Management by objectives as means of employee productivity

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The management by objectives is the best way to get more out of an employee in any organization. It is the way of dealing the problems by defining prior objectives for each employee and then to compare and to direct their performance against the objectives which have been set for each of them individually. It helps in increasing the performance of the organization by matching organizational goals with the objectives of subordinates from top level to the bottom level in any company. In normal cases the employees are asked to find out their own objectives and then they are evaluated by their superiors and will be added any extra if they do not meet the requirements or deadlines which are already preset for project completion.

MBO includes tracking of the continuous changes of the processes and providing feedback to reach the objectives.

Term coined by Peter Drucker:

Management by Objectives was first introduced by Peter Drucker in 1954 in the book written by him, 'The practice of Management'. According to Drucker Managers follow two rules without their knowledge

Rule 1: With active involvement in the current activities, Managers come under a trap namely "activity trap" to successfully complete those jobs.

Rule 2: As they are continuously involving in current activity it is quite common that they will lose their vision on long term goal.

One of the concepts of Management ByObjectives was that instead of just a few top-managers, all managers of a firm should participate in the strategic planning process, in order to improve the implementability of the plan.

According to Peter Drucker all managers (which implies both top as well as middle level) should:

participate in the strategic planning process, in order to improve the implementability and practicality of the plan, and

implement a range of performance systems, designed inorderto help the organization stay on the right track.

Another concept of Management by Objectives was, that managers should implement a range of performance systems, which are designed to help the organization to function well without any problems. Clearly, Management by Objectives can thus be seen as a predecessor of Value Based Management.


MbO - Main Principles

Cascading of organizational goals and objectives,

Specific objectives for each and every member,

Participative decision making,

Explicit time period, and

Performance evaluation after an activity and provide feedback.

The SMART Objectives:

By definition, a goal that doesn't shape behavior is ineffective. The theory went on to suggest that SMART parameters were good predictors of influential or effective goals. The SMART goal era of the 1980's and 1990's provided some helpful criteria about what makes goals more or less effective in shaping behavior. As an example, goals that were not specific or measurable were less likely to shape behavior than those that were high in these characteristics. Using just any words, you should be smart enough to include these characteristics in the definition of your goal and objective.

Management by Objectives has also introduced the SMART method for checking the validity of the objectives, which should be 'SMART':




Realistic, and


One of the almost important impressions of SMART goals is that they are pointed; they have an edge, often a sense of energy created by the specificity, the time limits and the measurement.

Non-SMART goals seem flat in comparison (ie. Improve productivity); bureaucratic, like one more strategic plan that's going nowhere. While the enhancement to goal definition was a helpful direction, it did not address fundamental weaknesses in this model.

In the 90s, Peter Drucker put the significance of this organization management method into perspective, when he said: "It's just another tool. It is not the great cure for management inefficiency... Management by Objectives works if you know the objectives, but mostly 90% of the time you don't know the objectives.

The MBO style is appropriate for knowledge-based enterprises when your staff is competent. It is appropriate in situations where you wish to build employees' management and self-leadership skills and tap their entrepreneurial creativity, tacit knowledge and initiative.Management by Objectives (MBO) is also used by chief executives of multinational corporations (MNCs) for their country managers abroad.

Famous innovation management policies:

MBO followed at Intel

A Manager's Guide at Intel provides the following directions.

Start with a few well-chosen overriding objectives.

Set your subordinates objectives that fit in with your overriding objectives.

Allow your subordinates to set their own key results to enable them to meet their objectives

MBO followed at Microsoft

By: Bill Gates, Founder of Microsoft

Prevent the missions or objectives that are competing against each other resulting in misunderstanding.

Review Mechanism

The review mechanism enables leaders to measure the performance of their managers, in the key result areas: productivity; marketing; innovation; human organization; financial resources; social responsibility; and profit requirements

All individuals within an organization are assigned a special set of objectives that they try to reach during a normal operating period. These objectives are mutually set and agreed upon by individuals and their managers.

Performance reviews are conducted periodically to determine how close individuals are to attaining their objectives.

Rewards are given to individuals on the basis of how close they come to reaching their goals. .

Setbacks of Management by Objectives: (Luthans 2005)

1. May lead to suboptimalization: which means people are not ready to look beyond their own objectives and help each other.

2. Innovation cannot be seen anywhere.

3. Potential misuse by superiors who simply assign the objectives rather than asking their opinion.

4. Subordinates may try to negotiate easy goals.

5. Watch out for unrealistic expectations about what can be reasonably accomplished.

6. Most of the time the specific objectives cannot be formed easily and once formed they cannot be changed hence this is not complete practical.

Solution: The Scheduled Project Management

Drawing upon the influence of MBO theory that is to set clear objectives, build an action plan, and measure progress and Deming's work (optimize processes and products by identifying top practiced behaviors), emerged the project management movement. Ineffect saying,

1. Set clear objectives, and get key stakeholder buy-in and definition for the participantthrough explicit requirement setting

2. Put together a series of best practices action steps in the form of a work breakdownstructure.

3. But, what primarily helps people achieve their objective, is the planning, securing, scheduled deployment of resources and the completion of tasks.

Project management is an evolution of MBO theory.

The Application of Goal Setting to Organizational Performance

The goal setting is the basis for traditionally used MBO or Management by Objectives, an approach to planning, control, personnel appraisal and overall system performance.

Nowadays MBO has evolved into an overall systems performance approach using goal setting and appraisal for results.

The application of goal setting and appraisal by results of overall organizational systems generally follows the series of steps outlined as follows:

Step 1: Setting up of the overall objectives and action plans

Step 2: Develop the Organization

Step 3: Set individual objectives and action plans

Step 4: Conduct periodic appraisals and provide feedback on progress; make adjustments

Step 5: Conduct final appraisal of results.

All these above steps are in a cyclic order and just after completion of one step the other step begins and hence it is continuous process.

As shown once the overall objectives have been set and organization is developed to the point of accommodating the performance system, individual objectives are set. These individual objectives are determined by each manager subordinate pair, starting at the top and going down as far as the system is to be implemented. The scenario for this process would be like something as follows: The boss would contact each of the subordinates and say:

Practical Example in present INDUSTRY:

As you know, we have completed our system performance improvement orientation and development program, and it is now time to set each individual objectives. I would like you to develop by in a week a proposed set of objectives for your area of responsibility. Remember that your set of objectives should be in line with the overall organizations' objectives developed with much care by the top management team, which you have a copy and should be able to contribute to the objectives on your same level and your subordinates' objectives. Your objectives should be stated in quantifiable, measurable terms and should have a target date. I will also have some suggestions that I think should be given top priority for your area of responsibility. We will sit down and have an open give-and-take session until we reach a mutually agreeable set of objectives for your own area of responsibility.


This goal setting theory emphasizes the importance of the relationship between goals and performance. Laboratory and filed studies have verified this relationship. In particular most effective performances seems to result when specific, difficult golas are accepted and when feedback on progress and results is provided. The goal setting and MBO may have overlooked impact on the psychological contract. To be successful, the human capital must also benefit and receive a return.