Management by objectives helps improve managerial performance and effectiveness. It provides a workable framework to the manager within which he can make decisions which are in the best interest of the organisation. The key concepts of MBO are emphasis on results, participative objective setting for each managerial position, and emphasis on team work, human relations and a regular review system.
FOCUS OF DECISION MAKING
When a manager takes a decision, the purpose is to increase either the efficiency or the effectiveness of the existing operation, or increase both efficiency and effectiveness; Efficiency is the best way of performing a task. Formally, efficiency is defined as the ratio of output to input. The more output that can be obtained from a given input, the more efficient is the utilization of the input. While efficient refers to the right or best way of doing a particular task, effectiveness is concerned with doing the right task. However efficient a manager may be at performing his tasks, if the choice of tasks itself is not right; his efficiency is certainly not helping his organisation. A sales manager is very efficient in managing the time of his sales force and ensures that each salesman makes at least six to seven sales calls every day. But wrong identification of potential customers makes the salesman’s calls totally ineffective as no sale is actually made.
The manager’s concern should always be to increase his own effectiveness and that of the total organisation. An organisation which concentrates on doing the right tasks, i.e. its focus is on effectiveness, will surely survive and grow even if it performs the tasks in a somewhat less efficient manner. But a firm whose choice of tasks is totally wrong, no matter how high its efficiency, will certainly fail. Management By Objectives (MBO) is a tool by which managers can improve their performance and increase their effectiveness.
EVOLUTION OF MBO
The term MBO was coined by Peter Drucker more than 25 years ago. Drucker used the term in a very broad sense to connote not just a specific tool, but rather an approach or philosophy of management. Later contributors to the subject have focused on MBO in terms of improving performance of either an individual in the context of a superior-subordinate relationship or the entire, organisation. In the United States, the name most associated with MBO is that of George Odiorne and he stresses the superior-subordinate relationship and propounds MBO as a “guide for operating the unit and assessing the contribution of each of its members”. John Humble of U.K. visualises MBO as a “system which integrates the company’s need to achieve its goals with the managers need to contribute and develop himself” and consequently places greater emphasis on corporate planning.
THE NEED FOR MBO
At this point you may like to raise the question “Why do we need MBO?” Why should an organisation, which has been performing well all these years, now turn its attention to MBO and go through all the problems involved with its introduction? The answer to this lies in the very nature of an organisation which tends to draw attention away from, rather than towards, the common organisational goals. Specifically there are four factors inherent in each organisation which is barriers towards the achievement of the organisational goals. These are: specialisation of work; misdirection of effort by the boss; hierarchical structures of management; and misdirection by cornpensation. Thus there is need to unify the efforts of individuals towards achievement of corporate goals. This unifying force is provided by MBO.
Today’s technological sophistication requires specialised knowledge, specialized skills and specialised workers. The danger is that these specialised workers, in their quest for perfection within the narrow confines of their specialised function, often tend to lose sight of the organisational goals. They forget they are working for an organisation, and that their specialised function has to operate within specified parameters. MBO helps to mesh together the various functional specialists for the achievement of the firm’s overall objectives.
The compensation and appraisal system tends to act as a deterrent towards achieving organisational goals. This is because there is a tendency for people to ‘please the boss’ even in the most objectively designed appraisal system. People tend to take even the most casual observation or remark of the boss seriously and work to please him because they know that the boss plays an important role in their promotion. And organisational goals are relegated to the back seat. MBO brings in greater objectivity with its emphasis on results.
In every organisation there are various hierarchical levels of management. Each level has its own vision and own set of narrow objectives to fulfill. Often these levels are totally insulated from each other. This creates barriers towards harmonious working together for achieving the organisational goals. For instance, the machine operator would like to maximise his production and minimise the number of rejects and his interest is limited to the machine he operates. The shop floor supervisor is concerned with all the machines and is interested in maximising the total output with maximum utilisation of various inputs. In achieving this objective, the supervisor may like to minimise the operation of an inefficient machine. However, the operator of that particular machine would not like that. If there is agreement about the overall organisational goals which have to be achieved, this kind of conflicting pressure can be avoided.
Finally, the compensation system can often create situations in which people work towards maximisation of their compensation, often to the detriment of achieving the organisational goals. If the machine operator’s compensation is tied to the output which he produces on the machine he would obviously like to produce the maximum numbers, disregarding the factor of inefficiency, wastage, rejects, etc. Similarly, a salesman would like to book maximum orders irrespective of the fact whether the payment is made promptly or not. But at the organisational level, the concern is not only with output and orders booked, but equally with the costs incurred and realisation of payments. Only when ‘objectives are specified for each person, drawn from and contributing towards the organisational goals, with emphasis on team work, can these forces of separatism be minimised.
DEFINITIONS AND CONCEPTS
For our purpose we shall define MBO as an approach which uses objectives as a focal point to improve managerial performance and managerial effectiveness, both at the individual and at the organisational level. These objectives serve to guide, direct, review and measure performance. However, MBO should not be thought of as merely a tool for performance appraisal. It is a far more comprehensive mechanism and provides a framework for organisational and managerial decisions.
In the MBO approach while the objectives provide the focal point, the emphasis is on improving the performance and providing better results. This is because MBO is concerned with achieving the objectives as well as the process by which they are achieved. The objectives will necessarily vary with the managerial level at which they are set. Objectives at the level of the managing director will be different from those of a branch manager or the production manager. However, all these objectives are derived from the organisation’s overall objectives and in turn are linked to the corporate plan. The fact that MBO allows for distant, intangible organizational – objectives to be converted into achievable, personalised objectives (for each level of management) is the reason for its success and popularity. The key concepts in MBO are emphasis on results than activities, objectives for specific managerial positions, participatory or joint objective setting, and identification of key result areas and establishment of periodic review system.
Emphasis on results rather than activities
The basic feature of every MBO is the emphasis on results rather than activities. Activities, per se, are never important. Their importance lies in the fact that they lead to results. If an activity produces no results, it may just as well be dropped, for obviously it is only consuming time and resources with no output.
In MBO, the starting point is the identification of results which are important to the organisation and then working backwards to see which activities can lead to these results. George Morrisey has identified “management by activities or reactions” and “management by objectives and results” as the two theoretical extremes. Traditionally, management was characterised by activities. Even today you may find this happening in many cases. For instance, most job descriptions are spelled out in terms of activities, such as travelling, meeting people, corresponding, etc, rather than results. It is this disproportionate focus on activities which leads to the situation where apparently all managers are very busy but are not able to achieve any significant results.
To shift from an activity-oriented to a result-oriented management system is not always easy. Engaging in activities gives a lot of satisfaction to most people even when they know that its result contribution is very low. The more visible is the activity, such as preparing graphs, charts, etc. the greater is the satisfaction. The other reason why people derive satisfaction from engaging in activities is because sometimes the gap between activities and results may be so long and uncertain that keeping a constant focus on results may be very difficult. Urgent, pressing problems arising out of crisis situations or out of the need to meet deadlines such as drawing up of balance sheet by the end of the financial year require immediate activity which is unavoidable. However, if the manager always keeps in mind the results for which he is accountable, he can change his style of working towards result achievement.
Objectives for specific managerial positions
In the context of MBO, objectives are defined as expected results. Objective must be specified for every managerial position at each, level of the managerial hierarchy. Objectives are set for specific managerial positions and not for the individuals who occupy these positions.
Irrespective of whether it is Mr. K.D. Das or Mr. R. Venkat who is manager of after sales service, the objective of the managerial position still will remain the same. It is important to specify objectives according to managerial positions to ensure the continuity of effort in the achievement of organisational objectives. The only exception to this is in the case of top management. When a company changes hands or a new managing director is appointed it is likely that he may like to modify or even totally change some of the existing corporate objectives and provide a totally new direction to the organisation. In such a situation, objectives for all the managers may have to be modified or changed.
There are three distinct levels of management in every organisation. these are: the top management, middle management and operating management. Objectives must be specified for each level of management. At the top management level the objectives are referred to as corporate objectives and they provide the general direction for the entire organisation. Since their scope extends to the entire firm, corporate objectives necessarily encompass a span of five to ten years. Predictions of future events can never be made with complete certainty and therefore the corporate objectives are specified more in general rather than very specific terms. Corporate objectives are externally oriented as they are derived from the external environment in which the firm operates. This environment comprises economic, technical, legal, social, cultural, political and demographic factors as well as consumer tastes, attitudes, competition, etc. Thus a company manufacturing mopeds may well define its corporate objective as satisfying the short distance transportation needs of middle income classes.
The corporate objective must be broken down into more specific objectives to become practical and workable for the middle management. Managers of functional divisions and geographical territories represent the middle management. In case of the moped company, the objective at the middle level i.e. marketing manager may be to achieve sales figure of 85,000 mopeds per year by March 1988, and 60 per cent of this sale is to be achieved in the southern region since the company is located in Bangalore.
Area sales managers, shop-floor production managers, and managers of inventory control are all representative of the operating management level. Objectives at the operating level are concerned with the short-term, such as sales per month, production level per machine, etc. Operating level objectives are derived from the objectives of the middle management level which in turn are derived from the corporate objectives. Objectives at different levels and in different functional areas are linked to each other. To reach the sales figure of 85,000 units, production must also be set correspondingly at 86,000 units (allowing 1000 for defective and rejects). Apart from this hierarchy of objectives and their linking with each other, there is also the need to rank them in order of importance. The more important objectives must first be fulfilled before moving on to the next most important objectives. This is necessary because the resources and time at the disposal of the organisation are limited and simultaneous fulfilment of all objectives is not possible.
To be truly workable, objectives must be measurable in specific terms such as quantity, time, cost and quality. An objective which simply states improve quality’ is not useful because it does not specify up to what level and by what time, and at what cost. In case of such vaguely stated objectives it is impossible to measure their attainment. To be achievable, objectives must be set realistically, taking into account all the strengths and weaknesses of the existing situation. Objectives which are set at an unrealistically high level will only serve to frustrate the people for whom they are set. Similarly, objectives which are set too low are also not desirable.
Participatory or joint objective setting
Management by Objectives (MBO) We have seen that all operating objectives are derived from the corporate objectives by breaking them down into smaller workable and specific functional area objectives. In an organisation practicing MBO these objectives are set by the concerned managers themselves in consultation with their superiors. The emphasis is on participation of the concerned manager himself. The participation process allows the manager to exert his influence on those very objectives and decisions against which his performance will be measured. This participation ensures that the objectives set are realistic since the manager is in direct contact with the market, labour, production facilities, etc. and knows the true situation. Since the objectives are realistic and set in agreement with the concerned manager their chance of being attained is also higher.
Identification of key result areas
Every managerial position has associated with it certain results or outputs. However, it is the achievement of only a few result areas that is critical to the organization’s success and these are known as key result areas. For instance, the various result areas for a production manager may include quality, quantity, adherence to delivery schedules, rejects, wastage, inventory, labour costs, material cost, machine down time, etc. Depending on the nature of his organisation and industry, the production manager will identify his key result areas. In an industry, where the raw material and machinery are the major cost contributors, the manager’s key result areas may be raw material cost, wastage and machinery utilisation. On the other hand, in an industry like television set manufacturing, where assembly is the major operation, labour costs, critical component costs, and quantity may be the key result areas. Similarly, in other functional areas the key result areas can be identified. In marketing, these may be related to sales, new markets, new customers, marketing research, distribution, pricing policy, media advertisements, local sales promotion plans, etc.
Just as Key Result Areas (KRAs) can be identified for different functional areas, these can also be identified at the organisational level. For instance, Modi Xerox, a company engaged in manufacturing and marketing photocopiers views itself primarily as a service organisation and emphasises the after sales service aspect. In contrast, other companies may view their business as mainly manufacturing. While service is obviously one of the important key result areas for modi Xerox, it may not be so for its competitors.
There are KRAs which are common to all business organisations and all managerial positions irrespective of the functional area or industry. Peter Drucker has identified eight such KRAs common to all firms. These are: profitability, market standing, innovation, productivity, worker performance, financial and physical resources, managers’ performance and development, and public responsibility.
W.J. Reddin has identified five KRAs which are common to all managerial positions. These are: subordinate development, innovation, project implementation, managerial development and systems implementation. Madura Coats, a company engaged in manufacturing and marketing of a variety of threads and yarns had identified its various KRAs as financial resources, profitability, and development of organisation, management development, labour relations, diversification and cotton development. In the same year, Gujarat Industrial Development Corporation, a state government: agency for encouraging and assisting industrial development, had identified its KRAs as capacity utilisation, cost reduction, resource mobilisation, organisation development,, customer service, infrastructure planning and development, diversification, corporate image and rural industrial infrastructure.
Identification of key result areas helps the manager and the organisation focus its scarce resources on those activities which contribute to the critical results. Focusing is important because, in most cases, all managerial activities do not equally contribute to results. In the course of an average day, a manager may indulge in a number of activities such as meeting people, sorting out employee’s grievances, planning for products to be launched in the next year, reviewing last month’s expense sheet, etc. While sorting out personal grievances and meeting unexpected visitors- may be unavoidable and urgent, it is activities such as future planning which are important and contribute to results.
Key result area can be identified by asking the simple question: what is the unique contribution of my job or the organisation? The answer to this question will provide the clue to identifying the key result areas. Once identified, these KRAs may remain unchanged for a number of years. These may change when the scope of the managerial position or organisation is changed or if a subordinate has been developed to take over an existing KRA so that it is no longer in the purview of the manager’s responsibility. As is the case with objectives, so also the KRAs at the corporate level are more durable than those at the middle and operating management levels.
Establishment of Periodic Review System
An important feature of every MBO is the periodic review system. The review may be held at intervals of every three, six or twelve months. The purpose is to review the performance against the objectives’. Also, the validity of continuing with the pre-established objectives may be reviewed.’ An organisation which professes to follow the M BO approach but has no review system is only paying lip service to MBO without actually practising it. Objectives are useful only if they can initiate action and the review system is a way to ensure that the action in the desired direction is being taken and is yielding the desired results. The review system thus provides a mechanism for both measuring and controlling.
MBO should not be confused with a performance appraisal system. There are many elements which are common to both, but MBO is wider in both the concept and application than a system of performance appraisal. Without going into too many details, it would be useful to point out one major difference between the two. In performance appraisal, the emphasis is on simply reviewing the past, while in MBO the focus is on initiating future corrective action. Though MBO may also be used for performance appraisal, you must remember that this is not its main purpose. The purpose of MBO is to improve managerial performance and effectiveness.