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An MBO system usually starts at the top of the organization. Top management formulates and communicates the firm's overall corporate goals to managers at lower levels so they can formulate their own operational goals. Although there are varying versions of MBO, most MBO programmes contain the following elements:

 

(a)      Arranging organizational goals in a means-ends chain: In an MBO system a firm's corporate goals are structured in a means-ends chain (Figure 10.2). Top management formulates a set of long-range and short-term corporate objectives for the company as a whole. Divisional or functional managers participate in the goal-setting process to reflect their own desires and indicate the constraints that must be considered as well. These managers then work with their subordinates to formulate divisional or functional goals, which in turn are translated into group or individual goals. As shown in Figure 10.2, managers serve as linking pins that tie organizational units together at different levels. Through this organizational process, corporate objectives set at higher levels are communicated downward to lower levels to be used as a guide for formulating task goals. These lower-level goals are communicated upward, to be incorporated into the firm's corporate goals. Any differences between organizational levels or groups that show up during the goal-setting process will be negotiated by managers in linking-pin positions.

Figure 10.2: Organizational Goals in Means-Ends Chain

(b)      Engaging in joint goal setting: The most unique feature of MBO is joint goal setting. Supervisors meet with their subordinates individually or in groups to formulate a set of objectives for the group or individual. The goal-setting process has the following steps:

i.                    Identify key performance or result areas (KRAs), such as increasing loans, reducing loan risk or employee training.

ii.                   Define the expected results, such as increasing loans by 5 per cent, reducing bad loans by 10 per cent or training 100 employees.

iii.                 Assign specific responsibilities to employees. This step is needed to make employees accountable for accomplishing their tasks.

iv.                Define authority and responsibility relationships. This step clarifies who has what authority and responsibility and who is reporting what to whom.

(c)       Conducting periodic progress reviews: Performance can be periodically reviewed to determine progress. Supervisors and subordinates should meet regularly to review their progress toward goal attainment. The reviews should be held monthly or quarterly. These reviews serve as a built-in feedback mechanism for an MBO system. Since individual or group goals are specifically defined, usually in quantifiable terms, employees can compare their progress at review time against the specified goals. Any performance variations or changes in goals be discussed during the review sessions.

(d)      Conducting annual performance review: At the end of an MBO cycle, usually on an annual basis, the manager meets subordinate(s) to assess the employee‘s or the group's contribution to the organization. While periodic review is intended to identify and solve specific performance problems, the annual review is conducted to assess and reward one's overall contribution to the organization. Because employees are evaluated on their performance results, MBO is often called a result-based, performance appraisal system.

 

MBO Benefits

 

MBO is hailed as the greatest innovation in years. Advocates argue that “it is the successor to Taylor's ‘mental revolution‘ – a new way of thinking about and engaging in, collective effort”. It is claimed that when an organization is managed by objectivess, it becomes performance-oriented, it grows, develops and becomes socially useful in many ways:

(a)      Clearer goals: MBO produces, clear and measurable performance goals. Goals are set in an atmosphere of participation, mutual trust and confidence. There is a meeting of minds between the superior and the subordinates where the latter will be shooting for right goals. Participation increases commitment, additionally, it also results in setting better goals. Research experience also indicates that individuals are more likely to be highly committed to objectives that they had a hand in setting. Joint goal-setting sessions enhance team spirit and inter-group communication.

(b)      Better planning: MBO programmes sharpen the planning process. Specific goals are products of concrete thinking. They tend to force specific planning setting highly specific, challenging and attainable goals; developing action programmes tied to a definite schedule; providing resources for goal accomplishment; discussing and removing obstacles to performance – all these activities demand careful advance planning. Passivity gives way to activity.

(c)       Facilitates control: MBO helps in developing effective controls. A clear set of verifiable goals provides an outstanding guarantee for exercising better control.

(d)      Objective appraisal: MBO provides a basis for evaluating a person‘s performance since goals are jointly set by superior and subordinates. By setting specific goals, MBO allows persons to better control their own performance. The individual is given the freedom to police his own activities. A pleasant and stimulating organizational climate prevails where individuals are not subjected to domination and control from ‘upstairs'. Instead, they are trained to exercise discipline and self-control. Management by self-control replaces management by domination. Appraisals would be more objective and impartial since employee performance is evaluated against preset, verifiable objectives.

(e)      Motivational force: Both appraiser and appraisee are committed to the same objective. It forces managers to think of planning for results rather than planning for activities or work. It compels forward planning and living life in an anticipatory mode rather than responding to events. Clarified roles reduce ambiguity and employee anxiety. It allows managers increased opportunities to provide subordinates with a better fix on the job; to clarify for subordinates the path to personal rewards. In the words of Mervin Kohn, “MBO gives an individual or groups some leeway to use imagination or creativity to accomplish the mission; fosters a feeling of independence; provides an incentive to achieve the goal and permits a feeling of true participation in the task from its inception”.

(f)       Better morale: MBO encourages commitment rather than rote compliance. It is at once functional in terms of what top management demands and developmental in terms of people at work. The two techniques, participative decision-making and two-way communication, encourage the subordinate to communicate freely and honestly. It minimizes the possible misunderstanding about what is expected of each individual and organizational sub-units. Participation, clarified goals, and improved communication – all will have a tonic effect on the psychology of subordinates.

(g)      Result-oriented philosophy: MBO is a result-oriented, practical and rational management philosophy. Managers are forced to develop specific individual and group goals, develop appropriate action plans, marshall the resources properly and establish needed control standards. It helps manager to avoid management by crisis and ‘fire fighting'.

 

MBO Limitations

 

MBO is not a panacea, cure-all for organizational problems. Quite often many organizations look to MBO as an instant solution to their problems. They fail to recognize that MBO demands careful planning and implementation, to be successful. This technique, like all others, can be no better than the people who try to apply it. Some of the problems preventing MBO from achieving its best results may be catalogued thus:

(a)      Pressure-oriented: MBO may prove to be self-defeating in the long-run since it is tied with a reward-punishment psychology. It is a clear violation of the integrity of subordinate's personality. MBO programmes sometimes, discriminate against superior performers. It tries to indiscriminately force improvement on all employees and at times, may penalize the very people who are most productive in the organization.

(b)      Time consuming: MBO demands a great deal of time to set objectives carefully at all levels of the organization. Initially to instill confidence in subordinates in the ‘new system' superiors may have to hold many meetings. The formal, periodic progress and final review sessions also consume time.

(c)       Increased paperwork: MBO programmes introduce a tidal wave of newsletters, instruction booklets, training manuals, questionnaires, performance data, reports into the organization. To stay abreast of what is going on in the organization managers may demand regular reports and data in writing resulting in    ‘gruelling exercise in filling out forms'. It has created one more ‘paper mill'. According to Howell, MBO's effectiveness is inversely related to the number of MBO forms.

(d)      Goal-setting problems: MBO works when important measurable objectives are jointly agreed upon. It works less when; (i) Verifiable goals are difficult to set. (ii) Goals tend to take precedence over the people who use it. MBO focuses on end results and it may foster an attitude that any action is acceptable as long as it helps to achieve the goals. Consequently, unwise decisions are made that would ultimately harm the organization. (iii) Goals are inflexible and rigid. (iv) There is over-emphasis on quantifiable and easily measurable results instead of important results. Many important qualitative goals like job satisfaction, employee attitudes are lost sight of (attempts to set measurable goals force managers to search for a magic figure for each area). (v) Overemphasis on short-term goals at the expenses of long-term goals. Attempts to show results force managers to curtail cost in areas where a long-term perspective would be more fruitful to the organization in the long-run.

(e)      Organizational problems: MBO is not a palliative for all organizational ills. It is not for everybody. MBO creates more problems than it solves when:

i.                    there is failure to teach the philosophy to all participants. Too often MBO is introduced across the organization with little explanation, training or help

ii.                   there is failure to limit objectives. Too many objectives obscure priorities and create a sense of fear and panic among subordinates

iii.                 it is inconsistent with management philosophies. Under MBO programmes managers are forced to take a 180º turn from their present ways of thinking and acting. Instead of planning and deciding things for others, they are advised to invite subordinates and plan for work in an atmosphere of participation, much to their dislike

iv.                the programme is used as a ‘whip' to control employee performance

v.                  it leads to a tug-of-war in which the subordinate tries to set the lowest possible targets and superior the highest

vi.                managers turn MBO into a sham and start ‘playing games'.