Group Project

Organizational Theory and Practice

Submitted to:
Submitted by:
Prof. P. Ramakrishna Chadaga Group I1

-Paminderjit Sunner
-Hima
-Jitendra
-Vineesh
-Sailesh
 Contents

1. Introduction......................................................................................................... 1
2. Nature of objectives............................................................................................ 1
3. Evolving Concepts in MBO................................................................................ 6
4. The Process of managing by objectives............................................................... 7
5. How to set objectives?................................................................................. 9
6. Benefits and weaknesses of Management by Objectives....................................13
7. References...........................................................................................................16

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 ➢ Introduction:
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.

MBO aims to increase organizational performance by aligning goals and subordinate

objectives throughout the organization. Ideally, employees get strong input to identifying
their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback
in the process to reach objectives.

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 fulfil their responsibilities.

➢ Nature of Objectives:
Objectives state end results and overall objectives need to be supported by sub objectives.
Thus, objectives form a hierarchy as well as a network. Organizations have multiple goals
that are sometimes incompatible and may lead to conflicts within organization, within the
group, and even within individuals. A manager may have to choose between short term and
long term performance, and personal interests may have to be subordinated to organizational
objectives.

 Hierarchy of Objectives
Objectives form a hierarchy, ranging from the broad aim to specific individual objectives.
The zenith of the hierarchy is the socioeconomic purpose of society, such as requiring the
organization to contribute to the welfare of the people by providing goods and services at a
reasonable cost. Then there is the mission or purpose of the business, which might be to
furnish convenient, low cost transportation for the average person. The stated mission might
be to produce, market, and service automobiles. The next level of hierarchy contains more
specific objectives, such as those in key result areas. These are the areas in which
performance is essential for the success of the enterprise; e.g. to obtain 10 percent return on
investment by end of financial year.

The top-down approach remains extremely popular in contemporary project

management. The phrase “top-down” means that all the directions come from the top.
Project objectives are established by the top management. Top managers provide guidelines,
information, plans and fund processes. All of the project manager’s expectations are clearly
communicated to each project participant. Following this approach, ambiguity opens the door

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for potential failure, and the managers should be as specific as possible when communicating
their expectations. Process formality is very important for this approach.
Examples of the top-down approach applications can be found in many organizations. One of
such example is the New York Times, a leader in the newspaper industry. Several years ago,
American Journalism Review (www.ajr.com) reported that The Times’ executive
management felt that they were far from what was necessary for creation of a vibrant
workplace and a successful organization. Power was centralized and masthead editors
experienced overall control. Editors introduced the same management pattern in the projects
for which they were responsible. One person’s emotions and opinions influenced all the
project decisions, and this person was the project manager. What was the result? Team
members felt that they weren't listened to, that their voices didn't count. There was no
effective collaboration between the journalists. They were not morally motivated to do their
jobs. The managing executives then realized that they needed to give more freedom to the
teams and change their management style. It took quite a while to introduce bottom-up
management to the organization. But, obviously, it was worth the time and effort, as New
York Times employees say that collaboration became much more efficient, and team
members now work together more productively.
Similar problems caused by utilizing the top-down approach can be observed in many
organizations with a traditional management style. Experience shows that this top-down
management often results in reduced productivity and causes bottlenecks or so-called
lockdowns. A lockdown gives the project manager total control over his team. Such
lockdowns can lead to unnecessary pain and significantly slow down a project’s
completion.
Bottom-up project management options
The factors mentioned above may play a vital role in a project’s failure, and this is the reason
why numerous organizations have turned to a bottom-up management style or at least some
of its elements. The New York Times is one of the good examples. The bottom-up approach
implies proactive team input in the project executing process. Team members are invited to
participate in every step of the management process. The decision on a course of action is
taken by the whole team. Bottom-up style allows managers to communicate goals and value,
e.g. through milestone planning. Then team members are encouraged to develop personal to-
do lists with the steps necessary to reach the milestones on their own. The choice of methods
and ways to perform their tasks is up to the team. The advantage of this approach is that it
empowers team members to think more creatively. They feel involved into the project
development and know that their initiatives are appreciated. The team members’ motivation
to work and make the project a success is doubled. Individual members of the team get an
opportunity to come up with project solutions that are focused more on practical requirements
than on abstract notions. The planning process is facilitated by a number of people, which
makes it flow significantly faster. The to-do lists of all the team members are collected into
the detailed general project plan. Schedules, budgets and results are transparent. Issues
are made clear by the project manager to avoid as many surprises as possible. Bottom-up
project management can also be viewed as a way of coping with the increasing gap between
the information necessary to manage knowledge workers and the ability of managers to
acquire and apply this information.

However, despite all its the advantages, the bottom-up style alone will not make your projects
flourish. According to many experts, the bottom-up approach is not the perfect solution, as
sometimes it lacks clarity and control. The best way is to find a balance between the two
opposite approaches and take the best practices from both of them as follows:

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 Network of Objectives:
Both objectives and planning programs form a network of desired results and events. If goals
are not interconnected and if they do not support one another, people very often pursue paths
that may seem good for their own department but may be detrimental to the company as a
whole.
Goals and plans form an interlocking network. Managers must make sure that the
components of the network “fit” one another. Fitting is a matter not only of having the
various programs carried out but also of timing their completion, since undertaking one
program often depends on first completing another.
It is easy for one department of a company to set goals that may seem entirely appropriate for
it, only to find itself operating at cross purposes with another department. The manufacturing
department may see that its goals are best served by long production runs, but this might
interfere with the marketing department`s desire to have all products in the line readily
available or with the finance department`s goal of maintaining investment in inventory at a
certain low level.
Companies often set goals that are unrealistic without recognizing the many constraining
factors such as the economic condition or the moves by competitors. Moreover, setting the
company`s financial goals is a continuing process in which conflicting priorities must be
balanced. In fact, managers too often see the objectives from their own perspective – on the
basis of their self interest without understanding the total network of aims.

Multiplicity of Objectives

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Aims are numerous and even the mission and broad major objectives of an enterprise are
normally multiple. Likewise, at every level in the hierarchy of objectives, goals are likely to
be multiple. Some people think that a manager cannot pursue more than a few objectives,
perhaps two to five. The argument is that too many objectives tend to dilute the drive needed
for their accomplishment and may unduly highlight minor objectives to the detriment of
major ones.
Goals are not conceived of as dealing with every facet of a person`s job; they should not be
confused with activities. If they are so many objectives that none receives adequate attention,
planning will be ineffective. The number of objectives depends on how much the managers
will do themselves and how much they can assign to subordinates, thereby limiting their role
to one of assigning, supervising and controlling.

➢ Evolving concepts in MBO:

Some think about MBO as a planning and control device, others see it as a motivational
technique and some think of it as a motivational tool.

The term MBO was coined by Peter Drucker in 1954

“MBO is a comprehensive managerial system that integrates many key managerial activities
in a systematic manner, consciously directed towards the effective achievement of
organizational objectives.”

Early Impetus to MBO

No one person can be called as the originator of this approach. However certain individuals
have long placed emphasis on management by objectives and by doing so, have speeded its
development as a systematic process.
Peter Drucker in 1954 emphasized that objectives must be set in all areas where performance
affects the health of the enterprise. He laid down the philosophy that emphasizes self-control
and self direction.

Emphasis on Performance appraisal

In 1957, in his article, Douglas McGregor, a major contributor, criticized traditional appraisal
programs that focused on personality trait criteria’s for evaluating subordinates. He suggested
a new approach to appraisal based on Drucker’s concept of management by objectives.
Subordinates assume the responsibility of setting short-term objectives for themselves and
they review those objectives with their superior.

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Performance is then evaluated against the present objectives, primarily by the subordinates
themselves. This type of appraisal encourages self-development and self-appraisal. The
emphasis is on performance rather on personality.

Emphasis on Short-term objectives and motivation

Performance is higher when people had specific objectives than when they were simply asked
to do their best. Improvement in the attainment of goals and a continuing increase in
productivity were noted in the firms. But, in the follow-up study made, the productivity
tapered off. The factors which motivate the employees are:
a) Goal Setting
b) Incentives
c) Participation
d) Autonomy
Goal setting is not restricted to only business organizations but also it is also applicable to
public organizations.
Inclusion of Long-Range Planning in the MBO process
When the MBO programs emphasis on performance appraisal and motivation, the focus tends
to be on short-term objectives. This may result in undesirable managerial behavior. For
example: A production manager may neglect necessary expenses to reduce the maintenance
costs, which will result in costly repairs later.
Recognizing these short comings, many organizations now include long-range and strategic
planning in MBO programs.

The systems approach to MBO

MBO has undergone many changes, it has been used to motivate individuals and most
recently in strategic planning. There are still some managerial subsystems which can be
integrated into the MBO process. Those are:
a) Design of organizational structures
b) Portfolio Management
c) Management Development
d) Career Development
e) Compensation Programs
f) Budgeting

MBO as a comprehensive system of managing indicates that most key managerial activities
can and should be integrated with MBO process.
In short, MBO should be considered as a way of managing and not as an addition to the
managerial job

➢ The Process of Managing By Objectives:

The success of “Managing by Objectives” can be judged by checking how it works in

practice.

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The exercise generally starts at the top of the organization. The Chief Executive Officer gives
direction to the organization. It is not mandatory that the exercise starts at the top. It can start
at division level, department level etc, as and when the need is felt by the respective
department head.
As H. Koontz says in his book “As in all other kinds of planning, one of the critical needs in
the MBO is the development and dissemination of consistent planning premises. No manager
can be expected to set goals or establish budgets without guidelines.”

Setting Preliminary Objectives at the top:

The top manager determines the mission/ purpose of the organization for the given time
period. The time period may range from one quarter to five years, depending upon the
objectives. Longer time frames are usually assigned at top levels, where the objectives
defined are broad and cover many aspects. Down the hierarchy, the time periods set tend to
become shorter, as the goals pertain to a specific field or aspect. For example: a trainee may
have defined goals to achieve in a three-month time frame. For a junior level executive this
could be six months, whereas for the CEO the time frame cold well be one fiscal year.

The supervisor comes up with a set of preliminary objectives. These objectives fall in line
with the broad aims, direction of the company. The parameters considered while setting the
objectives are: company’s strengths and weaknesses, individual’s skills/ competencies,
readiness for minor changes on consultations with subordinates. The supervisor then
establishes metrics to evaluate the progress towards goal accomplishment. The metrics could
be sales dollars, profits, percentages, cost levels etc.

Clarifying Organizational Roles:

It is important to clarify goals and responsibilities. Many a time, the purpose of the objectives
gets lost because of the lack of clarity on who is responsible for what. The responsible parties
must be identified clearly: the person setting the objectives- the manager/ supervisor, the
person for whom objectives are set- individual employee. This helps to build a sense of
accountability, responsibility in the employee.

Setting Subordinates’ Objectives:

After making sure that subordinate managers have been informed of pertinent general
objectives, strategies and planning premises, the supervisor then proceeds to work with
subordinates in setting their objectives.
This step is essentially a two-way process. The supervisor first presents his preliminary
objectives to his subordinates individually. He then asks for the subordinate’s views on what
he thinks to be a feasible target, the resources that he might require to improve. The
discussion then moves on to what is in line with the company’s, department’s goals.

According to H. Koontz, the questions the manager must be asking during goal-setting are:
1) What can you contribute?
2) How can we improve our operation to help me improve mine?

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 3) What stands in the way; what obstruction keeps you from a higher level of
performance?
4) What changes can I make?
5) How can I help?

These questions give an insight into the real growth potential and the hurdles that need to be
dealt with.
The supervisor at this stage must play a supporting role. He/she must make sure that his/her
subordinates get sufficient time, resources to accomplish the said goals. Forcing objectives on
an employee might prove detrimental to the employee productivity and most importantly,
morale. The focus must rather be on long term growth. However, the final authority of
approving the objectives and responsibility for following-up lies squarely with the manager/
supervisor.
One of the major advantages of carefully setting up a network of verifiable goals and a
requirement for doing so effectively is tying the need of capital, materials and human
resources at the same time. Individuals at various levels need resources to fulfil their
objectives. By tying the objectives to the goals themselves, the superiors can find out the
most effective and economical way of allocating the resources.

Recycling Objectives:
Top-down approach by itself seldom succeeds in delivering the desired results. The key to
success is the readiness of the system for minor changes, within company guidelines, based
on employee feedback/ recommendations. It might not always result in reduction of the
target, but in fact could be vice versa. For example: a manager might set an employee a sales
target of 50 units/ month, whereas the employee himself might be convinced that he can
achieve a sales target of 60 units/ month. This revision of objectives can happen only if the
process is open to recycling.

➢ How to set objectives?

Nobody can be expected to perform effectively and efficiently without clear objectives.
The following table illustrates some objectives and how can they be restated in a way that
allows measurement.
Table: Examples of non-verifiable and verifiable objectives

Non-verifiable Verifiable objectives

objectives
1 To make a reasonable To achieve a return on investment of 12% at the end of the
. profit current fiscal year
2 To improve To issue a two-page monthly newsletter beginning July 1, 1994,
. communication involving not more than 40 working hours of preparation time
(after the first issue)
3 To improve To increase production output by 5% by December 31, 1994,
. productivity of the without additional costs and while maintaining the current
production

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 department quality level
4 To develop better To design and conduct a 40-hour in-house program on the
. managers “fundamentals of management”, to be completed by October 1,
1994, involving not more than 200 working hours of the
management development staff and with at least 90% of the 100
managers passing the exam(specified)
5 To install a computer To install a computerized control system in the production
. system department by December 31, 1994, requiring not more than 500
working hours of systems analysis and operating with not more
than 10% downtime during the first three months nor 2%
thereafter.
Quantitative and Qualitative Objectives
To be measurable, objectives must be verifiable. This means, one must be able to answer the
following question: At the end of the period, how do I know if the objective has been
accomplished?

For example: a return of investment of 12 percent at the end of the current fiscal year can be
measured; it answers these questions: How much or what? When?

At times, it is difficult to state results in verifiable terms. For example: installing a computer
system is an important task, but “to install a computer system” is not a verifiable goal.
However, if the objective is “to install a computerized control system (with certain
specifications) in the production department by December 31, 1994, with an expenditure of
not more than 500 working hours”. Then goal accomplishment can be measured. Moreover,
quality can also be specified (in terms of computer downtime).

Three Types of Objectives Used in MBO

1. Improvement Objective
“Increase sport-utility sales by 10%”
2. Personal Development Objective
“Attend five days of leadership training”
3. Maintenance Objective
“Continue to meet the increased sales goals specified last quarter”

Setting objectives in Government

The need of managing by objectives in government has been recognized by Frederic V.
Malek, a former special assistant to the President and one of the driving forces in the
implementation of MBO in the Federal government. He stated: “If the executive branch of
the government is to be managed effectively, it clearly needs a system for setting priorities,
pinpointing responsibility for their achievement, requiring follow-through, and generating
enough feedback that programs can be monitored and evaluated from the top.” The MBO
program initiated in the federal government in the early 1970s indeed had some success. For

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example: the department of health, education, and welfare set an objective for training 35000
welfare recipients and placing them in meaningful jobs, an objective that seemed almost
impossible to achieve. The goal was not only achieved but also exceeded; 40000 welfare
recipients were trained and placed on payrolls.

Thus, the setting of objectives, as in MBO programs, not only is essential for making line
managers in business organizations more effective but also is equally important for
improving the performance of staff personnel and public administrators.

What is a Good Objective?

An objective is defined excellently by dictionary.com as ‘something worked toward or
striven for’. When we combine this definition with the acronym SMART (and variations
thereof), which is often discussed in the same ‘breath’ as business objectives, we are able to
set objectives for any level of an organization which compliment the strategy of the
organization (and hence the vision and mission).
Drucker was a proponent of meaningful and relevant (i.e. SMART) objective setting. As in
SMART objective setting, there is a time element to each objective as objectives do change
over time. SMART means:
• Specific: The objective must not be too broad and must be defined.
• Measurable: Self explanatory – you must be able to measure success against the objective.
• Achievable: It must be possible to achieve the objective.
• Relevant: The objective must compliment higher objectives and strategy and be relevant to
the person/department for which the objective is being set.
• Time-based: Don’t leave objectives open-ended. Have a specific date as to then the
objective must be met.

Guidelines for setting objectives:

Setting objectives is indeed a difficult task. It requires intelligent coaching by the superior
and extensive practice by the subordinate.

List of objectives should not be too long, yet it should cover the main features of the job.
Objectives should be verifiable and should state what is to be accomplished and when. If
possible, the quality desired and the projected cost of achieving the objectives should be
indicated. Furthermore, objectives should present a challenge, indicate priorities, and promote
personal and professional growth and development.

How Do Objectives Align Throughout an Organization?

Of course, objectives which are SMART are not necessarily good objectives unless they align
with the strategy of the organization. The alignment of objectives and strategy starts at the
executive level of an organization; the strategy is set at a high organizational level and then
objectives (which are aligned to the strategy) are set for divisional and senior managers.
Those managers then set objectives for their direct reports who will meet the higher

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objectives and so on (this is illustrated in the diagram below). By setting objectives for every
level of the organization (which helps to meet the strategy) ensures that the organization is
aligned and working towards common goals as follows:

Steps in goal setting

1. Identify an employee’s key job tasks.
Goal setting begins by defining what it is that you want your employees to accomplish. The
best source for this information is each employee’s job description.
2. Establish specific and challenging goals for each key task.
Identify the level of performance expected of each employee. Specify the target for the
employee to hit.
3. Specify the deadlines for each goal.
Putting deadline on each goal reduces ambiguity. Deadlines, however, should not be set
arbitrarily. Rather, they need to be realistic given the tasks to be completed.
4. Allow the employee to actively participate.
When employees participate in goal setting, they are more likely to accept the goals.
However, it must be sincere participation. That is, employees must perceive that you are truly
seeking their input, not just going through the motions.
5. Prioritize goals.
When you give someone more than one goal, it is important for you to rank the goals in order
of importance. The purpose of prioritizing is to encourage the employee to take action and
expend effort on each goal in proportion to its importance.
6. Rate goals for difficulty and importance.
Goal setting should not encourage people to choose easy goals. Instead, goals should be rated
for their difficulty and importance. When goals are rated, individuals can be given credit for
trying difficult goals, even if they don’t fully achieve them.
7. Build in feedback mechanisms to assess goal progress.

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Feedback lets employees know whether their level of effort is sufficient to attain the goal.
Feedback should be both self- and supervisor- generated. In either case, feedback should be
frequent and recurring.
8. Link rewards to goal attainment.
It’s natural for employees to ask “What’s in it for me?” Linking rewards to the achievement
of goals will help answer that question.

An EXAMPLE of MBO:
ZYTEC CORPORATION---a leading manufacturer of power supplies for computers and
other electronic equipment. Each of Zytec’s managers and workers participate in goal setting.
Top managers first establish cross-functional teams to create a five-year plan for the company
and to set broad goals for each function. This plan is then reviewed by employees from all
areas of the company. They evaluate the plan’s feasibility and make suggestions about how to
modify or improve it. Each function then uses the broad goals in the plan to set more specific
goals for each manager and each team in the organization; these goals are reviewed with top
managers. The MBO system at Zytec is organization-wide and fully participatory, and
performance is reviewed both from an annual and a five-year time horizon. Zytec’s MBO
system has been very effective. Not only has organizational costs dropped dramatically, but
the company also won the Baldridge Award for quality.

➢ Benefits and weaknesses of Management by Objective:

MBO is one of the most frequently used management approaches nowadays. But, its
effectiveness is questioned sometimes mainly due to faulty implementation or because of its
application as a mechanical technique focussed on selected aspects of the managerial process
without integrating them into a system.

Benefits of Management by Objectives

1. Improvement of managing:
Objectives of a business cannot be achieved without planning. MBO forces managers to think
about planning for results, rather merely planning activities or work. This has a long term
positive impact on the firm. MBO also provides for better resource allocation as mangers
start thinking about how to accomplish the goals and the personnel and organization they
will require to do so. It also facilitates in better incentives to control and set the standards for
control.

2. Clarification of Organization:
MBO forces managers to clarify organizational roles and structures. To the extent possible,
positions should be built around the key results expected of the people occupying them.
Managers often forget that to get work done one has to delegate work and MBO helps
managers identify these deficiencies.

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 3. Encouragement of Personnel commitment:
MBO helps people to commit themselves to their goals. Individuals are working towards
clearly defined purposes, setting up of which was partly done by them.

4. Development of effective controls:

MBO not only helps in more effective planning but also aids in developing effective controls.
Control involves measuring results and taking actions to correct deviations from plans in
order to ensure that goals are reached.

Weaknesses of Management by Objectives

1. Failure to teach the philosophy of MBO

Managers who are to put MBO into practice should have good understanding of it. They in
turn must explain to subordinates what it is, how it is done, why is it being implemented, how
participants can benefit, etc. The philosophy is built on concepts of self control and self
direction that are aimed at making managers professionals.

2. Failure to give guidelines to goal setters

MBO cannot succeed if those who are expected to set goals are not given needed guidelines.
Managers must understand what the corporate goals are and how their own actions fit in with
them. If corporate goals are vague, unreal or inconsistent, it is virtually impossible for
managers to tune in with them.
3. Difficulty in setting goals
Truly verifiable goals are difficult to set, particularly if they are to have the right degree of
stretch or pull, quarter in and quarter out, year in and year out. Goal setting may not be much
more difficult than any other kind of effective planning, although it will probably take more
study and work to establish verifiable objectives that are formidable but attainable than to
develop many other plans, which tend to lay out work to be done.

4. Emphasis on Short run goals

In most MBO programs managers set goals for short run rather than long run. There is clearly
a danger of emphasising the short run, perhaps at the expense of the longer range. This means
that superiors will have to ensure that current objectives are designed to serve longer range
goals.

5. Danger of inflexibility
Managers often hesitate to change objectives. Although goals may cease to be meaningful if
they are changed too often and do not represent a well thought out and well planned result, it
is nonetheless important to change the goals as per the changes in corporate policies, change
in environment, etc.

6. Other dangers

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 a. Over use of quantitative methods.
b. It’s difficult to arise at a goal oriented planning in a very dynamic and complex
environment.

References

[1] Management: a global perspective by Heinz Weihrich, Harold Koontz

[2] http://eckstein.id.au/71/management/management-by-objectives-mba-drucker/
[3] http://www.12manage.com/methods_smart_management_by_objectives.html
[4] www.scribd.com
[5]http://www.wrike.com/projectmanagement/02/07/2008/Top-down-and-Bottom-up-Project-
Management-Leveraging-the-Advantages-of-the-Two-Approaches
[6] http://en.wikipedia.org/wiki/Management_by_objectives

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[7]http://www.fs.fed.us/psw/topics/fire_science/craft/craft/Four_stages/Objectives/Objectives
_hierarchy_tutorial.htm
[8] Organizational Theory, Design, and Change (Fifth Edition) by Gareth R. Jones, Mary
Mathew
[9] Fundamentals of Management by Stephen P. Robbins, Mary Coulter, and Nancy
Langton