INTRODUCTION:

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
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 organizational and
individual objectives.”

FEATURES OF MBO:

1. Goal Orientation:

MBO focuses on the determination of unit and individual goals in line with the organizational
goals. These goals define responsibilities of different parts of the organisation and help to
integrate the organisation with its parts and with its environment.

MBO seeks to balance and blend the long term objectives (profit, growth and survival of the firm
with the personal objectives of key executives. It requires that all corporate, departmental and
personal goals will be clearly defined and integrated.

2. Participation:

The MBO process is characterized by a high degree of participation of the concerned people in
goal setting and performance appraisal. Such participation provides the opportunity to influence
decisions and clarify job relationships with superiors, subordinates and peers.

It also helps to improve the motivation and morale of the people and results in role clarity.
Participative decision-making is a prerequisite of MBO. MBO requires all key personnel to
contribute maximum to the overall objectives.

3. Key Result Areas:

The emphasis in MBO is on performance improvement in the areas which are of critical
importance to the organisation as a whole. By identification of key result areas (KRAs), MBO
ensures that due attention is given to the priority areas which have significant impact on
performance and growth of the organisation.

Goals of all key personnel are properly harmonized and they are required to make maximum
contribution to the overall objectives. Key and sub Key areas are identified for each function as
shown in the following example:

Finance (Key Area)

Sub-Key Areas:

(a) Cash flow

(b) Dividend Policy

(c) Debt-equity Ratio

(d) Sources of Funds

The role of each department towards the Key and sub-Key areas 15 also specified.

4. Systems Approach:

MBO is a systems approach of managing an organisation. It attempts to integrate the individual

with the organisation and the organisation with its environment. It seeks to ensure the
accomplishment of both personal and enterprise goals by creating goal congruence.

5. Optimization of Resources:

The ultimate aim of MBO is to secure the optimum utilization of physical and human resources
of the organisation. MBO sets an evaluative mechanism through which the contribution of each
individual can be measured.

6. Simplicity and Dynamism:

MBO is a non-specialist technique and it can be used by all types of managers. At the same time
it is capable of being adopted by both business and social welfare organizations. MBO applies to
every manager, whatever his function and level, and to any organisation, large or small.

7. Operational:

MBO is an operational process which helps to translate concepts into practice. MBO is made
operational through periodic reviews of performance which are future-oriented and which
involve self-control.

8. Multiple Accountability:

Under MBO, accountability for results is not centralized at particular points. Rather every
member of the organisation is accountable for accomplishing the goals set for him.

Multiple centers of accountability discourage 'buck-passing' and 'credit-grabbing'. MBO

establishes a system of decentralized planning with centralized control.

9. Comprehensive:

MBO is a 'total approach'. It attaches equal importance to the economic and human dimensions
of an organisation. It combines attention to detailed micro-level, short range analysis within the
firm with emphasis on macro-level, long range integration with the environment.

PROCESS OF MBO:

The six steps of MBO process are shown below graphically;

1. Define organizational goals
2. Define employees objectives
3. Continuous monitoring performance and progress
4. Performance evaluation
5. Providing feedback
6. Performance appraisal

Let’s briefly look at each of these;

1. Define Organizational Goals
Goals are critical issues to organizational effectiveness, and they serve a number of purposes.
Organizations can also have several different kinds of goals, all of which must be
appropriately managed.
And a number of different kinds of managers must be involved in setting goals. The goals set
by the superiors are preliminary, based on an analysis and judgment as to what can and
what should be accomplished by the organization within a certain period.
2. Define Employees Objectives
After making sure that employees’ managers have informed of pertinent general objectives,
strategies and planning premises, the manager can then proceed to work with employees in
setting their objectives.
The manager asks what goals the employees believe they can accomplish in what time period,
and with what resources. They will then discuss some preliminary thoughts about what goals
seem feasible for the company or department.
Also, Read Four Common Ingredients that makes up an MBO Program.
3. Continuous Monitoring Performance and Progress
MBO process is not only essential for making line managers in business organizations more
effective but also equally important for monitoring the performance and progress of
employees.
For monitoring performance and progress the followings are required;

 Identifying ineffective programs by comparing performance with pre-established

objectives,
 Using zero-based budgeting,
 Applying MBO concepts for measuring individual and plans,
 Preparing long and short range objectives and plans,
 Installing effective controls, and
 Designing sound organizational structure with clear, responsibilities and decision-
making authority at the appropriate level.
4. Performance Evaluation
Under this MBO process performance review are made by the participation of the concerned
managers.
5. Providing Feedback
The filial ingredients in an MBO program are continuous feedback on performance and goals
that allow individuals to monitor and correct their own actions.
This continuous feedback is supplemented by periodic formal appraisal meetings which
superiors and subordinates can review progress toward goals, which lead to further feedback.
6. Performance Appraisal
 Performance appraisals are a regular review of employee performance within organizations.
It is done at the last stage of MBO process.

ADVANTAGES OF MANAGEMENT BY OBJECTIVES:

1. Develops result-oriented philosophy: MBO is a result-oriented philosophy. It does not

favor management by crisis. Managers are expected to develop specific individual and
group goals, develop appropriate action plans, properly allocate resources and establish
control standards. It provides opportunities and motivation to staff to develop and make
positive contribution in achieving the goals of an Organisation.
2. Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces
goals that identify desired/expected results. Goals are made verifiable and measurable
which encourage high level of performance. They highlight problem areas and are limited
in number. The meeting is of minds between the superior and the subordinates.
Participation encourages commitment. This facilitates rapid progress of an Organisation.
In brief, formulation of realistic objectives is me benefit of M[BO.
3. Facilitates objective appraisal: NIBO provides a basis for evaluating a person's
performance since goals are jointly set by superior and subordinates. The individual is
given adequate freedom to appraise his own activities. Individuals are trained to exercise
discipline and self control. Management by self-control replaces management by
domination in the MBO process. Appraisal becomes more objective and impartial.
4. Raises employee morale: Participative decision-making and two-way communication
encourage the subordinate to communicate freely and honestly. Participation, clearer
goals and improved communication will go a long way in improving morale of
employees.
5. Facilitates effective planning: MBO programmes sharpen the planning process in an
Organisation. It compels managers to think of planning by results. Developing action
plans, providing resources for goal attainment and discussing and removing obstacles
demand careful planning. In brief, MBO provides better management and better results.
6. Acts as motivational force: MBO gives an individual or group, opportunity to use
imagination and creativity to accomplish the mission. Managers devote time for planning
 results. Both appraiser and appraise are committed to the same objective. Since MBO
aims at providing clear targets and their order of priority, employees are motivated.
7. Facilitates effective control: Continuous monitoring is an essential feature of MBO.
This is useful for achieving better results. Actual performance can be measured against
the standards laid down for measurement of performance and deviations are corrected in
time. A clear set of verifiable goals provides an outstanding guarantee for exercising
better control.
8. Facilitates personal leadership: MBO helps individual manager to develop personal
leadership and skills useful for efficient management of activities of a business unit. Such
a manager enjoys better chances to climb promotional ladder than a non-MBO type.

LIMITATIONS OF MANAGEMENT BY OBJECTIVES

1. Time-consuming: MBO is time-consuming process. Objectives, at all levels of the

Organisation, are set carefully after considering pros and cons which consumes lot of
time. The superiors are required to hold frequent meetings in order to acquaint
subordinates with the new system. The formal, periodic progress and final review
sessions also consume time.
2. Reward-punishment approach: MBO is pressure-oriented programme. It is based on
reward-punishment psychology. It tries to indiscriminately force improvement on all
employees. At times, it may penalize the people whose performance remains below the
goal. This puts mental pressure on staff. Reward is provided only for superior
performance.
3. Increases paper-work: MBO programmes introduce ocean of paper-work such as
training manuals, newsletters, instruction booklets, questionnaires, performance data and
report into the Organisation. Managers need information feedback, in order to know what
is exactly going on in the Organisation. The employees are expected to fill in a number of
forms thus increasing paper-work. In the words of Howell, "MBO effectiveness is
inversely related to the number of MBO forms.
4. Creates organizational problems: MBO is far from a panacea for all organizational
problems. Often MBO creates more problems than it can solve. An incident of tug-of-war
 is not uncommon. The subordinates try to set the lowest possible targets and superior the
highest. When objectives cannot be restricted in number, it leads to obscure priorities and
creates a sense of fear among subordinates. Added to this, the programme is used as a
'whip' to control employee performance.
5. Develops conflicting objectives: Sometimes, an individual's goal may come in conflict
with those of another e.g., marketing manager's goal for high sales turnover may find no
support from the production manager's goal for production with least cost. Under such
circumstances, individuals follow paths that are best in their own interest but which are
detrimental to the company.
6. Problem of co-ordination: Considerable difficulties may be encountered while
coordinating objectives of the Organisation with those of the individual and the
department. Managers may face problems of measuring objectives when the objectives
are not clear and realistic.
7. Lacks durability: The first few go-around of MBO are motivating. Later it tends to
become old hat. The marginal benefits often decrease with each cycle. Moreover, the
programme is deceptively simple. New opportunities are lost because individuals adhere
too rigidly to established goals.
8. Problems related to goal-setting: MBO can function successfully provided measurable
objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable
goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence
over the people who use it (d) greater emphasis on quantifiable and easily measurable
results instead of important results and (e) over-emphasis on short-term goals at the cost
of long-term goals.
9. Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the
Organisation. This may be due to the failure of the top management to communicate the
philosophy of MBO to entire staff and all departments. Similarly, managers may not
delegate adequately to their subordinates or managers may not motivate their
subordinates properly. This creates new difficulties in the execution of MBO programme.