A Review of Literature - History. Evolution and Limitations of MBO - Management by Objectives

INTRODUCTION

The term ‘Management by Objectives (MBO)’, was coined by Peter Drucker. The term Management by Objectives was first used by him in 1954 in his book ‘The Practice of Management’ ( Drucker, The Practice of Management, 1954). He made this system by compiling some points from various works. Douglas McGregor, along with George Odiorne as well as John Humble were some of the scholars of management theory who went on to develop the management tool that is Management by Objectives. (Thomson, 1998)

Let us first define the term Management by Objectives.

According to Griffin, MBO is defined as-“A formal goal-setting process involving collaboration between managers and subordinates; the extent to which goals are accomplished is a major factor in evaluating and rewarding subordinates’ performance.” (Griffin, 2012)

According to Koontz and Weihrich, Management by Objectives is defined as-“A comprehensive managerial system that integrates many key managerial activities in a systematic manner and is consciously directed towards the effective and efficient achievement of organizational and individual objectives.” (Koontz & Weihrich, 2010)

Management by Objectives can thus be understood as a technique of management where the employees of the said organization work to achieve goals set for them by their managers with their inputs for which the employees would be responsible and then the goals achieved by all the employees would work towards accomplishing the larger goals that necessitate the organization’s existence. Here, the completion of the smaller objectives by the employees would be rewarded through means such as pay hikes or even promotions, whereas the failure to do so would result in repercussions such as transfers or increased supervision and scrutiny. (Thomson, 1998)

In this article, I will study the History. Evolution and Limitations of MBO through the use of review of literature.

REVIEW OF LITERATURE

ARTICLE 1: “MBO-TWENTY YEARS LATER, WHERE DO WE STAND” 

AUTHOR(S): DALE D. McCONKEY.

 JOURNAL: BUSINESS HORIZONS, VOLME 16 (AUGUST 1973).

PUBLISHED BY:  ELSEVIER

This article was published in 1973 and evaluates the development, extent of adoption, successes and failures as well as future prospects of Management by Objectives in the twenty odd years that had passed since Peter Drucker coined the term MBO.

Peter Drucker was the first to use objectives as the very basis of a management system. ( Drucker, The Practice of Management, 1954) In the fifteen years that followed, this idea was turned from an untested concept into reality. Then came MBO’s evolution from a system directed at the goal-setting of individual managers to a system of overall effectiveness of the organization as a single entity to finally a system directed at the long term future of the organization by focusing on the results of individual managers utilizing MBO to achieve organizational goals as a whole. ( Howell, Managing by Objectives-A, 1970) Finally, MBO’s conversion from a specific management tool to a proper system

There is no clarity on which organizations actually adopted MBO since they often only adopt parts of it. Such cases notwithstanding, from private, non-profit and others to the growing service sector, many have extensively adopted MBO. Geographically, MBO had spread from the USA to other parts of the world, especially developed nations. One important fact here is that organizations that fully adopt MBO are extremely rare.

MBO can be credited for the new approach of management-“management is comprised of three steps: establishing objectives, directing the attainment of objectives, and measuring results.” (Engineers, 1968)

MBO has seen success in a balanced, participative style of management rather than an autocratic style as employee participation is a cornerstone of MBO. It requires incentive based planning for proper ongoing management. (Patton, 1973)

MBO has also seen an increase in the effectiveness of staff managers who were earlier considered to be redundant but now make up 20-40% of the manpower budget on average. MBO failures, on the other hand, can mostly be attributed to adopting MBO itself or flaws in the implementation stage. (McConkey D. D., 1972)

The past successes of MBO in the 20 years before this article indicate that it is not a passing fad but a system capable of achieving success.

ARTICLE 2: “MBO: The Fad That Changed Management”

AUTHOR(S): Eugene J. Seyna.

 JOURNAL: Long Range Planning, Vol. 19, No. 6 (1986).

PUBLISHED BY:  ELSEVIER

In this article, the author’s contention is that a lack of a common definition is behind the criticism of MBO and hence defines it in a comprehensive manner using Peter Drucker’s work as a source. This definition would help companies increase both their productivity and quality, lower their costs, make decision making faster and help serve customers in a better way. (Seyna, 1986)

The author is a strong proponent of MBO. Statements referring to MBO as something that caused severe harm to businesses involved (Hoare, (1972)) or the failure of MBO due to inherent conceptual issues making it a waste of time to work on improving it (Ford C. H., 1979) angers the author.

According to the author, managers have ruined the meaning and as a result the system of MBO by coming up with their own definitions upon consulting with others. This has also caused completely different managements with one or two aspects of MBO to refer to their style as MBO. (McConkey D. H., 1973) The real definition which brings the best output using MBO can only be found within Drucker’s work.

After doing a comprehensive research of Drucker’s philosophies, ideas and recommendations in ‘Management by Objectives and Self-control’, ( Drucker, The Practice of Management, 1954), the author arrived at the definition- ‘MBO is the system and philosophy that integrates all managing techniques and all human contributions into a united organization to achieve a common purpose and individual fulfilment.’ (Seyna, 1986)

In conclusion, this definition is to be followed by managers to truly practice MBO which has been proven to be a theory with successful results time and again and as such, is a viable system of management to be considered as an option be every manager.

ARTICLE 3: “The Causal Relationship Between Trust And The Assessed Value Of Management By Objectives”

AUTHOR(S): Dow Scott.

 JOURNAL: JOURNAL OF MANAGEMENT, Vol. 6, No.2 (1980).

PUBLISHED BY:  SAGE PUBLICATIONS

Multiple studies show a positive relationship between trust and success of MBO in an organization. (Hollman, 1976); (Patten, 1972); (Ford R.,1972)

The objective of this study is to determine the relationship between the two since there are three conflicting theories- Trust being a necessity for MBO to be successful. The successful implementation of MBO increases trust in an organization. Successful MBO and trust in an organization have an interactive relationship. (Scott, 1980)

The transportation department of a city was studied for this purpose.

The results indicate that employees’ trust in management improves the success of MBO. If implementation of MBO is a major management change, employees’ faith in management is a big factor in its success. (Keller, 1978); (Shirley, 1973)

Lawler’s theory that trust in management by employees is necessary for a successful implementation of compensation programs is also supported by the results. (Lawler & Hackman, 1969)

According to the author, the fact that MBO like any other major management intervention might have an outside consultant, means the consultant would slowly have to build trust and avoid actions to create mistrust, as that would further hamper the employees’ faith in the system.

Thus, in conclusion, the theory that propagates the fact that a high level of trust between managers and subordinates would lead to better implementation of MBO has been supported by the author’s research.

ARTICLE 4: “Management by objectives and the Balanced Scorecard: will Rome fall again?”

AUTHOR(S): David Dinesh, Elaine Palmer

 JOURNAL: Management Decision

PUBLISHED BY: EMERALD

This article compares the two management philosophies of Management by Objectives (MBO) by Peter Drucker ( Drucker, The Practice of Management, 1954) and the Balanced Scorecard given by Kaplan and Norton, (Kaplan & Norton, 1992) since both measure performance and are similar in that aspect as the Balance Scorecard places great importance on goal congruence. (Hoffecker & Goldenberg, 1994)

The article shows that both philosophies stem from similar ideologies. Flaws in MBO implementation can be analyzed to see possible issues with balanced scorecard’s implementation. Yet the major flaw seen here is that managements adopt MBO without having managers gain a deep understanding of it which leads to a partial or flawed adoption of MBO as seen in a study of 48 MBO using organizations. (Reddin & Kehoe, 1974)

The authors predict that the same partial application that plagues MBO will also be an issue in organizations that utilize Balanced Scorecard due to huge expenditure of time in organization wide scorecards. Due to the influence of Total Quality Management (TQM), which also focusses on employee training and collaboration among other things, (Hellsten & B Klefsjö, 2000) there will be more focus on collaboration unlike MBO, which was said to be against Total Quality Management. (Poister & Streib, 1995) (Van Tassel, 1995)

In conclusion, it can be seen that this article shows MBO to be a system prone to failure due to various reasons that may also affect Balanced Scorecard except the factor of human resource management which might be successfully achieved here due to the influence of Total Quality Management on current managements.

ARTICLE 5: “Management by objectives – an effective tool for teamwork?”

AUTHOR(S): Conny Antoni

 JOURNAL: The International Journal of Human Resource Management

PUBLISHED BY: TAYLOR AND FRANCIS

This article studies an organization where MBO was implemented 5 years ago. A group of employees was divided into teams to test the mechanism of MBO at team level.

Goal setting studies are done for individuals and the group level requires more research. This is the hence the area of research for this study. (O’Leary-Kelly, Martocchio, & Frink, 1994) (Weaver, Bowers, Salas, & Cannon-Bowers, 1997)

The results support the earlier studies that show MBO to be a success for management (Carroll & and Tosi, 1973)

Both group goals as well as goal commitment were found to correlate with the group outcomes.

There was no moderating effect as a result of task interdependence.

Group processes were seen to correlate with job satisfaction, but there was no such correlation with group productivity.

Due to the absence of correlation between group processes as well as group productivity, no   mediating effect of group processes among group goals, goal commitment and productivity can be found.

This study shows that MBO is a successful tool at team level and for leading self-regulating teams. Teams should be sufficiently trained so that they can achieve their goals whereas supervisors should be trained in leading the team. The external factors that influence attainment of goals should be considered so that the team does not lose motivation by attributing success to external factors.

ARTICLE 6: “A Foundation of Good Management Practice in Government: Management by Objectives”

AUTHOR(S): Robert Rodgers and John E. Hunter

 JOURNAL: Public Administration Review

PUBLISHED BY: Wiley on behalf of the American Society for Public Administration

In this article, the authors provide the results of 70 studied about MBO adoption in the public sector and private sector. It is seen that MBO has been just as successful in the public sector as it was in the private sector. While it is seen that MBO had a positive impact on the productivity of public sector agencies, (Poister & McGowan, 1984) the greatest benefits were reaped by those public sector agencies where top management showed great commitment to MBO. It is seen that if top management isn’t fully committed, the average increase in productivity in public sector agencies due to implementation of MBO would only be 12% whereas with an increase in commitment from top management, it may even increase to 63%.

MBO consists of 3 aspects- participative team members in decision making, setting of goals and objective feedback. ( Drucker, The Practice of Management, 1954) The results confirm the MBO theory that any management practicing these 3 at once would be successful.

This result hence opposes the view that for MBO, "productivity improvement is a likely, though not certain, outcome.” (Kirchhoff, 1975)

The public administrators will thus keep adopting new strategies aimed at productivity increase like Total Quality Management and others all of which have some aspects of themselves derived through the 3 processes of MBO. Hence, even if MBO itself isn’t directly adopted by public sector agencies, it will continue being used on a large scale.

ARTICLE 7: “Using Management by Objectives as a performance appraisal tool for employee satisfaction”

AUTHOR(S): Xhavit Islami, Enis Mulolli, Naim Mustafa

 JOURNAL: Future Business Journal

PUBLISHED BY: ELSEVIER

This article aims to gauge employee satisfaction in organizations using MBO. One British practice review showed 89% employees measured their satisfaction against goals or objectives. (I.R.S, 2005)

The benefits of using MBO as an appraisal tool was also seen in another detailed review which discovered that organizations introducing an appraisal / Management-By-Objectives system, with a significant level of commitment from the top brass of the organization, achieved average productivity increments more than 56%, when compared to average increments of a little more than 6% in the organizations where there wasn’t enough commitment. (Rodgers & Hunter, 1991)

Performance appraisal increases the performance of employees, their communication expectations, the determining of their potential and aiding their counseling. (A. & Thakur, 2013)

Clearly defining results as well as their participation in setting the goals and standards increases employee satisfaction as they consider work to be personal, not organizational. When the employee knows what is expected from him, achievement gives him satisfaction. Setting limits on time and budget motivate the employee which causes more satisfaction upon completion.

Continuous communication, individual appraisals and incentives on good results boost productivity of employees.

 On the other hand, communication of objectives has been shown to be unrelated to employee satisfaction, whereas freedom and interdependence may or may not boost employee satisfaction based on the personality of the employee.

The results suggest that MBO should be used as an appraisal tool. Evaluation of individual performances and clear definition of the results increase the effectiveness of the organization’s employees.

ARTICLE 8: “MANAGING BY OBJECTIVES-A THREE-STAGE SYSTEM Evolution requires 4-5 years”

AUTHOR(S): ROBERT A. HOWELL

 JOURNAL: BUSINESS HORIZONS

PUBLISHED BY: ELSEVIER

The author originally had 2 dichotomous views that MBO is an improved form of performance appraisal or that MBO was not restricted to performance appraisal but instead is an entire management system by itself. This system wishes to integrate the objectives of the organization with that of the managers’ individual goals. (Howell, A Fresh Look at Management by Objectives, 1967)

The author, in this article, talks about the 3 stages organizations go through during their implementation of MBO which ordinarily requires more than a decade of time. The author gives a way to possibly go through these stages in four to five years and implement MBO quickly in an effective manner.

The first stage is performance appraisal. It is characterized by individual managers adopting MBO while top management mildly supports them. Result oriented appraisals were used to motivate the managers. A number of prolific writers supported the theory of performance appraisal in MBO. (McGregor, 1987)

The second stage is integration. It refers to integration of managers’ objectives with the organization’s objectives. This was supported by the founder of MBO, Peter Drucker. (Drucker, Managing for results: Economic tasks and risk-taking decisions, 1964)

The third stage is long range planning. This was developed to provide for the lack of long term prospects in MBO.

The manager must first set his own objectives in consultation with his superiors before moving towards vertical as well as horizontal integration. This process takes 2-3 years at the very least. Next the short term goals of the organization can be set at the same time as the long range planning to a certain extent, but the time taken in addition to the integration process still reaches 4-5 years.

ARTICLE 9: “Management by objectives: the Swedish experience in upper secondary schools”

AUTHOR(S): Erik Lindberg and Timothy L. Wilson

 JOURNAL: Journal of Educational Administration

PUBLISHED BY: Emerald

This research paper studies the impact of management by objectives being adopted by upper secondary schools in Sweden. It was in 1994 that Sweden decided to adopt MBO to manage its education system as part of a much larger global movement. A debate in 1980 led to the New Public Management to make the public sector similar to the private sector. (Hood, 1991)

There was a study on the principals’ perception of the adoption of MBO in 1998 which was followed by an identical study 10 years later in 2008. This paper compares the 2 studies.

After the first study gave both encouraging as well as disappointing results, there were criticisms of the decision to implement the model as well as the model itself. (Brunsson, 2002)

There were also concerns over politicians’ capability to handle the education system, and whether MBO would change anything. (Weick, 1995)

These concerns and critiques developed a need for a second study and an analysis of the results.

According to the principals’ responses, it would seem that the effectiveness of MBO diminished over the period of ten years between the studies. Changes in student performance were insignificant, whereas the MBO system resulted in less stress on teachers and frustration among the principals.

These results point to the fact that MBO may have led to better staff management in these schools but that has not translated to better performances among students.

ARTICLE 10: “The unintended consequences of management by objectives: the volume growth target at Volvo Cars”

AUTHOR(S): Fredrik Dahlsten, Alexander Styhre and Mats Williander

 JOURNAL: Leadership & Organization Development Journal

PUBLISHED BY: Emerald

Interviews with some relevant managers of Volvo Car Corporation were held in order to analyze the overall volume target in Volvo Cars with regards to its results on organizational practice.

In Volvo Car Corporations, marketing, production and other departments operated individually towards the same organizational goals. This resulted in all of them having unique interpretations of the objectives. This caused goals to become unclear which lead to several problems and ultimately the MBO implementation was a failure.

This is because managing the managers in an organization demands special care to eliminate misdirection while putting in place a common direction. The superior must be willing to listen to the lower managers and there must be a system to let them be heard. (Drucker, The Practice of Management, 1955) MBO is best suited for ‘mechanic systems’ (Burns & Stalker, 1961) or ‘machine bureaucracies’ (Mintzberg, 1983) where objectives trickle down through the hierarchy of the organization.

The result was that the demanding volume targets caused a chasm between top and middle management. The goals, looking clear at first glance, were interpreted very differently by the people involved and there were multiple perspectives on the rationale as well direction the changes needed to be to achieve the organization’s goals. The managers responded more emotionally than anticipated thus causing target fatigue in the organization.

In conclusion, managers must clearly define the objectives and the means to go towards them. The requirements for achieving organizational goals must be fulfilled first and organizational and cultural context should be taken into account.

CONCLUSION

The history of MBO can be trace back to when Peter Drucker coined the term in his 1954 book, The Practice of Management. He compiled it from the works of several authors and was the first to use objectives as the very basis of a management system. Over the next 15 years, MBO went from an untested concept to reality.

 MBO evolved from a system directed at the goal-setting of individual managers and to a system where the overall effectiveness of the organization as a single entity to finally a system for the long term future of the organization via focusing on the results of individual managers utilizing MBO to achieve the organizational goals as a whole. Finally MBO was turned from a management tool to a full-fledged management system.

The evolution of MBO in a single organization takes place in a 3 stage process starting with introducing a system of result oriented performance appraisal for the individual managers. Then comes the vertical and horizontal integration of the managers’ objectives with that of the organization. Short term goals are set. The third and final step is the long term goal setting to secure the future of the organization.

The main limitations studied here are as follows-

The partial adoption of MBO by organizations.

Authoritative management where employee participation is not encouraged.

Lack of trust within the organization towards each other or superiors.

There is also lack of commitment from top management towards the MBO process.

 Lack of understanding of the managers in the organization towards MBO can also lead to failure in implementation.

Absence of a clear direction which leads to misinterpretation of objectives by decoupled departments.

Hence it is my suggestion that while implementing MBO, an organization must solve these problems by ensuring complete adoption of all facets of MBO while training the employees to understand this system. There must be an atmosphere of trust between employees and their supervisors where upper management can listen to and encourage the participation of lower management in goal setting. The top management must proceed with full commitment towards this initiative while clearly defining the goals that have been set for all departments.

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