Management by Objectives (MBO) – Definition, Need and its Limitations

This article covers whole Management by Objectives (MBO). This can be helpful for students and professionals.

Successful management goes a long way towards extracting the best from workers and making them work as one team towards a common objective.

What is Management By Objectives (MBO)? Or Definition of MBO

The organization’s method of establishing objectives to give workers a sense of direction is termed as Management By Objectives (MBO)

It refers to the process of setting targets for workers to learn what to do in the workplace.

Management By Objectives (MBO) describes duties and obligations for workers and helps them form their future course of action in the company.

Management By Objectives (MBO) directs workers to reach their highest level and goals within the stipulated timeline.

Management By Objectives (MBO) (MBO) is a strategic management paradigm that seeks to enhance an organization’s efficiency by explicitly identifying priorities decided by management and employees. According to the philosophy, getting a voice in goal-setting and action plans promotes employee engagement and dedication, as well as aligning priorities around the company.

The term had first been illustrated by Peter Drucker through his 1954 book, The Practice of Management While MBO’s basic ideas were not original to Drucker, they pulled from other management practices to create a complete “system. The concept is based on the many ideas expressed in Mary Parker Follett’s 1926 essay,” The Giving of Orders.

After the concept and idea were discussed by Drucker’s student and George Odiorne, he continued to grow the idea in his Goals Management Decisions book, published in the mid-1960s. MBO was popularized by companies such as Hewlett-Packard, who believed it contributed to their success.

Conception and process

Management By Objectives (MBO) at its core is the process of employers/supervisors trying 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 towards those goals accordingly.

Five stages:

  1. Review the organization’s Goals
  2. Set Worker Objectives
  3. Monitoring progress
  4. Evaluation
  5. Give reward

Management By Objectives (MBO) is the development of a management information system to measure actual growth and performance with established objectives. Practitioners believe that MBO’s main benefits are increasing employee morale and engagement and facilitating improved contact between management and employees. However, MBO’s cited weakness is that it unduly emphasizes setting goals to achieve goals rather than working on a systematic plan to do so.

Peter Drucker ‘s book, which coined the term, set out several principles. Objectives are set with employees’ support and are intended to be demanding but achievable. Employees receive daily feedback, focusing more on rewards than punishment. Personal growth and progress are emphasized, not blame, for failure to achieve goals.

Drucker claimed MBO was not a cure-all, just a tool to use. It gives organizations a method, with many practitioners believing MBO’s success depends on top-management support, clearly defined priorities, and qualified managers who can execute it.

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Need for Management By Objectives (MBO)

The Management By Objectives (MBO) approach helps workers understand their job duties.

KRAs are planned according to each employee’s interest, specialization, and educational qualification.

Employees are clear about what is expected.

The Priority process leads to happier workers. It later prevents job mismatch and needless confusion.

Employees in their own way contribute to the organization’s goals and objectives. Every employee has his own workplace position. All feels important to the organization and gradually develops a commitment to the organization. They prefer to stick to the company longer and contribute effectively. They enjoy at work, not seeing work as a burden.

Management By Objectives (MBO) ensures efficient communication among employees. It creates a healthy workplace environment.

Management By Objectives (MBO) contributes to well-defined organizational hierarchies. It ensures all-level transparency. Any organization’s boss will never communicate directly with the managing director for queries. He would meet his reporting boss first, then pass the message to his senior, and so on. Everyone ‘s clear about the organization’s position.

The MBO process leads to highly motivated employees.

Every employee’s MBO process sets a benchmark. Superiors set goals for each team member. Each employee has a list of specific tasks.

Shortcomings of Management By Objectives (MBO)

It sometimes ignores the organization’s prevailing culture and working conditions.

More emphasis is placed on targets and objectives. It only wants the workers to accomplish their goals and fulfill the organization’s objectives without worrying much about the on-the-job circumstances. Employees are expected to work and follow deadlines. MBO method often views people as pure machines.

MBO process increases workplace comparisons between individuals. Employees tend to rely on nasty politics and other unproductive tasks to outshine fellow workers. Employees do only what their superiors ask. They lack innovation, creativity, and sometimes become monotonous.

Five Steps Organizations use to implement MBO

Management By Objectives (MBO) outlines five steps organizations should use to implement management techniques.

  1. The first step is to either determine or revise the entire company’s organizational goals. This broad overview will stem from the company’s mission and vision.
  2. The second step is to translate the employees ‘ organizational objectives. Drucker used the acronym SMART (specific, measurable, appropriate, realistic, time-bound).
  3. Step three stimulates employee participation in individual goals. After sharing the organization’s goals with workers from top to bottom, workers will be empowered to help set their own objectives to accomplish these broader organizational goals. It gives workers more incentive as they are motivated.
  4. Phase four includes tracking employee development. In step two, a key component of the goals was that they are measurable to determine how well employees and managers are met.
  5. The fifth step is evaluating and rewarding employee progress. This move requires truthful feedback on what every employee accomplished and not accomplished.

Management by Objectives

There are endless ways of approaching Management By Objectives (MBO). Simply identify common objectives in an organization or corporation. Most notable companies used MBO. Computer company Hewlett-Packard (HP) management has said it considers the policy a huge component of its success. Many other organizations praise MBO ‘s efficacy, including  DuPont, Xerox, Intel, and numerous others. Businesses using MBO also record higher revenue and profitability within the company. Objectives may be set in all business areas such as development, marketing, services, distribution, R&D, human resources, finance, and information technology. Some goals are collective, others may be targets for every worker. Both make the task at hand seem achievable, allowing workers to see what needs to be done and how.

Must Read  Management by Exception (MBE)

In the Management by Objectives (MBO) paradigm, managers determine the company’s mission and strategic goals. The goals set by top-level managers are based on analyzing what the organization can and should accomplish within a specific timeframe. Such managers ‘roles can be centralized by naming a project manager who can oversee and coordinate the different departments’ activities. If this can not be achieved or is not appropriate, the contributions of each manager to the organizational objective should be explicitly stated.

In several large Japanese firms, Management by Objectives (MBO) was used as the basis of the “performance-based merit scheme”, which used simple numerical goals to calculate performance as opposed to the previous system of non-specific contracts in Japanese companies.

Objectives need to be quantified and monitored. Reliable management information systems are needed to set relevant goals and monitor their “reach ratio” in an objective manner. Pay incentives (bonuses) are often linked to achievement outcomes.

The mnemonic S.M.A.R.T. is associated with the objective-setting process in this paradigm.

  • Broad-Specific area for change.
  • Measurable — Quantify or imply progress measure.
  • Assignable-Specify who will.
  • Realistic-State what outcomes can be obtained, despite available resources.
  • Time-bound — Specify when outcomes can be reached.
  • The aphorism “what is known is finished” aligns with the MBO theory.

MBO or Objective Management is characterized as a comprehensive management system that incorporates several main managerial activities into a structured process and is actively aimed at achieving organizational and individual objectives effectively and efficiently.

The practical importance of management goals can best be seen by summarizing how successful goal-management works in practice.

MBO is a 6 Phase Process

  • Define organizational goals
  • Defines workplace expectations
  • Continuous monitoring and progress
  • Performance evaluation
  • Provide feedback
  • Performance Appraisal

Defining organizational goals

Targets are important concerns for organizational success and serve a variety of objectives. Organizations may also have different types of goals, all of which must be handled accordingly.

And a variety of different types of managers will be involved in setting goals. The goals set by the subordinates are subjective, based on examination and evaluation of what the company can and will achieve within a given timeframe.

Defines Employees Objectives

After making sure that employee managers are told about specific general objectives, plans, and planning premises, the manager will then collaborate with employees in setting their goals.

The manager asks what targets workers think they can accomplish with what time period and money. They’ll then share some tentative thoughts on whether the organization or department ‘s targets seem feasible.

Continuous Monitoring of Performance and Progress

The MBO method is not only necessary for having line managers in business organizations, but also equally vital for tracking employee efficiency and development.

Must Read  Management by Exception (MBE)

Follow-ups are needed for tracking performance and progress;

Identifying unsuccessful interventions by contrasting results with pre-set targets,

Using zero-budgeting,

Management by Objectives (MBO) concepts for individual and plan measurement,

Preparing long-range targets and plans,

Installing successful tests and

Designing a strong organizational framework with a consistent sense of accountability and decision-making authority.

Performance evaluation

Under this MBO process, the performance review is performed by the managers involved.

Provide Feedback

The filial ingredients in an MBO system are continuous performance feedback and objectives that enable individuals to track and correct their own actions.

This continuous feedback is complemented by frequent formal assessment meetings where supervisors and subordinates will discuss progress towards objectives, leading to more feedback.

Performance Appraisal

Performance Appraisal evaluations are frequent assessments of employee performance within organizations. It’s done at the MBO’s final stage.

Limitations of Management By Objectives (MBO)

MBO’s detractors and attention, notably W. Edwards Deming, who argued that a lack of understanding of systems commonly results in the misapplication of goals. In addition, Deming stated that setting production goals will encourage workers to meet those goals by whatever means necessary, which usually results in poor quality.

Point 7 of Deming’s core principles allows managers to sacrifice objectives in favor of leadership because he felt a leader with a program understanding was more likely to direct workers to a viable solution than an objective reward. Deming also pointed out that Drucker warned managers that a systematic view was needed and thought that MBO practitioners generally ignored Drucker ‘s warning.

The underlying assumptions about management’s effect are restricted by goals:

  • It over-emphasizes setting targets over operating a program as a result engine.
  • It emphasizes the value of setting goals in the world or context.
  • It involves everything from resource availability and efficiency to relative buy-in by leadership and stakeholders. In a 1991 systematic analysis of thirty years of research on the effects of Objective Management, Robert Rodgers and John Hunter concluded, as an indication of management buy-in as a contextual influencer, that companies whose CEOs demonstrated a strong commitment to MBO reported an average productivity gain of 56%. Companies with CEOs showing weak commitment saw just 6 percent productivity benefit.
  • If this approach is not properly set, agreed upon, and managed by organizations, self-centered employees may be prone to distort results, misrepresenting the achievement of short-term, narrow-minded targets. In this case, targeting would be counterproductive.

Recent Study of Management By Objectives (MBO)

Management By Objectives (MBO) is still practiced today, with an emphasis on planning and growth supporting different organizations. The current work focuses on particular sectors, defining the practice of Management by Objectives (MBO) for each. However, following criticism of the original Management by Objectives (MBO) strategy, a new method was implemented in 2016 to revitalize it, called the OPTIMAL MBO, which stands for Management by Objectives (MBO).

Although the practice is used today, different names the follow – the letters “MBO” have lost their formality, and future planning is a more common practice.

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