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Management by Objectives (MBO) is a process of agreeing upon 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]

Contents 1 Domains and levels 2 Practice 3 Limitations 4 References

[edit] Domains and levels

Objectives can be set in all domains of activities (production, 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.

[edit] Practice

MBO is often achieved using set targets. MBO introduced the SMART criteria: Objectives for MBO must be SMART (Specific, Measurable, Achievable, Relevant, and Time-Specific).^[2] In some sectors (Healthcare, Finance etc.) many add ER to make SMARTER, where the E=Extendable R=Recorded.^{[citation needed]}

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

[edit] 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]

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.^[4]

4. It did not address the importance of successfully responding to obstacles and constraints as essential to reaching a goal. The model didn’t adequately cope with the obstacles of:

• Defects in resources, planning and methodology,
• The increasing burden of managing the information organization challenge,
• The impact of a rapidly changing environment, which could alter the landscape enough to make yesterday’s goals and action plans irrelevant to the present.^[5]

When this approach is not properly set, agreed and managed by organizations, in self-centered thinking employees, it may trigger an unethical behavior of distorting the system of results and financial figures to falsely achieve targets that were set in a short-term, narrow, bottom-line fashion.^{[6][dubious – discuss]}

A more fundamental and authoritative critique comes from Walter A. Shewhart / W. Edwards Deming, the fathers of Modern Quality Management, for whom MBO is the opposite of their founding Philosophy of Statistical Process Control^[7].

Deming suggested that the practice of MBO is implemented under the false assumption that meeting an objective is always beneficial. Organizations should be thought of as systems made up of interdependent components, and change that is beneficial to one component is often harmful to the system because that change can be detrimental to one or more interdependent components. Effectively, a system is not the sum of its parts. Attempting to improve a system by independently changing its parts in accordance with objectives results in systemic losses.^[8] Deming laments that Drucker went unheeded when making the same point ^[9] and advocated that objectives should be replaced with the leadership of a manager knowledgeable of systems and methods of controlling them, specifically Statistical Process Control.

The use of MBO needs to 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, based upon a more strategic picture being available to employees. Engagement of employees in the objective setting process is seen as a strategic advantage by many ^[10]

A saying around MBO and CSF's -- "What gets measured gets done" ^[11]-- 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.

[edit] References