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Management by objectives

What is Management by Objectives ?

Management by Objectives (MBO) is a personnel management technique where managers and employees work together to set, record and monitor goals for a specific period of time. Organizational goals and planning flow top-down through the organization and are translated into personal goals for organizational members. The technique was first championed by management expert Peter Drucker and became commonly used in the 1960s.  

Management by objectives process

Goal Setting: First and foremost, the long term goals of the organization are defined, such as its strategic intent, vision, mission and goals. Once these are formulated, the management then decides specific objectives to be attained within the given time frame.

Action Plan: Action plan refers to the way through which the objectives are achieved. It provides direction regarding how the objectives can be achieved, as in what is to be done, what steps are to be followed, etc.

Performance Appraisal: Last but not the least, at this stage, a comparison is made between actual and predetermined standards. These objectives acts as a basis for reviewing the progress.

MBO, is directed towards raising the performance level of the organization by conspiciosly identifying the measurable goals and end results, which are agreed to the management as well as employees of the organization. Thereafter, the employees participate in formulating the action plan and strategy for the attainment of the goals.

The core concept of MBO is planning, which means that an organization and its members are not merely reacting to events and problems but are instead being proactive. MBO requires that employees set measurable personal goals based upon the organizational goals. For example, a goal for a civil engineer may be to complete the infrastructure of a housing division within the next twelve months. The personal goal aligns with the organizational goal of completing the subdivision.

MBO is a supervised and managed activity so that all of the individual goals can be coordinated to work towards the overall organizational goal. You can think of an individual personal goal as one piece of a puzzle that must fit together with all of the other pieces to form the complete puzzle: the organizational goal. Goals are set down in writing annually and are continually monitored by managers to check progress. Rewards are based upon goal achievement.

MBO has some distinct advantages. It provides a means to identify and plan for the achievement of goals. If you don't know what your goals are, you will not be able to achieve them. Planning permits proactive behavior and a disciplined approach to goal achievement. It also allows you to prepare for contingencies and roadblocks that may hinder the plan. Goals are measurable so that they can be assessed and adjusted easily. Organizations can also gain more efficiency, save resources, and increase organizational morale if goals are properly set, managed, and achieved.

Understanding Management by Objectives

Management by objectives (MBO) is the establishment of a management information system to compare actual performance and achievements to the defined objectives. Practitioners claim that the major benefits of MBO are that it improves employee motivation and commitment and allows for better communication between management and employees. However, a cited weakness of MBO is that it unduly emphasizes the setting of goals to attain objectives, rather than working on a systematic plan to do so.

In his book that coined the term, Peter Drucker set forth several principles. Objectives are laid out with the help of employees and are meant to be challenging but achievable. Employees receive daily feedback, and the focus is on rewards rather than punishment. Personal growth and development are emphasized, rather than negativity for failing to reach objectives.

Drucker believed MBO was not a cure-all but a tool to be utilized. It gives organizations a process, with many practitioners claiming that the success of MBO is dependent on the support from top management, clearly outlined objectives, and trained managers who can implement it.

Management by Objectives in Practice

Management by objectives outlines five steps that organizations should use to put the management technique into practice.

The first step is to either determine or revise organizational objectives for the entire company. This broad overview should be derived from the firm's mission and vision.

The second step is to translate the organizational objectives to employees. Drucker used the acronym SMART (specific, measurable, acceptable, realistic, time-bound) to express the concept.

Step three is stimulating the participation of employees in setting individual objectives. After the organization's objectives are shared with employees, from the top to the bottom, employees should be encouraged to help set their own objectives to achieve these larger organizational objectives. This gives employees greater motivation since they have greater empowerment.

Step four involves monitoring the progress of employees. In step two, a key component of the objectives was that they are measurable in order for employees and managers to determine how well they are met.

The fifth step is to evaluate and reward employee progress. This step includes honest feedback on what was achieved and not achieved for each employee.

Key Takeaways

Management by objectives (MBO) is a strategic management model that aims to improve organizational performance by clearly defining objectives that are agreed to by both management and employees.

According to the theory, having a say in goal setting and action plans encourages participation and commitment among employees, as well as aligning objectives across the organization.

The strategy was formulated by Peter Drucker in the 1950s, following five steps that organizations should follow.

Features of Management by Objectives

In the light of the above definitions of MBO, the following features of it can be identified;

It is a technique and philosophy of management.

Objective setting and performance review are made by the participation of the concerned managers.

Objectives are established for all levels of the organization.

It is directed towards the effective and efficient accomplishment of organizational objectives.

It is concerned with converting an organizational objective into a personal objective on the presumption that establishing personal objectives makes an employee committed which leads to better performance.

The basic emphasis of MBO is on objectives. Management by Objectives tries to match objectives with resources.

Objectives in MBO provide guidelines for appropriate systems and procedures.

A periodic review of performance is an important feature of MBO.

MBO provides the means for integrating the organization with its environment, its subsystems, and people.

Employees are provided with feedback on actual performance as compared to planned performance.

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