Management by Objective (MBO) is a system of management that uses specific, measurable goals to guide and coordinate individual and departmental efforts. Managers and employees work together to develop objectives that are specific, measurable, attainable, relevant, and time-bound. Once the objectives are set, employees are held accountable for meeting them. MBO helps to ensure that everyone in the organization is working towards the same goals and that everyone is aware of what is expected of them.
Why do you need Management by Objective?
In order to effectively manage a company's resources, it is important to have a system in place that allows for the measurement and assessment of progress and success. Management by objective (MBO) is one such system that can be used to help a company achieve its goals.
MBO is a management system that is based on the principle that employees should be given specific goals and objectives that they are responsible for achieving. In order to ensure that these goals are met, a company's management team must work closely with employees to create and monitor these objectives.
The use of MBO can be extremely beneficial for a company. By setting specific goals and objectives, a company can measure its progress and ensure that it is on track to achieve its goals. Additionally, MBO can help to motivate employees by giving them a sense of ownership and responsibility for their work. Finally, MBO can help to improve communication between employees and management.
What sort of companies need Management by Objective?
There are a few different types of companies that need Management by Objective. Typically, companies that are growing rapidly need this type of management in order to keep track of all of the moving pieces. Additionally, companies that are facing tough competition or are in a declining market may also need to implement Management by Objective in order to improve their performance. Finally, companies that are looking to become more efficient and productive may also find value in this type of management.
How do you build a Management by Objective system?
The first step in building a Management by Objective system is to develop a set of specific, measurable goals for the organization. Managers and employees should work together to create achievable goals that are relevant to the company's overall strategy. Once the goals have been established, everyone in the organization should be held accountable for meeting them. Regularly measuring progress against the goals helps ensure that everyone remains focused on achieving the organization's objectives. Management by Objective systems can be adapted to any size organization, and they can be used to improve performance in any area, from sales to employee satisfaction.
Motivation is defined as “the intention of achieving a goal, leading to goal-directed behavior (Columbia Encyclopedia, 2004).” When we refer to someone as being motivated, we mean that the person is trying hard to accomplish a certain task. Motivation is clearly important for someone to perform well. However, motivation alone is not sufficient. Ability—having the skills and knowledge required to perform the job—is also important and is sometimes the key determinant of effectiveness. Finally, environmental factors—having the resources, information, and support one needs to perform well—are also critical to determine performance.
Figure 14.2 The P-O-L-C Framework
What makes employees willing to “go the extra mile” to provide excellent service, market a company’s products effectively, or achieve the goals set for them? Answering questions like this is of utmost importance to understand and manage the work behavior of our peers, subordinates, and even supervisors. As with many questions involving human beings, the answers are anything but simple. Instead, there are several theories explaining the concept of motivation.
Figure 14.3
According to this equation, motivation, ability, and environment are the major influences over employee performance.
Mitchell, T. R. (1982). Motivation: New directions for theory, research, and practice. The Academy of Management Review, 7, 80–88; Porter, L. W. & Lawler, E. E. (1968). Managerial attitudes and performance. Homewood, IL: Dorsey Press
When people are personally committed to their organization’s plans, those plans are more likely to be accomplished. This truism is the philosophy underlying management by objectives.
Management by objectives (MBO) is a philosophy of management, a planning and controlling technique, and an employee-involvement program.60 As a management philosophy, MBO stems from the human resource model and Theory Y’s assumption that employees are capable of self-direction and self- control. MBO also is anchored in Maslow’s need theory. The reasoning is that employee involvement in the planning and control processes provides opportunities for the employee to immerse the self in work-related activities, to experience work as more meaningful, and to satisfy higher-order needs (such as self-esteem), which leads to increased motivation and job performance (see ). It is hypothesized that, through involvement, employee commitment to a planned course of action will be enhanced and job satisfaction will be increased.
Exhibit 17.16 MBO and Its Effect on Employees (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)
Although there are many variations in the practice of MBO, it is basically a process by which an organization’s goals, plans, and control systems are defined through collaboration between managers and their employees. Together they identify common goals, define the results expected from each individual, and use these measurements to guide the operation of their unit and to assess individual contributions.61 In this process, the knowledge and skills of many organizational members are used. Rather than managers telling workers “These are your goals”—the approach of classical management philosophy—managers ask workers to join them in deciding what their goals should be.
After an acceptable set of goals has been established for each employee through a give-and-take, collaborative process, employees play a major role in developing an action plan for achieving these goals. In the final stage in the MBO process, employees develop control processes, monitor their own performance, and recommend corrections if unplanned deviations occur. At this stage, the entire process begins again. depicts the major stages of the MBO process.
Exhibit 17.17 The Management by Objective (MBO) Process (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)
The Theory of MBO
MBO has the potential to enhance organizational effectiveness. The following four major components of the MBO process are believed to contribute to its effectiveness: (1) setting specific goals; (2) setting realistic and acceptable goals; (3) joint participation in goal setting, planning, and controlling; and (4) feedback.62 First, as we saw earlier, employees working with goals outperform employees working without goals. Second, it is assumed that participation contributes to the setting of realistic goals for which there is likely to be goal acceptance and commitment. Setting realistic and acceptable goals is an important precondition for successful outcomes, especially if the goals are difficult and challenging in nature. Finally, feedback plays an important role. It is only through feedback that employees learn whether they should sustain or redirect their efforts in order to reach their goal, and it is only through feedback that they learn whether or not they are investing sufficient effort.
Thus, from a theoretical perspective, there are several reasons why MBO should produce a positive impact on employee performance, motivation, commitment, and job satisfaction. In the next section, we briefly look at what the research tells us about the effectiveness of MBO programs.
The Evidence
In both the public and private sectors, MBO is a widely employed management tool. A recent review of the research on MBO provides us with a clear and consistent view of the effects of these programs. In the 70 cases studied by Robert Rodgers and John Hunter, 68 showed increased productivity gains, and only 2 showed losses.63 In addition, the increases in performance were significant. Rodgers and Hunter report that the mean increase exceeded 40 percent.
While the results are generally positive in nature, differences in performance effects appear to be associated with the level of top management commitment. In those cases where top management is emotionally, intellectually (that is, top management espouses the value and importance of MBO), and behaviorally (top management actually uses MBO themselves) committed, the performance effects tend to be the strongest. The weakest MBO effects appear when top management does very little to “talk the value/importance of MBO” and they don’t use the system themselves, even as they implement it for others.64 This evidence tells us that “the processes” used to implement MBO may render a potentially effective program ineffective. Thus, not only should managers pay attention to the strategies used to facilitate planning and controlling (like MBO), they should also be concerned with how they go about implementing the plans. MBO requires top management commitment, and it should be initiated from the top down.65
Research shows that an MBO program can play a meaningful role in achieving commitment to a course of action and improving performance. In fact, research clearly documents instances where MBO programs have increased organizational effectiveness. Still, there have been failures. After reviewing 185 studies of MBO programs, one researcher concluded that they are effective under some circumstances but not all.66 For example, MBO tends to be more effective in the short term (less than two years), in the private sector, and in organizations removed from direct contact with customers. These factors also affect the success of an MBO program:
- The intensity of upper-level managers’ commitment: Half-hearted commitment to an MBO system is associated with a higher failure rate.
- The time element: Is there enough time for employees to learn how to participate in an MBO process, that is, to learn how to set meaningful goals, develop good action statements, and develop effective monitoring systems? Is there enough time for employees to learn how to assume responsibility in a new context? Is there enough time for employees and managers to collaborate in a joint planning and controlling process?
- The legitimacy of the system: Is it integrated into an overall philosophy of management? Or does it seem like a gimmick to seduce employees into being more productive?
- The integration of employees’ goals: Are goals for each employee integrated well enough into the goals of their larger work unit?
To be truly effective over the long haul, MBO programs probably need to be coupled with some type of gainsharing program (that is, programs whereby organizations share some of the financial gains accrued from the ideas, productivity improvements, and cost savings that stem from employee participation). Based on his extensive observation of involvement-oriented organizations, Edward E. Lawler III notes that information, knowledge, power, and rewards are four key components of an effective and sustained high involvement.67 Typically, MBO systems don’t provide mechanisms through which employees share in the economic gains that may accrue to the organization as a result of their expanded role and responsibility. In light of the conditions that influence the effectiveness of MBO programs, management is challenged to provide an appropriate context for the design and maintenance of an effective MBO system.