Introduction

Management by objective or MBO refers to a formal set of procedures that begins with goal setting and continues through performance review. Managers and subordinates act together to set common goals. Each person's major areas of responsibility are clearly defined in terms of measurable expected results or "objectives" used by staff members in planning their work and by both staff members and their managers for monitoring progress. Performance appraisals are conducted jointly on a continuing basis, with provisions for regular periodic reviews.

The setting up of goals or objectives became so important in the business world that the concept of Management By Objectives (MBO) propounded by Peter F. Drucker came to limelight in the year 1954. It is also known as 'Results Management': 'Goals Management': 'Work Planning Review'; 'Management by Results' or 'management by Mission'. Basic principle underlying the theory of MBO is the participative style of management. It aims at setting goals through participation of superiors and subordinates. The heart of MBO is the objectives, which spell out the individual actions needed to fulfill the unit's functional strategy and objectives. MBO provides a way to integrate and focus the efforts of all organisation members on the goals of higher management and overall organisational strategy.'

Meaning

Odiorne has described "the system of management by objective as a process whereby superior and subordinate managers of an organisation jointly identify common goals, define each individual's major areas of responsibility in terms of results expected of him and use these measures as guides for the operating unit and assessing the contribution of each of its members."

MBO is considered a system and philosophy of management rather than simple technique. It is a goal oriented approach which facilitates performance of all management functions in a logical and effective manner for achieving goals.

MBO is as old as management itself. In fact, management has to be always with and by objectives. However, most managers are really not sure about their objectives. They are usually not clear as to what their organisation, department or section should achieve within a particular period of time. If properly implemented MBO can provide the dynamism, purposiveness and trust that are essential characteristics of effective management.

Definition

A few definitions are given below:

1. McConkey has defined it, "as an approach to management planning and evaluation in which specific target for a year or some other length of time are established for each manager on the basis of result which each must achieve, if the overall objectives of the company are to be realised. At the end of the period, the actual results achieved are measured against the original goals, that is, against the expected results which each manager knows, he is responsible for achieving."

2. "MBO is a comprehensive managerial system that integrates many key managerial activities in a systematic manner, consciously directed towards the effective and efficient achievement." -Koontz and Weihrich

3. "MBO is a result-centred, non-specialist, operational managerial process for the effective utilisation of material, physical and human resources of the origanisation by integrating the individual with the organisation and organisation with the environment." -SK. Chakraborty

4. Prof. Reddin, who has contributed significantly towards making MBO more operational, has the following to say, "Management by objectives the establishment of effectiveness areas and effectiveness standards for managerial positions and the periodic conversion of these into measurable time bounded objective linked vertically and horizontally, and with future planning. 

MBO Characteristics

Based on the above definitions, MBO reveals the following features:

1. When goals are framed with participation of superiors and subordinates, it ensures integration of objectives across organisational levels and functional areas. This provides focus to all managerial activities and leads to effective attainment of goals.

2. The goals serve as standards of performance against which actual performance is measured. Discrepancy is removed through various techniques of control. Planning and control are the heart of MBO.

3. MBO is a continuous process or a never-ending process. The continuous nature of MBO process not only ensures sustained concentration of efforts toward organisational goals, it also helps in modifying the goals to suit changing conditions.

4. Performance of employees is periodically evaluated in the light of predetermined targets. Emphasis is put on improving future performance. Rewards are governed by the results achieved.

5. The basic emphasis of MBO is on objectives. Therefore, objectives are established for all the levels of the organisation, including the corporate level, all the units or departments and individual managers. Objectives provide the means for integrating the organisation with its environment, its subsystems and people.

6. Periodic review of performance is an important feature of MBO. The performance review is held regularly, normally once in a year. It emphasises initiative and active role by the manager who is responsible for achieving objectives. The review is future-oriented.

7. MBO recognizes the fact that the goal setting and achievement process is a cooperative and participative endeavour.

8. MBO aims at a radical realignment of relations between superior and subordinate managers. Superior managers are required to adopt a supportive stimulative role in relation to their subordinates.

9. Each manager sets his objectives and also evaluates his performance. He clarifies his job relationship with his superiors, peers and subordinates and the whole process of management revolves around the participative objective setting.

10. Objectives in MBO provide guidelines for appropriate system and procedures. Resource allocation, delegation of authority, etc. are determined on the basis of objectives. Similarly, reward and punishment system is attached with the achievement of the objectives.

Steps in MBO Process

Setting objectives is the first task of management. Reaching the objectives (goals) is the very logic of the management process - through organising, directing and control. Most organisations which have seriously introduced MBO have reaped distinct improvement in their management. The following sequence of steps is followed in the process of MBO.

1. Step 1: Setting Overall Organisational Goals

The top management sets goals for the enterprise in key areas. The objectives for each department are laid down in consultation with the departmental heads. Then, the process - goal setting, is repeated at lower levels until goals for each and every individual are established. Superiors and subordinates discuss corporate objectives and drive individual performance target.

2. Step II Setting up subordinate's Goals

The process of objective setting begins with superior's proposed recommendations for his subordinate's objectives. In turn, the subordinate states his own objectives as perceived by him. Thereafter, the final objectives for the subordinate are set by the mutual negotiation between superior and subordinate. The goal setting process is complete when agreement is reached between superiors and subordinates as to what is to be accomplished. The subordinate goals are set at departmental level, section level and individual level, etc. Everyone in the organisation should know what is expected of him? These goals should aim at contributing towards the overall goal of the organisation. The objectives at all levels must be set out in concrete terms.

3. Step III Matching Goals and Resources

When the objectives are set carefully, they also indicate the resource requirements. In fact, resource availability becomes important aspect of objective setting because it is the proper application of resources which ensures objective achievement. Therefore, there should be matching between objectives and resources. The superior is better able to see the needs and allocates the resources. The allocation of resources should be done in consultation with the subordinates.

4. Step IV: Developing Action Plans

Specific key areas are determined which require more attention than others in terms of allocation of resources. These areas are (1) profitability, (2) Market standing (3) Innovation (4) Productivity (5) Worker performances (6) Manager Performance, (7) Public Responsibility, etc. These plans are usually formulated at lower levels in consultation with their superiors.

5. Step V: Periodic Meetings

At frequent intervals actual performance is reviewed jointly by the superior and the subordinates. The top level management will be able to know the views and difficulties faced by the staff in achieving the targets. If necessary, the goals are modified. Problems, if any, are identified and solutions are sort out. The success of plans is ensured through periodic review of performance.

6. Step VI: Appraisal of Performances

Evaluation of performance at the end of a period is essential to assess the work. The superior should evaluate the work of the subordinates and find out deviations, if any. The persons whose performance is below the standard performance are penalised and those whose perfomance is outstanding are rewarded. The process of appraisal will enable the management to take corrective measures if there are deviations in performance. Feedback promotes self-direction and control. It helps a person to know the direction in which he is going to improve his overall performance. 

Objectives Of MBO

MBO aims at the following objectives

1. MBO promotes subordinate's participation in the goal setting process. 

2. MBO is a goal oriented process and not work oriented process.

3. Superiors play a supportive role in guiding the subordinates.

4. Individual performance targets are derived from the overall objectives of the organisation. 

5. Emphasis is put on improving future performance. 

6. It is a continuous process, i.e. never ending process.

7. It facilitates fast and effective decision-making.

8. It serves as the basis of control.

9. Organizational efficiency is increased by picking out the key areas. 

10. The programmes are designed to achieve the desired result.

Advantages Of MBO

MBO leads to the following benefits:

1. Clear Goals

MBO produces clear and measurable performance goals. The joint goal setting sessions are organised on a give and take basis. This enhances team spirits and better inter group communication. Goals are determined through employees' participation and therefore, they carry out their part of the job actively and willingly.

2. Result Oriented Planning

MBO results in verifiable goals which can easily be translated into action plans. The objective- setting process of MBO leads to an integrated hierarchy of objectives throughout the organisation. 

3. Personnel Satisfaction

When the individuals are involved in objective-setting, they derive satisfaction because of the feeling that they are important to the organisation. They enjoy considerable authority which is a source of inspiration for better performance. Beside these, they are very sure that their performance will be measured in terms of their actual performance and will not be affected by managerial prejudices, biases and other personal factors.

4. Basis for Organisational Change

In any organisation, change is required because of change in external factors and in internal factors or change taking place in both the factors simultaneously. Therefore, to cope up with the change, the organisation has to change itself appropriately. 

5. Motivation

Managers at all levels are involved in goal-setting. As a result they are more committed to the goals of the organisation. Rewards are linked with performance. Employees are allowed considerable discretion in setting individual targets which provides them psychological satisfaction. 

6. Performance Appraisal

MBO provides objective yardsticks for systematic evaluation of performance. The performance of subordinates is monitored more effectively due to periodic review of progress. Measurable targets serve good standards for control.

7. Cooperation and coordination

Role of ambiguity and confusion are avoided. It helps to minimise duplication of efforts and overlapping authority. By clarifying the roles and responsibilities of each individual position, each individual knows what is expected of him. The subordinates are allowed to act upon their own initiative in deciding upon the ways of achieving their goals.

8.Improves Better Relationship

Setting of goals through MBO improves the relationship between employers and employees. This creates a healthy environment of cooperation, integration and coordination and organisational goals are achieved with zeal and enthusiasm.

9. Personality Development

When superiors have confidence in their subordinates it promotes a feeling of involvement, recognition and commitment amongst employees. Their behavioural attitude changes in a positive direction which leads to ego satisfaction and develops their personality. 

10. Facilitates control

The self appraisal system promotes self-control by employees. Controlling aids can also used by superiors, through constant review of employees' performance, measuring it with planned performance and checking the deviations, to ensure that goals are effectively achieved.

Disadvantages Of MBO 

A number of problems are confronted while implementing this technique. The following are the weaknesses:

1. MBO emphasises on short-term goals. The long-term and quantitative objectives are not given proper attention.

2. The success of MBO will depend upon feedback system. But information is not properly conveyed to various levels.

3. The change in circumstances will necessitate a change in the objectives too. But the system is not rigidly followed.

4. MBO has been criticised as time-consuming and too pressure-oriented. 

5. The traditional hierarchical organisation structure restricts involvement and participation of subordinates.

6. MBO generates paper work because large number of forms are to be designed and put into practice.

7. MBO is a philosophy of managing an organisation in a new way. However, managers fail to understand and appreciate this new approach.

8. Many managers often hesitate to change objectives during a period of time. Thus inflexibility created by applying MBO may cause harm than what it may contribute.

Management By Exception (MBE)

The activities of a big organisation are so innumerable that it is neither feasible nor desirable for the management to exercise control over all minor or major deviations from the standards. "Trying to control everything may end up in controlling nothing." That is managers cannot control very organisational activity. When the deviation is not significant, the matter may not be reported to top managers. But if deviations are significant, they should be reported to manager. This is known as the management by exception (MBE). According to this principle, only exceptional (significant) deviations from the standards should be reported to the management.

The principle of MBE states that manages should concentrate only on significant deviations rather than each and every organisational activity. 

Benefits Of MBE

Management by exception provides the following benefits:

1. It saves the time of managers because they deal only with exceptional matters.

2. Simple and routine problems are left to lower level managers.

3. It facilitate delegation of authority.

4. It separates important information from unimportance one. 

5. It leads to optimum attainment of organizational goals by grouping the deviations between significant and insignificant.