approach is the concern not only for organizational objectives, but also personal development objectives. It recognizes that learning does not stop at the time a diploma or degree is earned. Learning is a continuing process. Therefore, developmental and growth objectives are now an important part of the MBO process. Another facet that should be mentioned here is that people in organizations are better educated than ever before. Consequently, they do not want to accept orders blindly; they demand a part of the action; they want to be involved; they want more control over their job and their life; and they also want to know where the company is going, so that they can contribute to the aims of the organization. MBO, which stresses participation, was found to be a means to satisfy these needs. It was recognized that people want to do a good job and that the needs of the organization and the individual are not necessarily incongruent, and that they can be integrated. Therefore, both the individual and the organization can benefit from this approach to management.
  3. The Long-Term View. Although the new emphasis on the needs of individuals created a more favorable environment for managing, there were still some problems. One was that the focus was still primarily on short-term, one-year objectives. Unfortunately, this often resulted in undesirable consequences. For example, individuals, focusing on the one-year cycle, may neglect important decisions necessary for the long-term health of the organization. This points to the need to integrate long range and strategic plans with medium and short-range objectives. The implication of the new orientation had a greater impact than might appear on the surface. Previously, MBO programs were primarily implemented by the personnel departments. It was not unusual to find the top management attitude that MBO is valuable, but only for middle and lower managers. The new orientation and the shift to a more comprehensive approach to MBO (relating it to long-range and strategic plans) demands the attention and involvement of top management. Their commitment has to go beyond the issuance of a policy statement endorsing MBO for the company. Instead, top executives must become active participants in the MBO process. Consequently, MBO welds together not only short-term goals with long-term aims, it also integrates the efforts of managers at all levels of the organization.

Management by Objectives (MBO) Method

The Management by Objectives (MBO) method is a process in which managers and employees jointly set objectives for the employees, periodically evaluate performance, and reward according to the results. Although it is a three-step process, no standard form is used with MBO, so it is a method. MBO is also referred to as work planning and review, goals management, goals and controls, and management by results.

Why and when do we use the MBO method? The MBO method is one of the best methods of developing employees. Like critical incidents, employees get ongoing feedback on how they are doing, usually at scheduled interval meetings. We can use the MBO method successfully with our employees if we commit to the process and truly involve employees rather than trying to make them believe that our objectives are theirs-accurate measures.

On an organization-wide basis, MBO is not too commonly used as the sole assessment method. It is more commonly used based on the evaluative assessment during the development part of the performance appraisal. One difficult part of MBO is that in many situations, most, if not all, employees will have different goals, making MBO more difficult and time-consuming than using a standard assessment form.

How do we use the MBO method? Steps in Setting up Management by Objectives (MBO) are;

  1. The first step is to clarify and set the common goals of the entire organization.
  2. To achieve the goals of the organization, any appropriate changes in the organization structure may be made: changes in titles, duties, relationships, authority, responsibility, span of control, and so forth.
  3. Superior sets down goals for his subordinates; subordinates also propose goals for their jobs and select the areas in which they must be effective during the period of company plan. Usually there are five or six vital areas where the subordinates, concerned must think to obtain the desired results. These results are straight drive to (a) Some targets of growth, (b) Achievement of greater productivity or profitability, (c) Elimination of certain problems etc.
  4. Superior and subordinates sit together and discuss the objectives and reach joint agreement on a subordinates’ goals to be achieved by him during a stated time period. In other words, the goals are jointly established and agreed upon in advance.
  5. Throughout the time period what is to be accomplished should be compared with what is being accomplished; necessary adjustments should be goals or unattainable goals should be discarded s0 that two sources are not unnecessarily wasted.
  6. The performance of all subordinates against their MBO plan (or targets) be formally reviewed at predetermined times during the plan. Usually a review is made annually but it is advisable for lesser quarterly reviews to be undertaken in the areas where progress has slow or where some unforeseen bottlenecks have recurred.
  7. Ultimately the performance of the entire organization should be with respect to the objective set at the start. If there is a discrepancy the objectives decided and those achieved, efforts should initiated mine the steps to be taken to overcome the problems responsibly or discrepancy. This sets the stage for the determination of objectives and the entire cycle of MBO is started again from first step.

Advantages of Management by Objectives (MBO)

  • MBO may become a powerful tool in gaining mutual commitment and high productivity for an organization. It keeps company objectives\ targets constantly in view. It gives meaning and direction to people in an organization
  • It coordinates the efforts of various departments of an organization.
  • It provides -motivation to people because they work on objectives decided with their consent.
  • It prevents littering away of efforts and money.
  • It allows greater consistency in decision-making.
  • It forces, management to think ahead in respect of its short-term and long-term goals.
  • It helps an enter rise to focus on the areas where it is vital that preventing progress towards many objectives.
  • It assists managers in their own self-development leads to an analysis of training requirement if subordinates are to improve their, performance in future years.
  • It leads to better understanding subordinates between superiors and the subordinates.

Disadvantages of Management by Objectives (MBO)

MBO methods of performance appraisal can give employees a satisfying sense of autonomy and achievement. But on the downside, they can lead to unrealistic expectations about what can and cannot be reasonably accomplished.

Supervisors and subordinates must have very good “reality checking” skills to use MBO appraisal methods. They will need these skills during the initial stage of objective setting, and for the purposes of self-auditing and self-monitoring. Unfortunately, research studies have shown repeatedly that human beings tend to lack the skills needed to do their own “reality checking”. Nor are these skills easily conveyed by training. Reality itself is an intensely personal experience, prone to all forms of perceptual bias.

One of the strengths of the MBO method is the clarity of purpose that flows from a set of well-articulated objectives. But this can be a source of weakness also. It has become very apparent that the modern organization must be flexible to survive. Objectives, by their very nature, tend to impose a certain rigidity.

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