The Philosophy And Practice Of Management By Objectives

The Philosophy And Practice
Of
Management By Objectives









Presented to:

Dr. Samuel Adekunle
MGT6671 Organizational Behavior










Presented by:

Bruce Wu
EMBA Program Taiwan, Troy State University

---

i
ACKNOWLEDGEMENTS

It is not an easy task for me to prepare a formal research paper, because I have never really done
so before by making a research plan, choosing a subject, searching for and recording information,
organizing ideas, and drafting, revising and finaling the paper. I have learned from the course of
preparing the research paper the importance of utilizing the resources in a library and manipulating the
software package of research like Biblioscape.

Organizational behavior is really a real-life discipline. “People, people, people! Just find them,
talk and share with them!” I am grateful to Dr. Samuel Adekunle for his teaching by personal example,
for his informative lecture and enthusiastic Q&A, and for his attentiveness to the culture difference. I
would like to thank my classmates as well for their sharing of experience and comments. My journey to
the EMBA degree will for sure not be rich and bright without any of them!

---

ii
CONTENTS

ACKNOWLEDGEMENTS ........................................................................................................... I
CONTENTS ...................................................................................................................................II
INTRODUCTION ..........................................................................................................................1
THE PHILOSOPHY AND PRACTICE OF MANAGEMENT BY OBJECTIVES .................2
THE EVOLVEMENT OF MANAGEMENT BY OBJECTIVES ..................................................................2
The Next Stage ..........................................................................................................................2
OBJECTIVES FORMULATION ...........................................................................................................3
Well-communicated hierarchy of objectives .............................................................................3
Participatively determined objectives.......................................................................................3
People-motivated objectives .....................................................................................................4
SMART objectives.....................................................................................................................4
EXECUTION PROCESS.....................................................................................................................5
Team work as balancing efforts towards objectives..................................................................5
Proper use of reports and procedures.......................................................................................6
PERFORMANCE FEEDBACK ............................................................................................................6
Verifiable measures...................................................................................................................6
Result-oriented .........................................................................................................................7
Self-control ...............................................................................................................................7
Continuous feedback.................................................................................................................8
SYSTEMS APPROACH TO MANAGEMENT BY OBJECTIVES ..........................................9
THE FRAMEWORK OF SAMBO......................................................................................................9
CONCLUSION .............................................................................................................................10
REFERENCE ............................................................................................................................... 11

---

MBO
1


Introduction
“Management by Objectives” (MBO) as a philosophy of management was first introduced by
Peter F. Drucker in his book “The Practice of Management” in 1954. The philosophy of management
by objectives comprises three building blocks: formulation of objectives, process of execution, and
mechanism of performance measurement and feedback.

Management by objectives, however, was not adopted in its entirety in the first place but
conducted in part, especially the very aspect of performance appraisal, even though it has been
popularized and broadly practiced both in public and private sector. It has been supported and
improved by researchers and practitioners, and evolved from an essential philosophy to a complete
practice of management. Nowadays, it comes to apply not only to performance measurement but also
to every management function.

The popularity of management by objectives should not be construed to mean that it always works.
Some criticize the incompleteness of management by objectives and attribute the failure to its unfitness
to enterprises. Others ascribe the failure to factors such as unrealistic expectations regarding results,
lack of commitment by top management, and an inability or unwillingness by management to allocate
rewards based on goal accomplishment. In fact, a systematic approach for enterprises to implement
management by objectives is more critical.

The researcher will examine the philosophy and practice of management by objectives, and
introduce a new approach to it.

---

MBO
2


The Philosophy and Practice of Management by Objectives
“Management by Objectives” (MBO) as a philosophy of management was first introduced by
Peter F. Drucker in his book “The Practice of Management” in 1954. As he wrote:

What the business enterprise needs is a principle of management that will give full
scope to individual strength and responsibility, and at the same time give common
direction of vision and effort, establish team work, and harmonize the goals of the
individual with the commonweal. The only principle that can do this is
management by objectives and self-control ... But management by objectives and
self-control may legitimately be called a “philosophy” of management.

With decades of evolvement, the philosophy of management by objectives is formed with three
major ingredients: objectives formulation, execution process, and performance feedback.

The Evolvement of Management by Objectives
The business is getting dynamic and volatile. For any notion or practice of management to be
viable and effective, it must continue to evolve. “MBO has come a long way, from a performance
appraisal tool to a device for integrating individual and organizational objectives, and finally to a
long-range planning instrument. MBO has probably survived as an effective managerial approach
because it has changed, grown, and developed.” (Weihrich)

It is because management by objectives has been supported and improved by researchers and
practitioners that MBO has been accepted and implemented in many businesses such as General
Motors, General Electric, General Foods, Quaker Oats and others, both large and small. (Krueger) A
recent research by Heinz Weihrich1 suggests further integrating new ingredients to the system of
management by objectives in the next stage.

The Next Stage
The proposition of Weihrich on management by objectives in the next stage follows:
1.
MBO is viewed as a system of managing in which many key managerial activities are
integrated.
2.
Systems concepts are used to emphasize the interdependency of MBO with its environment.

The researcher will introduce his new model, SAMBO, latter.

1 Heinz Weihrich, Ph.D., Assistant Professor of Management, Arizona State University, Tempe, Arizona

---

MBO
3


Objectives formulation
Objectives formulation is one of the most important strategic processes. It works out
well-communicated hierarchy of objectives and participatively determined, people-motivated, and
SMART objectives.

Well-communicated hierarchy of objectives
Strategic planning is the basis of determining the hierarchy of objectives, shown in figure 1. In
strategic planning, opportunities and external constraints are analyzed and matched with the internal
strengths and limitations of the organization. “The fundamental purposes, the mission, the overall
objectives as well as the more specific overall objectives are, to a large extent, determined by top
management, with, of course, input from lower level managers. These objectives are then further
broken down into divisional, departmental, unit, and individual objectives.” (Weihrich) Also, “Each
manager, from the ‘big boss‘ down to the production foreman or the chief clerk, needs clearly
spelled-out objectives … These objectives should always derive from the goals of the business
enterprise.” (Drucker)

Objectives need to be well communicated. A favorite story at management meetings is that of the
three stonecutters who were asked what they were doing. The first replied, “I am making a living.” The
second kept on hammering while he said, “I am doing the best job of stonecutting in the entire
country.” The third one looked up with a visionary gleam in his eyes and said, “I am building a
cathedral.” (Drucker) The first stonecutter knows only his own objective, the second may or may not
have an idea of what his objective was, while the third one can recognize not only his own objective
but also the one of the whole. Well-communicated hierarchy of objectives helps to motivate people and
pull efforts in the same and right direction.

Participatively determined objectives
“The process of setting objectives, however, is not a one-way street. Communication and planning
efforts must go in both directions (down and up) as indicated in Figure 1.” (Weihrich)

The goals of each manager’s job must be defined by the contribution he has to make to the success
of the larger unit of which he is a part. This requires each manager to develop and set the objectives of
his unit himself. Higher manager must, of course, reserve the power to approve or disapprove those
objectives. It means, too, that every manager should responsibly participate in the development of the
objectives of the higher unit of which he is a part. For example, the objectives of the district sales
manager’s job should be defined by the contribution he and his district sales force have to make to the
sales department. (Drucker)

---

MBO
4





People-motivated objectives
It is not a new idea! In fact, it was originally proposed 50 years ago as a means of using goals to
motivate people rather than to control them. Goal-setting theory demonstrates that hard goals result in a
higher level of individual performance than do easy goals, that specific hard goals result in higher
levels of performance than do no goals at all. Consistent with goal setting, MBO would be most
effective when the goals are difficult enough to require the person to do some stretching. (Robbins) “It
motivates the manager to action not because somebody tells him to do something or talks him into
doing it, but because the objective needs of his task demand it.” (Drucker)

SMART objectives
An objective comprises two parts: target and action. As a rule of thumb, a good objective should
be SMART, that is, the target of objective should be specific, measurable, and attainable, while the
action of objective should be results-focused and timely. (American Library Association)


Specific: concrete and use action verbs.

Measurable: numeric or clearly descriptive.

Achievable: feasible, appropriately limited in scope, and within the organization's control
and influence.

---

MBO
5



Results-focused: measures outputs or results (not activities) and Includes products,
accomplishments.

Timely: identifies target date.

Here is an example:
In order to find out why our subscribers do not renew their subscriptions, the Customer Service
Department will develop a process for conducting a survey and write a survey instrument, based
on the 2002 survey, by December 31, 2003.

Execution process
Many of the most important factors that lead the implementation of management by objectives to
failure lie within execution process instead of its basic components. It is not uncommon that most
managers are capable of doing a good job on planning or paper work, but they usually let plan go itself.
They stress more on the plan than the pain to get things done. “Many business leaders spend vast
amounts of time learning and promulgating the latest management techniques. But their failure to
understand and practice execution negates the value of almost all they learn and preach. Such leaders
are building houses without foundations.” (Bossidy & Charan)

There are lots of factors that can result in failed implementation of management by objectives, but
two key points are worthy of mention: team work and proper use of reports and procedures.

Team work as balancing efforts towards objectives
Team work makes it possible that individual efforts in a group bring about greater performance
than the sum of individual inputs. (Robbins) The project to build the Apollo 13 spacecraft is a good
example of team work. How long in the world does it take to build it by a single individual or
uncollaborated individuals? It may never come to a spacecraft! For enterprises to compete and survive
nowadays, it will hardly be disputed that “Any business enterprise must build a true team and weld
individual efforts into a common effort.” (Drucker)

Team work also implies balancing efforts towards objectives. Unbalanced efforts or empire
building will counteract the performance of organization. “For managers must understand that business
results depend on a balance of efforts and output in a number of areas. This is necessary both to give
full scope to the craftsmanship of each function and specialty, and to prevent the empire building and
clannish jealousies of the various functions and specialties. It is necessary also to avoid overemphasis
on any key area.” (Drucker)

---

MBO
6


Proper use of reports and procedures
Reports and procedures are necessary tools, but few others can be as easily misused as they can
and do so much damage as they do. Once reports and procedures are misused, they cease to be tools
and become malignant masters. There are three common misuses of reports and procedures. The first is
the all too common belief that procedures are instruments of morality. The second misuse is to consider
procedures a substitute for judgment. But the most common misuse of reports and procedures is as an
instrument of control from above. (Drucker)

Reports and procedures should focus only on the performance needed to achieve results in the key
areas, should be the tool of the man who fills them out, and must never themselves become the measure
of his performance. Reports and procedures should be kept to a minimum, and used only when they
save time and labor. They should be as simple as possible. (Drucker)

Performance feedback
Attaining objectives is a progress of improvement. “A critical enabler in achieving desired
performance goals is the ability to measure performance.” (Harbour) As the saying goes, “You can’t
improve what you can’t (or don’t) measure.”

A manager will make contributions to enterprises only if he is effective and efficient. For a
manager to know his objectives is for him to do the right things, but how well does he do the things
right? “To be able to control his own performance, a manager needs to know more than what his goals
are. He must be able to measure his performance and results against the goal.” (Drucker)

An effective performance appraisal system relies on objective measures and results instead of
subjective perceptions of superior, stresses on self-control measurement but control from above, and
provides continuous and immediate feedback of performance information.

Verifiable measures
Objective appraisal with verifiable measures is better than subjective evaluation by perceptions.
Verifiable measures are quantitative or descriptive. Using numbers is not the only objective way to
measure. The thinking of quantitative measures only is limiting and can result in measuring what is
easily quantifiable but not what is most important. Descriptive measures are complementary to
quantitative ones when numbers don't make sense. (Zigon) “These measurements need not to be rigidly
quantitative; nor need they be exact. But they have to be clear, simple, and rational.” (Drucker)

---

MBO
7


Measuring performance can help drive desired business results. The key to successful
performance measurement is to collect only those performance measures that can or will actually be
used. The following are common used family of measures: (Harbour)

Productivity measurements (e.g., 25 units produced per week).

Quality measurements (e.g., 3.8 defects per 25 units).

Timeliness measurements (e.g., 96 percent of orders completed on time).

Cycle time measurements (e.g., a production cycle time of 6 hours per unit).

Resource utilization measurements (e.g., production workers utilized 65 percent of the
time).

Cost measurements (e.g., production cost of $325 per unit).

Result-oriented
Aim at the results to attain objectives, not the activity or competency! Activity-oriented
measurements focus on activity, behavior, or actions which are means, not ends. It generates more
activity, because what gets measured gets done. Competencies define what skills, knowledge and
experience an individual needs in order to produce results. Having a skill and using it successfully,
however, are two very different things. A car mechanic with a certificate of training completion on the
wall is not the same as a repaired car. (Zigon)

“In its early application, MBO overcame some of the problems of traditional appraisals that
emphasized personality traits. In MBO appraisal, on the other hand, the focus is on results.
Performance is evaluated against verifiable objectives, rather than purely subjective judgments by the
superior. Moreover, in MBO the attention is on contributions individuals make to the broader
organizational aims.” (Weihrich)

Self-control
The results of performance measurement should go directly to the one who is evaluated instead of
to his or her superior. It should be the means of self-control, not a tool of control from above. “The
greatest advantage of management by objectives is perhaps that it makes it possible for a manager to
control his own performance. Self-control means stronger motivation: a desire to do the best rather than
just enough to get by. It means higher performance goals and broader vision.”

---