Management by objectives as a comprehensive system; steps in the MBO process

Explaining the statement

Management by objectives (MBO) is a way of running an organisation in which each manager and the people reporting to him or her agree, in advance, on what each person is to achieve; the agreed results then steer the day-to-day work and are the yardstick on which each person is judged. Objectives state what the organisation is trying to achieve; MBO turns them into personal, specific and shared targets.

The statement makes three points:

1. MBO is comprehensive. It is not merely a technique of goal setting or of appraisal, but a whole system of managing.
2. It integrates key managerial activities systematically. Planning (setting objectives), organising (clarifying roles and authority), directing and motivating (participation and self-control), controlling (reviews against objectives), appraisal and rewards are all linked through the same set of objectives.
3. It is consciously directed towards stated objectives. Every activity and every person is aimed at specific, agreed results, so effort is focused and measurable.

Features that make MBO a comprehensive system

• A hierarchy of objectives linking organisational, departmental and individual goals.
• Participation of subordinates in setting their objectives.
• Specific, measurable and time-bound objectives for each key result area.
• Self-direction and self-control in achieving them.
• Periodic review and feedback on progress.
• Appraisal and rewards based on results.
• Continuous cycle: each period's results feed the next period's objectives.

Steps involved in the MBO process

1. Setting organisational objectives. Top management sets overall goals for the period, consistent with the organisation's mission and strategy.
2. Clarifying the organisational structure and roles. Responsibilities for each objective are assigned and overlaps removed.
3. Setting subordinates' objectives. Each subordinate proposes objectives for his or her area; superior and subordinate discuss and agree on specific, measurable targets with deadlines.
4. Matching resources and authority to the agreed objectives.
5. Preparing action plans: the subordinate decides how the objectives will be reached.
6. Implementation with self-control. The subordinate works with freedom to achieve the objectives.
7. Periodic review of progress. Superior and subordinate meet to check progress, solve problems and revise objectives if conditions change.
8. Final appraisal of performance. Results are measured against objectives at the end of the period.
9. Feedback, rewards and recycling. Achievement is recognised and rewarded, and lessons learnt shape the next cycle.

Example. An insurance company sets a company-wide goal of 15 per cent premium growth. Each regional manager agrees on targets for new policies, renewal rates and claim-settlement time; quarterly reviews track progress; and bonuses are paid on results.

Conclusion

MBO integrates planning, organising, motivating, controlling and appraisal around clear objectives, which is why it is called a comprehensive management system. Its success needs top-management support, real participation and objectives that balance measurable targets with quality.