Jan 6, 2009

Why Every Company Should Embrace MBO

Gary Eckstein Management 4 business, drucker, leadership, Management, mba, models, objectives, strategy

Management by Objectives (MBO) is a term and concept made popular by the late management guru Peter Drucker. In its simplest form, MBO is about communicating the vision, mission and strategy throughout the organization in terms that ‘make sense’ to the level of organization for which the objectives are being set (aligning the vision and mission is not discussed in this article).
In many ways, MBO has done for management what the DuPont model did for understanding finance throughout the organization; making it relevant to all parts of the organization (see Wikipedia for a very high-level and thoretical explanation of the DuPont  model. The Wikipedia article unfortunately fails to explain the true advantages of the model from a Management perspective which is communicating in a meaningful way to all levels of the organization how they can benefit the organization financially).

What is a Good Objective

An objective is defined excellently by dictionary.com as ‘something worked toward or striven for’. When we combine this definition with the acronym SMART (and variations thereof), which is often discussed in the same ‘breath’ as business objectives, we are able to set objectives for any level of an organization which compliment the strategy of the organization (and hence the vision and mission). As a quick reminder here is what SMART means:
•    Specific: The objective must not be too broad and must be defined.
•    Measurable: Self explanatory – you must be able to measure success against the objective.
•    Achievable: It must be possible to achieve the objective.
•    Relevant: The objective must compliment higher objectives and strategy and be relevant to the person/department for whom the objective is being set.
•    Time-based: Don’t leave objectives open-ended. Have a specific date as to then the objective must be met.

How Do Objectives Align Throughout an Organization?

Of course, objectives which are SMART are not necessarily good objectives unless they align with the strategy of the organization. The alignment of objectives and strategy starts at the executive level of an organization; the strategy is set at a high organizational level and then objectives (which are aligned to the strategy) are set for divisional and senior managers. Those managers then set objectives for their direct reports which will meet the higher objectives and so on (this is illustrated in the diagram below). By setting objectives for every level of the organization (which help to meet the strategy) ensures that the organization is aligned and working towards common goals.

 

Is MBO Perfect?

Is it possible that an organization can be successful without having clearly articulated and communicated objectives? I have never heard of a company that has been successful where that company hasn’t had objectives (how can employees know what to do and on what basis to make decisions without any objectives?).
There has been some criticism of Drucker’s explanation of Management by Objectives over the years with the prime negative criticism suggesting that MBO is too rigid. I believe that this criticism is unwarranted and Drucker, as far as I’m aware, didn’t ever preach that objectives should be set in stone. Drucker was a proponent of meaningful and relevant (i.e. SMART) objective setting.  As in SMART objective setting, there is a time element to each objective as objectives do change over time.

How to Implement MBO

Implementing formal MBO often involves a cultural change within the organization. In general, objectives are set by each manager for their direct reports and these objectives are aligned to the setting managers’ objectives. Objectives are normally set yearly as is measurement against objectives appraised yearly. For example, a typical MBO cycle for an operational team will be:
1.    Manager sets team objectives (i.e. objectives for all in his/her team)
2.    Manager meets with each team members and sets team and objectives particular to the individual.
3.    Manager meets with each team member quarterly to assess progress towards objectives.
4.    After a year, the individuals’ performance is appraised against the objectives and a score given (promotions or salary increases are often heavily influenced by the score given against objectives).
5.    The cycle repeats (but with new or modified objectives).

What are the Benefits of MBO?

There are many benefits to MBO with the most obvious being; common aims communicated throughout the organization, a common understanding of what constitutes success and all employees working towards common goals.
MBO is resoundingly successful when implemented correctly. The most common cause of failure of MBO is in the implementation of MBA (hint: without senior management buy-in the implementation of MBO will likely fail).