Page 270 - Introduction to Business

244 PART 2 Managing Business Behavior

Management by Objective

management by objective (MBO) A top- These days, management by objective (MBO) is looked on as a relatively simple
down approach to management that concept of running a successful organization. Peter Drucker in his classic work, The
requires full collaboration of employees
right down the line to be a success Practice of Management (1954), first argued that management must be driven by
objectives if the firm is to succeed. In other words, managers should be directed
and controlled by objectives, rather than dictates from the boss, and should be paid
for performance. As the name suggests, the paramount issue in MBO is how to suc-
cessfully achieve company objectives. To become effective, this management phi-
losophy must be endorsed and implemented by the top management of the com-
pany. As can be seen in Exhibit 7.7, MBO is essentially a top-down approach to
running a firm, and it requires full collaboration of employees right down the line
to make it a success. Also, if the top managers of the company do not buy into the
MBO concept, the system will fail, since middle or junior managers by themselves
will not be able to implement the program. Having adopted the MBO concept, the
firm will then need to follow the following steps in the sequence indicated:

1. Clearly spell out corporate goals, which are based on the company’s mission
statement. Corporate goal setting could be a time-consuming affair, since it is
not restricted to financial objectives like profits and return on investment, but
includes such issues as implementing diversity, affirmative action, ethics, and
upward mobility in the workplace. Goal setting is a dynamic process, and it
should be altered or refined as the business environment changes or if the
goals are found to be unrealistic or inadequate.
2. Depending on the complexity of the organization, the manager or managers who
report to the chief executive officer meet with the employee team to explain what
the goals of the group as a whole are and obtain employee input. The manager
tries to identify how each employee could contribute to achieving the group’s
objective, by which the manager and the group will be judged and compensated.

EXHIBIT 7.7

Major Stages of a Typical MBO Program

Stage 1
MBO program endorsed by top management

Stage 2
Corporate goals based on mission statement

Stage 3
Employee goals set collaboratively with manager

Stage 4
Periodic review and adjustment of employee goals

Stage 5
Employee’s quantitative and qualitative output evaluated

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