Management by Objectives (MBO)
Some managers regard organizational objectives as such an important and fundamental part of management that they use a management approach based exclusively on objectives. This approach, called management by objectives (MBO), was popularized mainly through the writings of Peter Drucker. Although mostly discussed in the context of profit-oriented companies, MBO is also a valuable management tool for nonprofit organizations such as libraries and community clubs. The MBO strategy has three basic parts:37
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All individuals within an organization are assigned a specific set of objectives that they try to reach during a normal operating period. These objectives are mutually set and agreed upon by individuals and their managers.38
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Performance reviews are conducted periodically to determine how close individuals are to attaining their objectives.
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Rewards are given to individuals on the basis of how close they come to reaching their goals.
The MBO process consists of five steps (see Figure 5.6):
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Review organizational objectives—The manager gains a clear understanding of the organization’s overall objectives.
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Set worker objectives—The manager and the worker meet to agree on worker objectives to be reached by the end of the normal operating period.
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Monitor progress—At intervals during the normal operating period, the manager and the worker check to see whether the objectives are being reached.
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Evaluate performance—At the end of the normal operating period, the worker’s performance is judged by the extent to which the worker reached the objectives.
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Give rewards—Rewards given to the worker are based on the extent to which the objectives were reached.
Factors Necessary for a Successful MBO Program
Certain key factors are essential to the success of an MBO program. First, top management must be committed to the MBO process and set appropriate objectives for the organization. Because all individual MBO goals will be based on these overall objectives, if the overall objectives are inappropriate, individual MBO objectives will also be inappropriate, and related individual work activity will be nonproductive. Second, managers and subordinates together must develop and agree on each individual’s goals. If each party is to seriously regard the individual objectives as a guide for action, both managers and subordinates must feel that the objectives are just and appropriate. Third, employee performance should be conscientiously evaluated against established objectives. This evaluation helps determine whether the objectives are fair and whether appropriate means are being used to attain them. Fourth, management must follow through on employee performance evaluations by rewarding employees accordingly.
Figure 5.6 The MBO process
If employees are to continue striving to reach their MBO program objectives, managers must reward those who do reach, or surpass, their objectives rather than those whose performance falls short of their objectives. It goes without saying that such rewards must be given out fairly and honestly. Managers must be careful, though, not to conclude automatically that employees have produced at an acceptable level simply because they reached their objectives. Perhaps the objectives were set too low in the first place and managers failed to recognize it at the time.39
MBO Programs: Advantages and Disadvantages
Experienced MBO managers claim that the MBO approach has two advantages. First, MBO programs continually emphasize what should be done in an organization to achieve organizational goals. Second, the MBO process secures employee commitment to attaining organizational goals. Because managers and subordinates have developed the objectives together, both parties are sincerely interested in reaching those goals.
MBO managers also admit that MBO has certain disadvantages. One is that the development of objectives can be time-consuming, leaving both managers and employees less time to do their actual work. Another is that the elaborately written goals, careful communication of goals, and detailed performance evaluations required in an MBO program increase the volume of paperwork in an organization.
On balance, however, most managers believe that the MBO’s advantages outweigh its disadvantages. Therefore, they find MBO programs beneficial.40
MyManagementLab : Watch It, MBO at Kaneva
If your instructor has assigned this activity, go to mymanagementlab.com to watch a video case about Kaneva’s virtual game world and answer the questions.