The precursor to hoshin planning; introduced by Peter Drucker in his 1954 book, The Practice of Management.
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.
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 the choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.
Features and Advantages
Unique features and advantage of the MBO process
The principle behind Management by Objectives (MBO) is to create empowered employees who have clarity of the roles and responsibilities expected from them, understand their objectives to be achieved and thus help in the achievement of organizational as well as personal goals.
Some of the important features and advantages of MBO are:
Motivation – Involving employees in the whole process of goal setting and increasing employee empowerment increases employee job satisfaction and commitment.
Better communication and Coordination – Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the enterprise and also solve many problems faced during the period.
Clarity of goals – With MBO, came the concept of SMART goals i.e. goals that are:
4. Relevant, and
5. Time bound.
The goals thus set are clear, motivating and there is a linkage between organizational goals and performance targets of the employees.
The focus is on future rather than on past. Goals and standards are set for the performance for the future with periodic reviews and feedback.
In some sectors (Healthcare, Finance etc.) many add ER to make SMARTER, The ER can have many meanings including
E=Energizing, Exciting and Ethical Goals or E=Evaluate R=Reviewed and Resourced or R= Redo Goals or Recorded
E=Ecological - consider 'whole' self R=Reasons and Reward
Domains and levels
Objectives can be set in all domains of activities (production, services, sales, R&D, human resources, finance, information systems etc.).
Some objectives are collective, for a whole department or the whole company, others can be individualized.
Objectives need quantifying and monitoring. Reliable management information systems are needed to establish relevant objectives and monitor their "reach ratio" in an objective way. Pay incentives (bonuses) are often linked to results in reaching the objectives
There are several limitations to the assumptive base underlying the impact of managing by objectives, including:
1. It over-emphasizes the setting of goals over the working of a plan as a driver of outcomes.
2. It underemphasizes the importance of the environment or context in which the goals are set. That context includes everything from the availability and quality of resources, to relative buy-in by leadership and stake-holders. As an example of the influence of management buy-in as a contextual influencer, in a 1991 comprehensive review of thirty years of research on the impact of Management by Objectives, Robert Rodgers and John Hunter concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Companies with CEOs who showed low commitment only saw a 6% gain in productivity.