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Management by objectives (MBO), also known as management by results (MBR), is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to achieve them. The term "management by objectives" was first popularized by Peter Drucker in his 1954 book The Practice of Management.
The essence of MBO is participative goal setting, choosing course of actions and decision making. An important part of the MBO is the measurement and the comparison of the employee’s actual performance with the standards set. Ideally, when employees themselves have been involved with the goal setting and choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.
According to George S. Odiorne, the system of management by objectives can be described as a process whereby the superior and subordinate jointly identify its common goals, define each individual's major areas of responsibility in terms of the results expected of him, and use these measures as guides for operating the unit and assessing the contribution of each of its members.
Behind the principle of MBO is for employees to have a clear understanding of the roles and responsibilities expected of them. Then they can understand how their activities relate to the achievement of the organization's goal. Also places importance on fulfilling the personal goals of each employee.
Some of the important features and advantages of MBO are:
Objectives can be set in all domains of activities (production, marketing, services, sales, R&D, human resources, finance, information systems etc.).
Some objectives are collective, for a whole department or the whole company, others can be individualized. Managers must determine the mission and the strategic goals of the enterprise. The goals set by top-level managers are based on an analysis of what can and should be accomplished by the organization within a specific period of time. The functions of these managers can be centralized by appointing a project manager who can monitor and control activities of the various departments. If this cannot be done or is not desirable, each manager’s contributions to the organizational goal should be clearly spelled out.
Objectives need quantifying and monitoring. Reliable management information systems are needed to establish relevant objectives and monitor their "reach ratio" in an objective way. Pay incentives (bonuses) are often linked to results in reaching the objectives.
There are several limitations to the assumptive base underlying the impact of managing by objectives, including:
That context includes everything from the availability and quality of resources, to relative buy-in by leadership and stake-holders. As an example of the influence of management buy-in as a contextual influencer, in a 1991 comprehensive review of thirty years of research on the impact of Management by Objectives, Robert Rodgers and John Hunter concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Companies with CEOs who showed low commitment only saw a 6% gain in productivity.
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 use of MBO must be carefully aligned with the culture of the organization. While MBO is not as fashionable as it was before, it still has its place in management today. The key difference is that rather than 'set' objectives from a cascade process, objectives are discussed and agreed upon. Employees are often involved in this process, which can be advantageous.
A saying around MBO – "What gets measured gets done", ‘Why measure performance? Different purposes require different measures’ – is perhaps the most famous aphorism of performance measurement; therefore, to avoid potential problems SMART and SMARTER objectives need to be agreed upon in the true sense rather than set.
MBO has its detractors and attention notably among them W. Edwards Deming, who argued that a lack of understanding of systems commonly results in the misapplication of objectives. Additionally, Deming stated that setting production targets will encourage resources to meet those targets through whatever means necessary, which usually results in poor quality.
Point 7 of Deming's key principles encourages managers to abandon objectives in favour of leadership because he felt that a leader with an understanding of systems was more likely to guide workers to an appropriate solution than the incentive of an objective. Deming also pointed out that Drucker warned managers that a systemic view was required  and felt that Drucker's warning went largely unheeded by the practitioners of MBO.