MANAGEMENT BY OBJECTIVES (MBO)

MEANING: MBO provides for a regular review of performance. The objectives of MBO provide
guidelines for appropriate system and procedures. MBO is one of the techniques by which
executives can improve organizational performance and effectiveness. The idea of MBO was
contributed by Donaldson Brown and Alfred Sloan in 1920s and Edward Hagenin in 1930s. (Peter
Drucker, known as father of MBO technique, coined this term in 1954.

DEFINITION OF MBO

According to Koontz and Weihrich, "Management by objectives is a comprehensive managerial

system that integrates many key managerial activities in a systematic manner and that is consciously
directed toward the effective and efficient achievement of organisational and individual objectives.

S.K. Chakravarty defines it as. "MBO is a result-centered, non-specialist, operational managerial

process for the effective utilisation of material, physical, and human resources of the organisation by
integrating the individual with the organisation and organisation with the environment."

FEATURES OF MBO

These are the following features of MBO:

1. MBO is not merely a technique but a philosophy to management. A technique is applicable only in
specified areas by a philosophy or approach guides and influences every aspect of management.
MBO is an approach which includes various techniques of better management.

2. In this approach various objectives of the organisation and of individuals are collectively decided
by superiors and subordinates. These objectives become the targets which are to be achieved by
various persons in the organisation. The review of objectives is also done collectively.

3. The corporate, departmental and individual objectives are used as a yardstick to measure Notes
performance. A comparison of targets and actual results will enable managers to judge the
performance of subordinates and top level will similarly assess the performance of managers.

4. MBO provides for a regular review of performance. This review is normally held once in a year. It
emphasises initiative and active role by the manager who is responsible for achieving the objectives.
The review is future oriented and provides a basis for planning and corrective actions

5. The objectives in MBO provide guidelines for appropriate system and procedures. The degree of
delegation of authority, fixation of responsibility, allocation of resources etc. can be decided on the
basis of objectives of various individuals. These objectives also become a basis of reward and
punishment in the organisation.

PROCESS OF MBO

1.Setting Objectives at the Top: The first step in MBO process is to analyse the purpose or mission of
the organisation. This exercise is undertaken at the top level. The mission of the organisation will be
converted into goals for a given period, it may be for a quarter, half year, a year, 5 years or more In
many cases objectives are set to coincide with the completion of a project or with an annual budget.
This may not be desirable. Some goals may be set for a short period while some may be for a longer
period. Generally as we go downward in the hierarchy the period for objective setting is short. At the
operative level the objectives may be for a week or a month.
The goals set at the top level are only preliminary in nature. These goals are set by taking into
account company's strengths and weaknesses and opportunities available. These goals may be
modified while discussing them with the subordinates. The objectives should not be forced on the
subordinates rather their viewpoint should be given weightage while fixing objectives. It will bring
commitment from subordinates. The subordinates may suggest the problems which they will face in
implementing the plans. The goals should be verifiable or other criteria for goal accomplishment
should be established beforehand.

2. Clarifying Organisational Roles: Sometimes organisational roles are not properly clarified and
specific responsibility for attaining the objectives is not fixed. There should be clear cut assignment
of tasks and fixation of responsibilities. In some cases the responsibility of one person for a particular
task may not be fixed) For example, the development of a new product may be the responsibility of
research, production and marketing managers. Such activities can be put under the overall
command of a particular person, say product manager. In the absence of such a command specific
responsibilities for taking up separate tasks be given to concerned managers. So organizational roles
should be clearly spelt out.

3. Setting Subordinates Objectives: The subordinate managers should be informed of general

objectives, planning premises and strategies of the company. The superior should then discuss with
the subordinate about the objectives which he can accomplish, time frame for them and the
resources required. The feasibility of such goals for the company is also discussed. The superior has
to play an important role while interacting with the subordinate. He should ask questions like what
will be his contribution to the organisational goals? How can he improve his performance? What are
the hurdles he faces in reaching has objectives? What changes he expects from superiors? How can
the superior help him in his task. The answers to such questions can help in deciding the specific
objectives of subordinates. The goals should be such which are practicable, realistic or achievable.
Superiors are generally in the habit of fixing high objectives for their subordinates thinking that
higher objectives will help them in increasing their efficiency.

4. Recycling Objectives: Recycling of objectives denotes a joint and interactive process. Objectives
cannot be set in isolation. Neither can they scl at the top and communicate to the lower levels nor
can they be set at the bottom and communicated upwards. There should be proper consultalions
and interactions at various levels before deciding about the objectives. The objectives set by an
individual department may be higher than the expectations of higher management but still they may
not reconcile with the objectives of other departments. The objectives of marketing department, for
example, should reconcile with those of manufacturing and finance departments. So recycling of
objectives helps in their easy achievement.

MERITS OF MANAGEMENT BY OBJECTIVES

MBO helps in implementing goal oriented management. It can be applied in various areas of
organisation such as performance appraisal, organisational development, long range planning,
integration of individual and organisational objectives and so on. Merits of MBO can be stated as
follows:

1. Better Managing: MBO results in improved and better managing. Belter managing requires selling
goals for each and every activity and individual and ensuring that these are achieved. MBO not only
helps in setting objectives but also ensures balancing of objectives and resources: For establishing
objectives there is a need for belter and result oriented planning. Management by objectives forces
managers lo think about planning for results, rather than merely planning activities or work.
Managers will devise ways and means for achieving objectives. The objectives also act as controls
and performance standards. So MBO is helpful in improving management.

2. Clarifying Organisation: MBO helps in clarifying organisational roles and structures. Responsibility
and authority are assigned as per the requirements of the tasks assigned. There is no use of fixing
objectives without delegating requisite authority. The positions should be built around the key
results expected of people occupying them. Implementation of MBO will help in spotting the
deficiencies in the organization.

3. Encouraging personal commitment: The main benefit of MBO is that it encourages personnel to
commit themselves for the achievement of specified objectives. In a normal course people are just
doing the work assigned to them. They follow the instructions given by the superiors and undertake
their work as a routine matter. In MBO the purpose of every person is clearly defined with his or her
own consent. People in the organisation have an opportunity to put their own ideas before
superiors, discuss the pros and cons of various suggestions and participate in setting the final
objectives When a person is a party for setting objectives then he will make honest endeavour to
achieve them. He will feel committed to reach the goals decided with his consent. A feeling of
commitment brings enthusiasm and helps in reaching the goals.

4. Developing controls: MBO mechanism helps in devising effective controls. The need for setting
controls is the setting of standards and then finding out deviations if any. In MBO, verifiable goals
are set and the actual performance will help in finding out the deficiencies in results. Every person is
clear about what is expected from him and these standards act as clear cut controls. So controls can
easily be devised when MBO is followed.

DEMERITS OF MANAGEMENT BY OBJECTIVES

This system suffers from a number of demerits which are discussed as under:

1. Failure to Teach MBO Philosophy: The success of MBO will depend upon its proper understanding
by managers. When managers are clear about this concept only then they can explain to
subordinates how it works, why it is being done, what will be the expected results, how it will benefit
participants, etc. This philosophy is based on self direction and self-control and aims to make
managers professionals.

2. Failure to Give Guidelines to Goal setters: If the goal setters are not given proper guidelines
Notes for deciding their objectives then MBO will not be a success. The managers who will guide in
goal setting should themselves understand the major policies of the company and the role to be
played by their activity. They should also know planning premises and assumptions for the future.
Failure to understand these vital aspects will prove fatal for this system.

3. Difficulty in Setting Goals: The main emphasis in MBO technique is on setting objectives. The
setting of objectives is not a simple thing. It requires lot of information for arriving at the
conclusions. The objectives should be verifiable so that performance may be evaluated. Some
objectives may not be verifiable, precaution should be taken in defining such objectives. The
objectives should not be set casually otherwise MBO may prove liability for the business.

4. Emphasis on Short Term Objectives: In most of the MBO programs there is a tendency to set
short-term objectives. Managers are inclined to set goals for a year or less and their thrust is to give
undue importance to short term goals at the cost of long term goals. They should achieve short term
goals in such a way that they help in the achievement of long term goals also. There may be a
possibility that short term and long term objectives may be incompatible because of specific
problems. So proper emphasis should be given lo both short term and long term objectives.

5. Danger of Inflexibility: There is a tendency to the strict to the objectives even if there is a need
for modification. Normally objectives will cease to be meaningful if they are oftenly changed, it will
also be foolish to strive for goals which have become obsolete due to revised corporate objectives or
modified policies.