MBO is a system of systematic planning of what needs to be executed in the short term to implement the most effective action to take advantage of opportunities and to achieve the goals of the sales department and of the organization. After Peter Drucker introduced the phrase management by objectives (MBO) in 1954 his book, The Practice of Management, American businesses began embracing the notion with what often amounted to evangelical dedication, and during the 1960s and 1970s MBO was the most fashionable of all management practices.
Many companies adopted some form of MBO, which, as Drucker originally proposed, asks managers to focus on results, or outputs. However, MBO has fallen into disuse and many original MBO systems have been altered past recognition and usefulness. What has happened to such a strong concept? Has MBO proven not to be as effective as first hoped? Has MBO failed? Management experts in consulting firms, in business, and in the academic community are in general agreement that the problems with MBO stem from the users, not from the system, which is still regarded as one of the best, most effective, theoretical management practices ever conceived. The two biggest problems with MBO are lack of clear understanding of MBO procedures and hasty, inadequate implementation.
Management by objectives can work in any size organization if the procedures are understood and managers are patient in letting the system be accepted. First, MBO is an effective strategic planning and execution system; it is not an effective performance evaluation or reward system. Second, MBO is a bottom-up, process-oriented and team-oriented planning system, not a top-down command-and-control system.
Goals are defined as being relatively few and long-term in their focus. Objectives are defined as being relatively more numerous and short-term in their focus. The most important thing to remember about objectives is that the critical few are the ones to concentrate on. The critical few are the 20% of the objectives that will produce 80% of the results. One of the biggest problems many organizations have with MBO is that they set too many objectives, especially too many trivial ones. Set only those objectives that a unit or team can get their arms around—five to seven maximum—five is best. Also, remember that objectives are working tools, not public-relations statements designed to impress people. You cannot set effective objectives if you don’t have a “systematic way of exposing reality and acting on it.”
The first phase of the MBO process is planning in order to identify the critical few key result areas that will produce the vast majority of results. Some examples of key result areas for a sales department are:
High prices relative to the competition.
Share of advertising revenue
Staff development and training
Steps in the MBO Process
Describe roles and missions: “who does what?”
Define key result areas.
Identify indicators of effectiveness: “what is good performance?”
Set objectives with a bottom-up process described above: “To (action verb) (single key result) by (target date) at (cost, if appropriate).” EXAMPLE: “To increase average spot prices 15% by the end of the second quarter at current expense levels.”
Decide on task-oriented and process-oriented action plans.
The team monitors progress: information, reports, conversations, communication (constant, open, and informal).
Communication is the grease for the MBO wheel, it keeps everyone running smoothly. Teams must continually communicate to everyone (management included) progress toward achieving its objectives, and management must communicate with everyone how the organization is doing in meeting its objectives by using newsletters, wall charts, memos, and departmental meetings, for example.
Everyone evaluates results (management and teams), make necessary adjustments, and set new objectives. MBO must be a continuous process; it must be part of an on-going system. Leave out a step and the system breaks down. Team and individual performance coaching is an integral part of the system. MBO cannot work on just a macro level, it must be managed on a micro level and involve everyone in the process. Everyone must know what the overall objectives of the organization are and what the organization's department and teams' goals are.
Finally, the objectives in an MBO system must be inextricably linked to an organization’s mission statement. Every objective must help accomplish the overall mission and then managers must “manage to the mission.”