Management By Objectives: Concept and Process

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 need to do in the organization. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book 'The Practice of Management'. 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. According to George S. Odiorne, the system of management by objectives can be described as a process whereby the superior and subordinate managers of an organization jointly identify its common goals, define each individual's major areas of responsibility in terms of the results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members.

Definition

Management by objectives is a dynamic system which seeks to integrate the company's need to clarify and achieve its profit and growth goals with the manager's need to contribute and develop himself. It is a demanding and rewarding style of managing a business.

Explanation

Since the best managers have always practised management by objectives, the cynic's view that it is merely old wine in new bottles is perhaps valid. However, it is timely and useful to restate basic principles and to demonstrate that there is a practical approach which will help all managers to improve their performance. Companies are meeting increased pressures of competition and rising costs and management’s task is becoming more complex with accelerating changes in markets, technology, and social environment. Yet, many companies are content to follow tradition based on past success. The explosive growth in knowledge had led to more specialisation, with the result that fewer general managers and entrepreneurial types are being produced. Moreover, the time span and range of objectives set by companies is often dangerously restricted. Management by objectives must create a climate of opinion in which these and other problems are recognised as well as providing the framework of techniques for solving them.

Illustration

When a worthwhile system of management by objectives is operating in a company there is a continuous process of:

1. Reviewing critically, and restating, the company’s strategic and tactical plans. 2. Clarifying with each manager the key results and performance standards he must achieve, in line

with unit and company objectives, and gaining his contribution and commitment to these. 3. Agreeing with each manager a job improvement plan, which makes a measurable and realistic

contribution to the unit and company’s plans for better performance. 4. Providing conditions in which it is possible to achieve the key results and improvement plans,

notably: i. An organisation structure which gives a manager maximum freedom and flexibility in operation.

ii. Management control information in a form, and at a frequency, which makes for more effective self-control and better and quicker decisions.

5. Using systematic performance review to measure and discuss progress towards results, and potential review to identify men with potential for advancement.

6. Developing management training plans to help each manager to overcome his weaknesses, to build on his strengths, and to accept a responsibility for self-development.

7. Strengthening a manager's motivation by effective selection, salary, and succession plans.

These techniques are interdependent and the dynamic nature of the system can be shown as in the diagram above. It follows that the development of managers, which is a matter of vital importance to every company, only makes sense if it is integrated with the purpose of the business. Looked at in this way, management development is a valuable by-product of running a business efficiently.

Features and advantages

Unique features and advantages of the MBO process

The 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's goal. 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 helps to maintain harmonious relationships within the organization and also to solve many problems.

3. Clarity of goals4. Subordinates tend to have a higher commitment to objectives they set for 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, 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.

Arguments against

MBO has its detractors, notably among them W. Edwards Deming, who argued that a lack of understanding of systems commonly results in the misapplication of objectives. Additionally, Deming stated that setting production targets will encourage resources to meet those targets through whatever means necessary, which usually results in poor quality. Point 7 of Deming's key principles 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 pointed out that Drucker warned managers that a systemic view was required and felt that Drucker's warning went largely unheeded by the practitioners of MBO.

LIFE SKETCH OF PETER DRUCKER WHO GAVE THE CONCEPT OF MBO

Drucker's books and scholarly and popular articles explored how humans are organized across the business, government and the nonprofit sectors of society. He is one of the best-known and most widely influential thinkers and writers on the subject of management theory and practice. His writings have predicted many of the major developments of the late twentieth century, including privatization and decentralization; the rise of Japan to economic world power; the decisive importance of marketing; and the emergence of the information society with its necessity of lifelong learning. In 1959, Drucker coined the term “knowledge worker" and later in his life considered knowledge worker productivity to be the next frontier of management. The annual Global Peter Drucker Forum in his hometown of Vienna Austria, honors his legacy. Drucker was both on his paternal and his maternal side of Jewish descent, but his parents converted to Christianity and lived in what he referred to as a "liberal" Lutheran Protestant household in Austria-Hungary. His mother Caroline Bondi had studied medicine and his father

Adolf Drucker was a lawyer and high-level civil servant. Drucker was born in Vienna, the capital of Austria, in a small village named Kaasgraben (now part of the 19th district of Vienna, Dobling). He grew up in a home where intellectuals, high government officials, and scientists would meet to discuss new ideas. In 1934 Drucker married Doris Schmitz, an acquaintance from the University of Frankfurt. Their wedding certificate lists his name as "Peter Georg Drucker". They had four children and six grandchildren and lived in Claremont, California. After graduating from Dobling Gymnasium, Drucker found few opportunities for employment in post-World War Vienna, so he moved to Hamburg, Germany, first working as an apprentice at an established cotton trading company, then as a journalist, writing for Der Osterreichische Volkswirt (The Austrian Economist). Drucker then moved to Frankfurt, where he took a job at the Daily Frankfurter General-Anzeiger. While in Frankfurt, he also earned a doctorate in international law and public law from the University of Frankfurt in 1931.

In 1933, Drucker left Germany for England. In London, he worked for an insurance company, then as the chief economist at a private bank. He also reconnected with Doris Schmitz, an acquaintance from the University of Frankfurt whom he married in 1934. The couple permanently relocated to the United States, where he became a university professor as well as a free-lance writer and business consultant. In 1943, Drucker became a naturalized citizen of the United States. He then had a distinguished career as a teacher, first as a professor of politics and philosophy at Bennington College from 1942–1949, then for more than twenty years at New York University as a Professor of Management from 1950 to 1971.

Drucker came to California in 1971, where he developed one of the country's first executive MBA programs for working professionals at Claremont Graduate University (then known as Claremont Graduate School). From 1971 to his death he was the Clarke Professor of Social Science and Management at Claremont Graduate University. Claremont Graduate University's management school was named the "Peter F. Drucker Graduate School of Management" in his honor in 1987 (later renamed the "Peter F. Drucker and Masatoshi Ito Graduate School of Management"). He taught his last class there in 2002 at age 92. Drucker also continued to act as a consultant to businesses and non-profit organizations well into his nineties. He died November 11, 2005 in Claremont, California of natural causes at 95.

Among Peter Drucker's early influences was the Austrian economist Joseph Schumpeter, a friend of his father’s, who impressed upon Drucker the importance of innovation and entrepreneurship. Drucker was also influenced, in a much different way, by John Maynard Keynes, whom he heard lecture in 1934 in Cambridge. “I suddenly realized that Keynes and all the brilliant economic students in the room were interested in the behavior of commodities,” Drucker wrote, “while I was interested in the behavior of people.”

Over the next 70 years, Drucker’s writings would be marked by a focus on relationships among human beings, as opposed to the crunching of numbers. His books were filled with lessons on how organizations can bring out the best in people, and how workers can find a sense of community and dignity in a modern society organized around large institutions. As a business consultant, Drucker disliked the term “guru,” though it was often applied to him; “I have been saying for many years,” Drucker once remarked, “that we are using the word ‘guru’ only because ‘charlatan’ is too long to fit into a headline.”

As a young writer, Drucker wrote two pieces — one on the conservative German philosopher Friedrich Julius Stahl and another called “The Jewish Question in Germany” — that were burned and banned by the Nazis.

Peter Drucker as The 'business thinker'

Drucker's career as a business thinker took off in 1942, when his initial writings on politics and society won him access to the internal workings of General Motors (GM), one of the largest companies in the world at that time. His experiences in Europe had left him fascinated with the problem of authority. He shared his fascination with Donaldson Brown, the mastermind behind the administrative controls at GM. In 1943 Brown invited him in to conduct what might be called a "political audit": a two-year social-scientific analysis of the corporation. Drucker attended every board meeting, interviewed employees, and analyzed production and decision-making processes.

The resulting book, Concept of the Corporation, popularized GM's multidivisional structure and led to numerous articles, consulting engagements, and additional books. GM, however, was hardly thrilled with the final product. Drucker had suggested that the auto giant might want to reexamine a host of long-standing policies on customer relations, dealer relations, employee relations and more. Inside the corporation, Drucker’s counsel was viewed as hypercritical. GM's revered chairman, Alfred Sloan, was so upset about the book that he “simply treated it as if it did not exist,” Drucker later recalled, “never mentioning it and never allowing it to be mentioned in his presence.”

Drucker taught that management is “a liberal art,” and he infused his management advice with interdisciplinary lessons from history, sociology, psychology, philosophy, culture and religion. He also believed strongly that all institutions, including those in the private sector, have a responsibility to the whole of society. “The fact is,” Drucker wrote in his 1973 Management: Tasks, Responsibilities, Practices, “that in modern society there is no other leadership group but managers. If the managers of our major institutions, and especially of business, do not take responsibility for the common good, no one else can or will.”

Drucker was interested in the growing effect of people who worked with their minds rather than their hands. He was intrigued by employees who knew more about certain subjects than their bosses or colleagues and yet had to cooperate with others in a large organization. Rather than simply glorify the phenomenon as the epitome of human progress, Drucker analyzed it and explained how it challenged the common thinking about how organizations should be run. His approach worked well in the increasingly mature business world of the second half of the twentieth century. By that time, large corporations had developed the basic manufacturing efficiencies and managerial hierarchies of mass production. Executives thought they knew how to run companies, and Drucker took it upon himself to poke holes in their beliefs, lest organizations become stale. But he did so in a sympathetic way. He assumed that his readers were intelligent, rational, hardworking people of good will. If their organizations struggled, he believed it was usually because of outdated ideas, a narrow conception of problems, or internal misunderstandings.

Consulting career of Peter Drucker

During his long consulting career, Drucker worked with many major corporations, including General Electric, Coca-Cola, Citicorp, IBM, and Intel. He consulted with notable business leaders such as GE’s Jack Welch; Procter & Gamble’s A.G. Lafley; Intel’s Andy Grove; Edward Jones’ John Bachmann; Shoichiro Toyoda, the honorary chairman of Toyota Motor Corp.; and Masatoshi Ito, the honorary chairman of the Ito-Yokado Group, the second largest retailing organization in the world. Although he helped many corporate executives succeed, he was appalled when the level of Fortune 500 CEO pay in America ballooned to hundreds of times that of the average worker. He argued in a 1984 essay that CEO compensation should be no more than 20 times what the rank and file make — especially at companies where thousands of employees are being laid off. “This is morally and socially unforgivable,” Drucker wrote, “and we will pay a heavy price for it.”

Drucker served as a consultant for various government agencies in the United States, Canada and Japan. He worked with various nonprofit organizations to help them become successful, often consulting pro bono. Among the many social-sector groups he advised were the Salvation Army, the Girl Scouts of the USA, C.A.R.E., the American Red Cross, and the Navajo Indian Tribal Council. In fact, Drucker anticipated the rise of the social sector in America, maintaining that it was through volunteering in nonprofits that people would find the kind of fulfillment that he originally thought would be provided through their place of work, but that had proven elusive in that arena. “Citizenship in and through the social sector is not a panacea for the ills of post-capitalist society and post-capitalist polity, but it may be a prerequisite for tackling these ills,” Drucker wrote. “It restores the civic responsibility that is the mark of citizenship, and the civic pride that is the mark of community.”

Drucker's writings

Drucker's 39 books have been translated into more than thirty languages. Two are novels, one an autobiography. He is the co-author of a book on Japanese painting, and made eight series of educational films on management topics. He also penned a regular column in the Wall Street Journal for 10 years and contributed frequently to the Harvard Business Review, The Atlantic Monthly, and The Economist. His work is especially popular in Japan, even more so after the publication of "What If the Female Manager of a High-School Baseball Team Read Drucker’s Management", a novel that features the main character using one of his books to great effect, which was also adapted into an anime and a live action film. His popularity in Japan may be compared with that of his contemporary W. Edwards Deming.

Peter Drucker also wrote a book in 2001 called "The Essential Drucker". It is the first volume and combination of the past sixteen years of Peter Drucker's work on management. The information gather is a collection from his previous findings, The Practice of Management (1954) to Management Challenges for the 21st Century (1999), this book offers, in Drucker's words, "a coherent and fairly comprehensive introduction to management". He also answers frequently asked questions from up and coming entrepreneurs who wonder the questionable outcomes of management.

Main publications by Drucker

1939: The End of Economic Man 1942: The Future of Industrial Man 1946: Concept of the Corporation 1950: The New Society 1954: The Practice of Management 1957: America's Next Twenty Years 1959: Landmarks of Tomorrow 1964: Managing for Results 1967: The Effective Executive 1969: The Age of Discontinuity 1970: Technology, Management and Society 1971: Men, Ideas and Politics 1973: Management: Tasks, Responsibilities, Practices 1976: The Unseen Revolution: How Pension Fund Socialism Came to America 1977: People and Performance: The Best of Peter Drucker on Management 1977: An Introductory View of Management 1979: Song of the Brush: Japanese Painting from Sanso Collection 1979: Adventures of a Bystander 1980: Managing in Turbulent Times 1981: Toward the Next Economics and Other Essays 1982: The Changing World of Executive 1982: The Last of All Possible Worlds 1984: The Temptation to Do Good 1985: Innovation and Entrepreneurship 1986: The Frontiers of Management: Where Tomorrow's Decisions are Being Shaped Today 1989: The New Realities: in Government and Politics, in Economics and Business, in Society

and World View 1990: Managing the Nonprofit Organization: Practices and Principles 1992: Managing for the Future 1993: The Ecological Vision 1993: Post-Capitalist Society 1995: Managing in a Time of Great Change 1997: Drucker on Asia: A Dialogue between Peter Drucker and Isao Nakauchi 1998: Peter Drucker on the Profession of Management 1999: Management Challenges for 21st Century 2001: The Essential Drucker 2002: Managing in the Next Society 2002: The Functioning Society 2004: The Daily Drucker 2006: The Effective Executive in Action

Key ideas

Several ideas run through most of Drucker's writings:

Decentralization and simplification. Drucker discounted the command and control model and asserted that companies work best when they are decentralized. According to Drucker, corporations tend to produce too many products, hire employees they don't need (when a better solution would be outsourcing), and expand into economic sectors that they should avoid.

The concept of "Knowledge Worker" in his 1959 book "The Landmarks of Tomorrow". Since then, knowledge-based work has become increasingly important in businesses worldwide.

The prediction of the death of the "Blue Collar" worker. A blue collar worker is a typical high school dropout who was paid middle class wages with all benefits for assembling cars in Detroit. The changing face of the US Auto Industry is a testimony to this prediction.

The concept of what eventually came to be known as "outsourcing." He used the example of front room and a back room of each business: A company should be engaged in only the front room activities that are core to supporting its business. Back room activities should be handed over to other companies, for whom these are the front room activities.

The importance of the non-profit sector, which he calls the third sector (private sector and the Government sector being the first two.) Non-Government Organizations (NGOs) play crucial roles in countries around the world.

A profound skepticism of macroeconomic theory. Drucker contended that economists of all schools fail to explain significant aspects of modern economies.

Respect of the worker. Drucker believed that employees are assets and not liabilities. He taught that knowledgeable workers are the essential ingredients of the modern economy. Central to this philosophy is the view that people are an organization's most valuable resource, and that a manager's job is both to prepare people to perform and give them freedom to do so.

A belief in what he called "the sickness of government." Drucker made nonpartisan claims that government is often unable or unwilling to provide new services that people need or want, though he believed that this condition is not inherent to the form of government. The chapter "The Sickness of Government" in his book The Age of Discontinuity formed the basis of New Public Management, a theory of public administration that dominated the discipline in the 1980s and 1990s.

The need for "planned abandonment." Businesses and governments have a natural human tendency to cling to "yesterday's successes" rather than seeing when they are no longer useful.

A belief that taking action without thinking is the cause of every failure. The need for community. Early in his career, Drucker predicted the "end of economic man"

and advocated the creation of a "plant community" where an individual's social needs could be met. He later acknowledged that the plant community never materialized, and by the 1980s, suggested that volunteering in the nonprofit sector was the key to fostering a healthy society where people found a sense of belonging and civic pride.

The need to manage business by balancing a variety of needs and goals, rather than subordinating an institution to a single value. This concept of management by objectives forms the keynote of his 1954 landmark The Practice of Management.

A company's primary responsibility is to serve its customers. Profit is not the primary goal, but rather an essential condition for the company's continued existence.

An organization should have a proper way of executing all its business processes.

A belief in the notion that great companies could stand among humankind's noblest inventions.

Criticism of Drucker's work

The Wall Street Journal researched several of his lectures in 1987 and reported that he was sometimes loose with the facts. Drucker was off the mark, for example, when he told an audience that English was the official language for all employees at Japan’s Mitsui trading company. (Drucker’s defense: “I use anecdotes to make a point, not to write history.”) And while he was known for his prescience, he wasn’t always correct in his forecasts. He predicted, for instance, that the nation’s financial center would shift from New York to Washington. Others maintain that one of Drucker’s core concepts—“management by objectives”—is flawed and has never really been proven to work effectively. Critic Dale Krueger said that the system is difficult to implement, and that companies often wind up overemphasizing control, as opposed to fostering creativity, to meet their goals. Drucker's classic Concept of the Corporation criticized General Motors at a time when it was, in some ways, the most successful corporation in the world. Many of GM's executives considered Drucker persona non grata for a long time afterward. Alfred P. Sloan refrained from personal hostility toward Drucker, but even Sloan considered Drucker's critiques of GM's management to be "dead wrong".

Awards and honors

Drucker was awarded the Presidential Medal of Freedom by U.S. President George W. Bush on July 9, 2002. He also received honors from the governments of Japan and Austria. He was the Honorary Chairman of the Peter F. Drucker Foundation for Nonprofit Management, now the Leader to Leader Institute, from 1990 through 2002. In 1969 he was awarded New York University’s highest honor, the NYU Presidential Citation. Harvard Business Review honored Drucker in the June 2004 with his seventh McKinsey Award for his article, "What Makes an Effective Executive", the most awarded to one person. Drucker was inducted into the Junior Achievement U.S. Business Hall of Fame in 1996. Additionally he holds 25 honorary doctorates from American, Belgian, Czech, English, Spanish and Swiss Universities. In Claremont, California, Eleventh Street between College Avenue and Dartmouth Avenue was renamed "Drucker Way" in October 2009 to commemorate the 100th anniversary of Drucker's birth.

Questions

Q1. Define Management by objectives (MBO).

Q2. What are the major characteristics of Organization behavior?

Q3. Briefly explain Evolution and nature of Organizational Behavior.

Q4. Briefly explain fundamental theories in organization behavior.

Q5. What is Virtual Organization?

Q6. What are the limitations of OB?