Elements of the MBO System

by Sree Rama Rao on January 7, 2009

MBO systems vary enormously. Some are designed for use in a sub unit; others for the organization as a whole. Some emphasize corporate planning, others stress individual motivation. Most effective MBO programs share the following six elements:

(1) Commitment to the programs. At every organizational level, managers’ commitment to achieving personal and organizational objectives and to the MBO process is required for an effective program. Managers must meet with those they supervise, first to set objectives and then to review progress towards these objectives.

(2) Top level goal setting: Effective MBO programs usually start with the top managers, who determine the organization’s strategy and set preliminary goals that resemble annual objectives in their content and terms. An examples at Sega might be ‘a 5 percent increases in sales next quarter’ or ‘no increase in overhead costs this year’. This procedure gives both managers and staff members a clearer idea of what top management hopes to accomplish and shows them how their own work directly relates to achieving the organization’s goals.

(3) Individual goals: In an effective MBO program, each manager and staff member has clearly defined job responsibilities and objectives. The purpose of setting objectives in specific terms at every level is to help employees understand clearly just what they are expected to accomplish and to help each individual plan effectively to achieve his or her targeted goals.

(4) Participants: As a general rule, the greater the participation of both managers and employees in the setting of goals, the more likely the goals will be achieved. One of the hallmarks of successful quality management programs is the joint participation in setting goals.

(5) Autonomy in implementation of plans: Once the objectives have been agreed upon, the individual enjoys wide discretion in choosing the means for achieving them, without being second guessed by higher ranking mangers.

(6) Performance review: Managers and employees periodically meet to review progress towards their objectives. During the review, they decide what problems exist and what they can each do to resolve them. If necessary, objectives may be modified for the next review period.

Evaluation of MBO: Do MBO concepts really work? In their review of the literature on MBO research, Stephen J Carroll and Henry L Tosi focused on three key concepts – specific goal setting, feedback on performance, and participation, to determine whether the optimism about MBO was justified. They concluded that individuals who are successful in achieving the goals they have set, tend to aim for increased performance. Employees who receive specific and timely feedback perform better, and those who participate in goal setting show higher performance levels. The very process of participation leads to increased communication and understanding between managers and those they supervise.

Operationalizing Measurable Annual Objectives:

Examples of Deficient Annual objectives:

* To improve morale in the divisions (Plant, department etc)

Examples of Annual objectives with measurable criteria for performances:

* To reduce turnover (absenteeism, number of rejects. etc) among sales managers by 10 percent by January 1, 1995. Assumption: Morale is related to measurable outcomes (i.e. high and low morale are associated with different results).

* To improve support of the sales effort

* To reduce the time lapse between order date and delivery by 8 percent (two days) by June1, 1995.

* To reduce the cost of goods produced by 6 percent to support a product price decrease of 2 percent by December1, 1995.

* To increase the rate of before or on schedule delivery by 5 percent by June 1, 1995.

* To develop a terminal version of the SAP computer program

* To develop a terminal version of SAP capable of processing X bits of information in time Y at a cost not to exceed Z per 1000 bits by December 1, 1995. Assumption: There is virtually an infinite number of ‘terminal’ or operational versions. Greater detail of specificity defines the objectives more precisely.

* To enhance or improve the training effort.

* To increase the number of individuals capable of performing X operation in manufacturing by 20 percent by April 15, 1995.

* To increase the number of functional heads capable of assuming general management responsibility at the division level by 10 percent by July 15, 1995.

* To provide sales training to X number of individuals, resulting in an average increase in sales of 4 percent within six months after the training session.

* To improve the business’s image

* To conduct a public opinion poll using random samples in the five largest US metropolitan markets and determine averages scores on 10 dimensions of corporate responsibility by May 15, 1995. To increase our scores on those 10 items by an average of 7.5 percent by May 1, 1996.





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