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MBO is difficult to define, for organizations use it in different ways and for different reasons. In broad terms, it may be stated that MBO is an overall philosophy of management that concentrates on measurable goals and end results. It provides a systematic and rational approach to management and helps prevent management by crisis. MBO is based on the assumptions that people perform better when they know what is expected of them and can relate their personal goals to organizational objectives. It also assumes that people are interested in the goal-setting process and in evaluating their performances against the target. In the words of Odirone, MBO is a ‘process’ whereby the superior and subordinate managers of an organization jointly identify its common goals, define each individual’s major areas of responsibility in terms of results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members.’

1.4.1 MBO Process 

The exact meaning of MBO (and its application) varies from organization to organization. In some, MBO is nothing more than a catchy slogan from the latest management jargon. MBO is dismissed as a joke, a gimmick for justifying the existence of personnel departments, a fad that will go away and a paper-shuffling hassle that won’t stop. In other organizations, MBO represents an overall philosophy of management, a way of thinking that concentrates on achieving results. It is treated as a multifaceted tool for improving managerial as well as organizational performance. In order to understand the reasons for this diversity, it is necessary to look into the process of MBO.

  1. 1.                 Goal Setting 

Any MBO programme must start with the absolute and enthusiastic support of top management. It must be consistent with the philosophy of management. The long term goals of the organization must be outlined initially, like: What is the basic purpose of the organization? What business are we in and why? What · are the long term prospects in other areas? After these long term goals are established, management must be concerned with determining specific objectives to be achieved within a given time capsule.

  1. 2.                 Action Plan 

The action plan is the means by which an objective is achieved. The action plan gives direction and ensures unity of purpose to organizational activities. It will wet out in detail exactly what is to be done, how the subordinate will proceed, what step will be taken and what activities will be engaged in as the subordinate progresses. It provides a specific _answer to the question : ‘What is to be done?’ Questions like who is responsible for each activity, what resources are needed, what the time requirements are – are also answered.

  1. 3.                 Appraising Performance (Final Review) 

This is that last phase of the MBO programme. In this step the actual results are measured against predetermined standards. Mutually agreed on objectives provide a basis for reviewing the progress. While appraising the performance of subordinates, the manager should sit with the subordinates and find out the problems encountered while accomplishing the goals . The subordinate, as in the periodic sessions, should not be criticized for failure to make sufficient progress; the atmosphere should not be hostile or threatening. A give-and-take atmosphere should prevail and the appraisal should be based on mutual trust and confidence between managers and subordinates. In actual practice this type of give-and-take session is extremely difficult to achieve and rarely reaches its potential value, unless managers are gifted with necessary interpersonal skills. Often, appraisal takes place for the purpose of determining rewards and punishments;’ judging the personal worth of subordinates and not the job performance. As a result, appraisal sessions become awkward and uncomfortable to the participants and intensify the pressure on subordinates while giving them a limited choice of objectives. Insecure subordinates may come to ‘dread’ the sessions and they may not feel free to communicate honestly and openly without fear of retaliation.

1.4.2 Benefits 

Management by objectives moulds the planning, organizing directing and controlling activities in a number of ways.

  1. As objectives provide the basic foundation of planning, the programme of action is thoroughly tuned to the set of objectives. Instead of going through planning as a work or as a mental exercise in thinking, planning for performance can be made to prevail through a system of management by objectives.
  2. Delegation and decentralization in the sphere of organizing become effective and fruitful only when the subordinates are trained and allowed to work under a system of management by objectives.
  3. By clarifying the sense of direction and allowing subordinates to operate under greater freedom, management by objectives results in motivating managers to do the best possible work rather than enough to get by with the situation.
  4. Management by objectives leads to the adoption of managerial self-control Managerial self-control has been found from experience to be associated with higher performance goals and broader vision.
  5. Management by objective has ushered an era of improved managing in the business world. It provides a practical means of allowing wider participation in goal setting and of accomplishing goals of the enterprise in a better way.

5.6.3  MBO – Problems

Each organization is likely to encounter specific problems in MBO practice but some of the common problems are given here. 

            1. Time and cost. MBO is not as simple as it looks to be. It is a process which requires large amount of the scarcest resource in the organization time of the senior managers. This is particularly so at the initial stages, when MBO is seen as something over and above the normal work. Sometimes managers get frustrated and feel overburdened. Further, MBO generates paper work because large numbers of forms are to be designed and put into practice. Therefore, there is a problem of communication overload. However, such problems are transitory and emerge only at the initial stages. Once MBO becomes a part of the organizational life, these problems disappear.

2. Failure to Teach MBO Philosophy. MBO is a philosophy of managing an organization in a new way. However, managers fail to understand and appreciate this new approach. They have a number of doubts about MBO like what purpose is served by MBO, how the performance is to be appraised, and how organization will benefit. MBO demands rigorous analysis as an integral element of the management process but the organization may not be used to rigour. Frequently both the base data and the expertise for analysis are not available. If corrective action is not taken early, the objectives become imprecise, control information may not be available and one would not know if something was achieved. This is done on a systematic basis and managers seldom appreciate this. They take MBO as another tool for control. Moreover, their old way of thinking puts difficulty in introducing MBO because they may not appreciate the full view of MBO. 

            3. Problems in Objective Setting. MBO requires verifiable objectives against which performance can be measured. However, setting of such objectives is difficult at least in some areas. Objectives are more in the form of statement rather than in quantitative form. Of course, some objectives can be quantified and can be broken in terms of time period but others lack this characteristic, for example, objectives of staff activities. In such cases, there is absence of basis for further course of action.           

            4. Emphasis on Short-term Objectives. Sometimes, in order to be more precise, there is a tendency to emphasize on short-term objectives usually for a year or even less. No doubt, this may help in performance appraisal but there is always a danger in emphasizing short-term objectives at the cost of long-term objectives. Sometimes, an organization’s short-term and long-term objectives may be incompatible because of certain specific problems.           

            5. Inflexibility. : MBO represents the danger of inflexibility in the organization, particularly when the objectives need to be changed. In a dynamic environment, a particular objective may not be valid for ever. In the context of revised objectives, change premises, or modified policies, it is useless to follow the old objectives. However, many managers often hesitate to change objectives during a period of time. Thus inflexibility created by applying :MBO may cause harm than what it may contribute.           

            6. Frustration. Sometimes MBO creates frustration among managers. This frustration may be because to two reasons. First, as experience shows, many organizations could not implement MBO properly, resulting into utter chaos. In this case, the organization is not able even to work with its old ·system. Second, introduction to : MBO tends to arouse high expectations for rapid change, particularly among the young and junior managers. They begin to see the vision of a new world for their organization in terms of growth, profitability, and for themselves in terms of career advancement. If the rate of change is slower than expected due to any reason, managers begin to feel frustration and even disenchantment with MBO.

In spite of these obstacles and problems in MBO, it continues to be a way of managing the organization. In fact many of the problems and weaknesses of : MBO can be overcome by implementing it properly. 

5.6.4 MBO – Limitations & Specifications 

            Limitations: But management by objectives is fraught with certain difficulties in actual practice.

            First, subordinate managers are to be trained and coached for working under a philosophy of management by objectives.           

            Secondly, managers are to be provided with proper guidelines for goal-setting on their part by way of disseminating the planning premises and of imparting knowledge of the network of company objectives and policies.           

            Thirdly, the possibility of setting easy goals by managers in quantitative terms only without caring for their qualitative aspects is to be guarded against. 

            Fourthly, the tendency to overlook long-run objectives and to put emphasis on short-run objectives is to be checked on the part of managers. 

            Fifthly, as changes in top-level objectives call for a corresponding change in lower-level objectives, inflexibility in objectives may be introduced by the failure to revise lower-lever objectives, an inflexibility in objectives. 

            Finally, unless the entire pattern and style of managing are suitably adjusted to it, the system may degenerate into a management gimmick. As a matter of fact, the success of MBO programmes in industrial enterprises is as low as 20 to 40 per cent. 

Specifications for Objectives

A number of considerations are involved m setting objectives which are supposed to play a dominant role in management.

First, after defining the purpose and mission of business as to what the nature of business is, what is should be and what it will be, the objectives are formulated for any purposeful action. Otherwise, the objectives become good intentions or pious desires. In the context of the clear definition of the business, objectives become the strategies for committing resources and initiating actions. Developed in this way, objectives give direction to the business and provide standards for measuring performance.

Secondly, the translation of major objectives into derivative objectives should always be effected in intelligible, tangible and meaningful terms. Unless individual objectives are specified in definite terms of expected results and they are well understood by lower-level executives and operators, no successful accomplishment is practicable. Furthermore, in the hierarchy of objectives, the individual objectives must fit into the mould of overall objectives for the company to ensure effective management.

Thirdly, Objectives should be set in realistic terms rather than in idealistic terms.  Objectives which are not attainable and which signify the merge hope of top executives demoralize employees and retard their performance. But realistic objectives based on measured expectations provide incentives and job satisfaction for high performance.

Fourthly, short-range objectives should be recognized as distinct steps in the realization of long-range objectives. Otherwise, the achievement of long-range objectives becomes difficult, if not impossible. Long-range objectives involving plans for the distant future fail to make the individual objectives tangible and meaningful and to provide sensible standards for control. Such objectives may also appear as idealistic to the employees. All these difficulties can be removed by setting short-range objectives as different steps in long-range objectives.

Fifthly, as company objectives are of multiple characters, there arises the necessity of balancing various objectives through a greater concentration of resources and efforts on one or two objectives at a time. Rather than spreading resources over all objectives and stressing everything, the objectives are to be selective. Main and dominant objectives are given more care than others through the constant adjustment of short-run emphasis on such objectives.

Finally, the dynamic business environment makes the company objectives dynamic in nature, and such objectives call for changes along with changing time and situations. Although objectives are more stable than other plans, the periodic adjustment of objectives becomes necessary to keep pace with the progress of time and to cope with the expanding size of the business. Once a change is introduced in overall major objectives, the derivative objectives must also reflect the same degree of change to fit into the hierarchy of objectives. 


5.6.5 Prerequisites for Installing MBO Programme 

MBO is a philosophy, rather than a mere technique. As such, its installation requires a basic change in the organizational culture and environment. Many of the organizations could not use MBO successfully because of the lack of appreciation of this fact. Many of the organizations are designed so as to undermine the MBO Philosophy. This is because they could not create the proper environment required for the adoption of MBO. Below are stated some of the prerequisites and problems contained therein for installing the MBO programme:

            1. Purpose of MBO: MBO is a means rather than an end. It has to achieve certain things in the organization; it has to solve some problems. Thus, the organization should be very clear about the purpose for which it is being implemented. As already discussed, Howell has suggested a three stage evaluation of MBO: management appraisal and development, improvement of the productivity and profitability, and long range planning. Thus, an organization facing serious competition in both, in its product and factor markets and in the grip of secular decline, will tend to use MBO primarily for immediate improvements in productivity and profitability. On the other hand, an economically affluent organization might contemplate using MBO to change its management style so that it confines to a more advanced and germane model of man-in- the-organization. In both these cause, the details and emphases of the system will vary. Thus, if the purpose of MBO is not precisely defined and particular techniques in MBO suitable to the purpose are not emphasized, there is every possibility that MBO does not produce the results as anticipated. 

            2. Top Management Support. The presence or absence of top management support is a critical factor in determining the degree to which an MBO programme will be successful. Many studies on MBO suggest that out of the several factors dete1mining the success or failure of MBO, no single factor had greater conflation than the subordinate’s perception of superior’s attitude towards MBO. Thus subordinates who can see their superiors as having a positive approach towards MBO are themselves also like to show a positive attitude. MBO is a way of managing on a day-to-day basis rather than an exercise of writing objectives once a year. The manager has a responsibility of

(i) personally discussing with each subordinate the objectives that were set; (ii) evaluating progress made in achieving these objectives; and (iii) assisting and supporting the subordinate by removing obstacles that hinder his work accomplishment. Mere verbal or printed commitment is not enough. Vigorous involvement amongst the top management is essential and this must be seen and perceived as such throughout the organization. In short, an MBO programme is not an end in itself, rather a means to an end. Management support for using objectives to plan and to control, working on a continuous basis, increases the probability of success of a programme. 

            3. Training for MBO: Another critical factor in implementing MBO is the existence of some type of training programme for people who will be operating under it. Systematic training is required in the organization for disseminating the concepts and philosophy underlying MBO. The training should start with the concepts, philosophy, and need for MBO. If people in the organization are not clear about the reasons for which MBO is being undertaken, they will fear and may show their resistance because people tend to show fear to what they do not understand. This fear can lead to suspicion and mistrust which, in turn, undermines people’s enthusiasm which is very important during the initial stages of MBO. One consultant on MBO has remarked that ‘the importance of orientation and training should not be overlooked. I think it is important when you move into a programme like this, if you are starting from scratch, that people understand why and how you are developing the programme. Sometimes there is a certain amount of fear involved when a programme of this kind is involved.’ 

            4. Participation: Success with MBO required a commitment on the part of each individual involved in this type of system. Their commitment, in tum, is a function of their identification with and participation in the system. The subordinate should not perceive that MBO is another technique being used by his superior to control his performance. Such undesirable perception may be avoided by encouraging the subordinate to play an active role in the preliminary phases leading to the actual writing of the objectives. Subordinate’s role should include (i) the identification of important areas of accountability of his job; (ii) the determination of mutually agreeable performance measures; and (iii) the identification of this present performance level. However, the areas and scope for participation may vary in their relative emphasis according to the functional areas or hierarchical level to which an individual belongs. There cannot be a standard set of participation and each organization may make its own diagnosis about the extent and type of participation it desires under given conditions. In this context, Newport observes : ‘A change to participative management involves the establishment of a situation in which people are active rather than passive, responsible rather than irresponsible, and basically more independent than dependent. Yet our heritage is one for the most part of a belief in the necessity for highly structured organizational an arguments. To change such management ideologies adopted from generation to generation is a time consuming process.

In evaluating whether participation will work or not, following questions should be asked:

(i) Has the type of participation required been carefully thought out?

(ii) Does higher management really mean to share certain managerial prerogatives that supposedly go with their rank?

(iii) Is participation perceived as a trap by subordinates?

(iv) Have subordinates the right skills and knowledge in order to shed their defenses, and participate meaningfully?

            5. Feedback for Self direction and Self-control: One of the strong points in MBO system is that within this system a man can direct and control his own performance. For such a purpose, a man, who has performance objectives and knows how well he is achieving them, should know ‘where he stands’ and ‘where he is going’ so that he can make necessary adjustments to achieve the desired results on his own. As such feedback is necessary. Feedback is an essential ingredient in sustained learning and improvement in situations. By feedback, here, is not meant merely the regular supply of control information to each manager. The interpersonal aspect of feedback is equally important. Feedback under MBO should take two forms. First, the individual should get periodic reports on where he stands on an overall performance basis. This is required specially when the subordinate requires help from the superior. Second, feedback is necessary in the form of pe1iodic counseling and appraisal interview. The superior helps to evaluate progress, to identify problems. and to offer planning suggestions.

6. Other Factors. Besides the above major considerations, there are several other factors that influence the success of MBO. To the extent those responsible for implementation are aware of the various problems, they can make provisions in advance to overcome these. These are as follows: 

            (i) Implementing MBO at Lower Levels. If the full benefits of MBO are to be realized, it must be carried all the way down to the first line of the organization. There is a tendency for active participation in objective setting itself and for periodic feedback and review to diminish, the further down the management leader the programme gets. It such a tendency prevails, to that extent, the utility of MBO will be effective. 

            (ii) MBO and Salary Decision. One of the most elusive aspects of MBO is to tie the organization’s compensation system with the MBO programme. Though this problem does not arise at initial level, later on, this becomes a crucial issue. This is because rewards and penalties are among the accepted ways of exercising organizational authority over its members. There are various problems to the organizational remuneration with MBO. First, there is the problem of equating the degree of difficulty to the achievement of various objectives in various functional areas. Second if, the monetary differences between the superior and the average performer is not perceived being significant, the superior performer will lose enthusiasm to continue his outstanding performance. At the same time, minimum increases for average performers can also be discouraging. They may be doing their best work, and getting only a minimum increase may be perceived as punishment. However, such an opportunity may not exist in the organization. Third, some argue that to link MBO with reward- penalty systems would amount to bringing in the piece rate system from the shop floor to the manager’s office. Thus, linking MBO with reward and penalty is really a difficult problem. One way to overcome this problem is that rewards and penalties may be thought of in qualitative terms also, instead of the usual monetary alternatives. 

            (iii) Conflicting Objectives. One of the outcomes of MBO programme is that to a degree it builds a competitive climate. This is because MBO generates commitments. But it is often found in practice that over-commitment leads to competitive rivalry with respect to claims on the scarce resources of the organization. This may be dangerous if it exceeds the limits. The accomplishment of result in organizations largely requires interdepartmental cooperation and integration of efforts. The persons responsible for introducing MBO must be certain that competing objectives are not set. Some educational effort is needed to enable managers to adopt an overall approach to performance objectives. At the same time, MBO programme itself should not encourage sub-optimizing efforts in the short run. Inter group and intragroup pe1formance reviews at regular intervals should reveal the human dynamics of such sub optimal behavior. 

5.6.6 MBO in Indian Organizations

In India, there is very limited experience of MBO. In fact very few organizations have applied MBO and very few of them have shared their experience with others. MBO came to India initially through the multinational companies operating in India. At the initial stage, overseas corporate offices of multinationals provided expertise to the Indian associate companies. It was in 1969 that MBO made a systematic entry through a management institution : Administrative Staff College of India, Hyderabad, organized top management seminar on MBO in which heads of many organizations participated. Many of them appreciated the role of MBO as a system of management and applied it in their organizations.