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Chapter: Principles of Management : Planning

Managing By Objective (MBO)

MBO was first popularized by Peter Drucker in 1954 in his book 'The practice of Management’. It is a process of agreeing within an organization so that management and employees buy into the objectives and understand what they are.



MBO was first popularized by Peter Drucker in 1954 in his book 'The practice of Management’. It is a process of agreeing within an organization so that management and employees buy into the objectives and understand what they are. It has a precise and written description objectives ahead, timelines for their motoring and achievement.


The employees and manager agree to what the employee will attempt to achieve in a period ahead and the employee will accept and buy into the objectives.




“MBO is a process whereby the superior and the mangers of an organization jointly identify its common goals, define each individual’s major area 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.”


Features of MBO


MBO is concerned with goal setting and planning for individual managers and their units.


The essence of MBO is a process of joint goal setting between a supervisor and a subordinate.


Managers work with their subordinates to establish the performance goals that are consistent with their higher organizational objectives.


MBO focuses attention on appropriate goals and plans.


MBO facilitates control through the periodic development and subsequent evaluation of individual goals and plans.


Steps in MBO:


The typical MBO process consists of:


         Establishing a clear and precisely defined statement of objectives for the employee


         Developing an action plan indicating how these objectives are to be achieved


         Reviewing the performance of the employees


         Appraising performance based on objective achievement



1) Setting objectives:


For Management by Objectives (MBO) to be effective, individual managers must understand the specific objectives of their job and how those objectives fit in with the overall company objectives set by the board of directors.


The managers of the various units or sub-units, or sections of an organization should know not only the objectives of their unit but should also actively participate in setting these objectives and make responsibility for them.


Management by Objective (MBO) systems, objectives are written down for each level of the organization, and individuals are given specific aims and targets.

Managers need to identify and set objectives both for themselves, their units, and their organizations.


2) Developing action plans


Actions plans specify the actions needed to address each of the top organizational issues and to reach each of the associated goals, who will complete each action and according to what timeline. An overall, top-level action plan that depicts how each strategic goal will be reached is developed by the top level management. The format of the action plan depends on the objective of the organization.


3) Reviewing Progress:


Performance is measured in terms of results. Job performance is the net effect of an employee's effort as modified by abilities, role perceptions and results produced. Effort refers to the amount of energy an employee uses in performing a job. Abilities are personal characteristics used in performing a job and usually do not fluctuate widely over short periods of time. Role perception refers to the direction in which employees believe they should channel their efforts on their jobs, and they are defined by the activities and behaviors they believe are necessary.


4) Performance appraisal:


Performance appraisals communicate to employees how they are performing their jobs, and they establish a plan for improvement. Performance appraisals are extremely important to both employee and employer, as they are often used to provide predictive information related to possible promotion. Appraisals can also provide input for determining both individual and organizational training and development needs. Performance appraisals encourage performance improvement. Feedback on behavior, attitude, skill or knowledge clarifies for employees the job expectations their managers hold for them. In order to be effective, performance appraisals must be supported by documentation and management commitment.




            Motivation – Involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment.


Better communication and Coordination – Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the organization and also to solve many problems.

            Clarity of goals


            Subordinates have a higher commitment to objectives they set themselves than those imposed on them by another person.


            Managers can ensure that objectives of the subordinates are linked to the organization's objectives.




There are several limitations to the assumptive base underlying the impact of managing by


objectives, including:


            It over-emphasizes the setting of goals over the working of a plan as a driver of outcomes.


            It underemphasizes the importance of the environment or context in which the goals are set. That context includes everything from the availability and quality of resources, to relative buy-in by leadership and stake-holders.


            Companies evaluated their employees by comparing them with the "ideal" employee. Trait


appraisal only looks at what employees should be, not at what they should do.


When this approach is not properly set, agreed and managed by organizations, self-centered employees might be prone to distort results, falsely representing achievement of targets that were set in a short-term, narrow fashion. In this case, managing by objectives would be counterproductive.




The term 'Strategy' has been adapted from war and is being increasingly used in business to reflect broad overall objectives and policies of an enterprise. Literally speaking, the term 'Strategy' stands for the war-art of the military general, compelling the enemy to fight as per out chosen terms and conditions.


According to Koontz and O' Donnell, "Strategies must often denote a general programme of action and deployment of emphasis and resources to attain comprehensive objectives". Strategies are plans made in the light of the plans of the competitors because a modern business institution operates in a competitive environment. They are a useful framework for guiding enterprise thinking and action. A perfect strategy can be built only on perfect knowledge of the plans of others in the industry. This may be done by the management of a firm putting itself in the place of a rival firm and trying to estimate their plans.

Characteristics of Strategy


It is the right combination of different factors.


It relates the business organization to the environment.


It is an action to meet a particular challenge, to solve particular problems or to attain desired objectives.


Strategy is a means to an end and not an end in itself.


It is formulated at the top management level.


It involves assumption of certain calculated risks.



Strategic Planning Process / Strategic Formulation Process


Input to the Organization: Various Inputs (People, Capital, Management and Technical skills, others) including goals input of claimants (Employees, Consumers, Suppliers, Stockholders, Government, Community and others)need to be elaborated.


Industry Analysis: Formulation of strategy requires the evaluation of the attractiveness of an industry by analyzing the external environment. The focus should be on the kind of compaction within an industry, the possibility of new firms entering the market, the availability of substitute products or services, the bargaining positions of the suppliers, and buyers or customers.


Enterprise Profile: Enterprise profile is usually the starting point for determining where the company is and where it should go. Top managers determine the basic purpose of the enterprise and clarify the firm’s geographic orientation.


Orientation, Values, and Vision of Executives: The enterprise profile is shaped by people, especially executives, and their orientation and values are important for formulation the strategy. They set the organizational climate, and they determine the direction of the firm though their vision. Consequently, their values, their preferences, and their attitudes toward risk have to be carefully examined because they have an impact on the strategy.

Mission (Purpose), Major Objectives, and Strategic Intent: Mission or Purpose is the answer to the question: What is our business? The major Objectives are the end points towards which the activates of the enterprise are directed. Strategic intent is the commitment (obsession) to win in the competitive environment, not only at the top-level but also throughout the organization.

Present and Future External Environment: The present and future external environment must be assessed in terms of threats and opportunities.

Internal Environment: Internal Environment should be audited and evaluated with respect to its resources and its weaknesses, and strengths in research and development, production, operation, procurement, marketing and products and services. Other internal factors include, human resources and financial resources as well as the company image, the organization structure and climate, the planning and control system, and relations with customers.

Development of Alternative Strategies: Strategic alternatives are developed on the basis of an analysis of the external and internal environment. Strategies may be specialize or concentrate. Alternatively, a firm may diversify, extending the operation into new and profitable markets. Other examples of possible strategies are joint ventures, and strategic alliances which may be an appropriate strategy for some firms.


Evaluation and Choice of Strategies: Strategic choices must be considered in the light of the risk involved in a particular decision. Some profitable opportunities may not be pursued because a failure in a risky venture could result in bankruptcy of the firm. Another critical element in choosing a strategy is timing. Even the best product may fail if it is introduced to the market at an inappropriate time.


Medium/Short Range Planning, Implementation through Reengineering the Organization Structure, Leadership and Control: Implementation of the Strategy often requires reengineering the organization, staffing the organization structure and providing leadership. Controls must also be installed monitoring performance against plans.


Consistency Testing and Contingency Planning: The last key aspect of the strategic planning process is the testing for consistency and preparing for contingency plans.


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