Management by Objectives (MBO)

Management by Objective is a process whereby the superior and the subordinate managers of an enterprise
jointly identify its common goals. It is a rational and systematic approach to management wherein
measurable goals are set up in consultation with subordinate managers and the contribution of each
individual is judged in terms of such goals. This concept was originated by “Peter F. Drucker” in the year
1954 in his book – The Practice of Management and he is also known as the Father of MBO (Management
by Objectives). MBO guides the subordinates to fulfill the specified objectives within the given time
deadline. It critically reviews organizational performance on a regular basis.
As many changes have come about due to the new economic world so, the demands and expectations from
subordinates working in the organization have been modified extremely. So, the old techniques got
redundant to deal with the changes. As a result, new techniques originated and Management by Objectives
is one of that new techniques. Management by Objectives is considered to be an important process because
it makes it easy for the organization to achieve its objectives and enhance its productivity.
According to Koontz and Weihrich,“Management by Objectives is a comprehensive managerial system that
integrates many key managerial activities in a systematic manner and it consciously directed toward the
effective and efficient achievement of organizational and individual objectives.”
According to George Odiorne“MBO is a process whereby the superior and subordinate managers of an
organization jointly identify its [the organization’s] common goals, de- fine each individual’s major area of
responsibility in terms of the results expected of an individual, and use these measures as guides for
operating the unit and assessing the contribution of each of its members.”
Features of Management by Objectives (MBO)
1. Goal-oriented: MBO is goal-oriented rather than work-oriented as it focuses on what must be
accomplished rather than on how it is to be accomplished.
2. Participation of all: It involves the participation of subordinate managers in the goal-setting process. It
requires all key personnel to contribute the maximum to achieve the overall objectives.
3. Focuses on KRAs: MBO focuses on measurable and verifiable goals in the key result areas. It helps to
balance the goals of all the key personnel.
4. Dynamic: MBO is a dynamic system which integrates company’s needs to achieve the objective.
5. Managerial philosophy: Management by Objectives is a managerial philosophy and not just a simple
technique or method. Because a philosophy directs and influences every element of management,
whereas a technique is only useful in certain areas. MBO is an approach involving different techniques to
more finest management.
6. Serve as a criterion: To evaluate the complete performance of the organization, corporate, functional
and personal goals under Management by Objectives serve as a criterion. Managers will be able to
assess the efficiency of subordinates through the comparison of goals and actual results, and in some
ways, the top level can assess the efficiency of other managers too.
7. Continuous process: MBO is a continuous process of goal setting, periodic appraisals and modification of
goals and performance.
Objectives of Management by Objectives (MBO)
The objectives of Management by Objective are:
1. To aid employees in realizing their responsibilities at work. Each employee has key result areas
customized to their interest, areas of expertise, and academic background. The staff members are aware
of what is required of them because of MBO.
2. To make employees feel valuable in the organization. Every employee plays a unique role in helping the
company achieve its goals and objectives. Each employee plays a different role at work. Each person
eventually begins to feel devoted to the group and feels valuable in the organization. They typically stay
with the company for a longer period and provide significant contributions.
3. To guarantee the effectiveness among employees. It fosters an encouraging atmosphere at work,
allowing people to appreciate their jobs rather than viewing them as an obligation. Employees who use
the MBO process are extremely enthusiastic and dedicated.
4. To produce clearly specified hierarchies. It guarantees open-mindedness on all fronts. The Managing
Director is not approachable directly by any superior in any company. First, he or she would
communicate with their reporting boss, who would then convey the information to the senior, and so
on. Each person understands where they fit within the company.
5. To set a benchmark for every employee. For each member of the team, the managers establish
different organizational and personal goals. Detailed job lists are provided to each employee. Eventually,
it eliminates unnecessary complications and works incompatibility.
6. To serve as a device for organizational control and integration.
7. To serve as a basis for judgments about salary and promotions.
Advantages of Management by Objectives (MBO)
The following are the certain advantages regarding Management by Objectives (MBO):
1. More Clarity towards Objectives: MBO aids in defining organizational structures and responsibilities.
According to the demands of the job given, authority and responsibility are allocated. Setting objectives
without giving the necessary people the necessary power is useless. The organizational roles should be
 designed around the primary outcomes predicted by those holding them. Adopting Management by
Objectives in the organization will help the organization in identifying its shortcomings.
2. Better Management: MBO leads to enhanced and superior management. Setting goals for each
action and person, and ensuring that they are met, are necessary for better management. In addition to
assisting in goal-setting, MBO also makes sure that goals and resources are coordinated. Better and
more goal-oriented preparation is required for setting goals. MBO encourages strategic planning as
opposed to simply scheduling tasks or activities. Managers will come up with strategies for
accomplishing goals. The goals also serve as performance standards and controls.
3. Enhanced Individual Commitment: The primary advantage of MBO is that it motivates employees to
dedicate themselves to achieving predetermined goals. People typically just complete the tasks that
have been given to them. They carry out their job as usual and adhere to the directives of their superior.
But in the case of MBO, each individual’s goal is well stated and with their own agreement. Individuals in
the organization get the chance to present their own thoughts to employers, debate the benefits and
drawbacks of different recommendations, and take part in determining the ultimate goals.
4. Establishing Controls: MBO system aids in the creation of efficient controls. Setting standards and
determining any variations from those standards are necessary steps in establishing controls. Verifiable
targets are established in MBO, and overall performance will help in determining any shortcomings in
the outcomes. Everyone knows what is required of them, these yardsticks serve as unambiguous checks.
In order to achieve control, MBO must be observed.
5. Improved Communication: Managers and staff members establish and manage goals collectively, so
they get to communicate more frequently to discuss these goals’ progress. This provides employees with
more choices to communicate issues or ask queries from managers. Success requires
effective communication, which can lead to increased productivity, improved interpersonal
relationships, and work satisfaction. It is for this reason that it is said communication is the key.
6. Motivation and Morale: Because of MBO interpersonal relations are better as there is involvement and
recognition of people at all levels. It provides greater opportunities to make personal contributions and
accept more responsibility. Commitment and morale of the employees are high because of participative
goal setting and two-way communication.
Disadvantages of Management by Objectives (MBO)
The following are some of the disadvantages/limitations related to the Management by Objectives:
1. Goal-setting problem: The primary focus of the MBO technique is to set targets or goals. Setting goals is
not a simple process. To reach the findings, a lot of knowledge is needed. In order to assess the
performance, the goals must be provable. Some goals might not be able to be verified, so caution should
 be observed while identifying them. The targets should not be established immediately otherwise MBO
could hold the company accountable.
2. Time-consuming: As MBO requires a great deal of time in setting measurable goals through consensus, it
is a time-consuming process. Several meetings have to be held to instil confidence in subordinates.
3. More focus on short-term objectives: Short-term goals are frequently established in the majority of
MBO programs. The tendency of managers to establish goals for a year or less is to place an excessive
emphasis on short-term objectives at the expense of long-term objectives. They should accomplish their
short-term objectives in a manner that also aids in the accomplishment of their long-term objectives. It’s
possible that a specific issue will make short-term and long-term goals incompatible. Therefore, both
short-term and long-term targets should be properly prioritized.
4. Incapable to provide guidelines to goal setters: MBO will not be successful if the people who set goals
aren’t provided with the right instructions for doing so. The managers who will assist in establishing
goals should be aware of the key organizational policies and the position they are placed at. They should
be knowledgeable about future planning theories and assumptions. If these crucial elements are not
understood, this method or this new technique will actually fail.
5. Inflexibility: MBO may introduce inflexibility in the organization. Once the goals are set down, the
superior may not like to modify them due to fear of resistance from the subordinate.
6. Increased paperwork: MOB requires lots of newsletters, booklets, manuals, reports, etc., Employees
have to fill in forms and submit detailed reports on their performance, which reduces the effectiveness
of MBO.
 Management By Exception (MBE)

Definition: Management by Exception, shortly called as MBE is a management style or philosophy

that empowers the manager to concentrate on the exceptionally important or critical matters and
taking important decisions while facilitating the front line workers to complete the day to day
activities.

It aims at keeping the focus of the management on extremely important tasks and problems or
areas in need of action.

Components of Management By Exception

The six fundamental components of Management By Exception are:

1. Measurement: Assignment of values to the past and present performances, so as to easily

recognize an exception.
2. Projection: Forecasts that measurement which is relevant to the organizational objectives and
extends the same, to future expectations.
3. Selection: Determines the parameters used by the management to pursue organizational
objectives.
4. Observation: Measurement of existing performance so that the managers are having the
knowledge of the existing state of affairs of the organization.
5. Comparison: Compare the actual and planned performance and indicating the exception which
needs managerial action and reports the variances.
6. Decision Making: Prescription of the course of action which needs to be taken so as to ensure
that the performance is back in control or to adjust expectations, which represents the changing
conditions.
This principle requires the compliance of the principle of delegation of authority, i.e. a substantial
degree of delegation must be present in the organization. According to this principle, any issue of
unusual or non-recurring nature needs to be referred upwards, so as to be decided by the top tier
executives and managers.

Process of Management By Exception

The steps involved in the process of Management by Exception (MBE), are listed as under:

 Identifying and describing Key Result Areas (KRA).

 Establishing standards and determining an acceptable level of deviations.
 Making Comparison of actual result with that of the expected or the standard result.
 Ascertaining variance.
 Analyzing the causes of such variance (deviation).
 Strategizing and taking necessary actions wherever required and possible.
It is a well-known fact that if an organization seeks to control everything, resultantly it controls
nothing. Hence, only material deviations, that exceed the specific limit, are referred to the
management. Meaning that any information reflecting a considerable variance from the budgeted
or planned results are taken to the notice of the top-level management.

Therefore, if the company’s policies lay down 3% increase in the overheads as an acceptable
range, then anything over and above will be informed to the top executives.

Once the management is made aware of such deviation, it should be analyzed to know the causes
for such deviation, be it defective process, the inadequacy of resources, unrealistic standards, etc.
Thereafter the actual cause is identified; corrective action is taken to overcome, at the
appropriate level.

Importance of Management By Exception

The points given below will discuss the importance of management by exception:

 Effective utilization of manager’s time, by driving their attention to those areas that need
managerial experience and action.
 Timely identification of discrepancies and its causes
 Prompt decision making and a suitable flow of action.
 Assists the firm in growing and improving its output.
 Optimum utilization of the organization’s resources.
 Better delegation of authority
 Identification of crises
 Enhances degree of communication

In a nutshell, in management by exception, the manager steps in, only when the employees fail to
meet out their performance standards.
Difference Between Management by Objectives (MBO) and Management by Exception
(MBE)
Management by Objectives (MBO) and Management by Exception (MBE) are two management
strategies. The former focuses on setting specific, measurable, achievable, relevant, and time-bound
objectives for individuals and teams within an organization, and the latter identifies and addresses
significant deviations from expected performance.

What is Management by Objectives(MBO)?

Management by Objectives (MBO) is a management strategy that focuses on setting specific,
measurable, achievable, relevant, and time-bound objectives for individuals and teams within an
organization. The process involves collaboration between managers and employees to establish
objectives that are aligned with the organization’s overall goals, and regular communication and
feedback to ensure progress toward those objectives. MBO provides a framework for goal-setting
and performance management that emphasizes employee participation, ownership, and
accountability. It encourages employees to take responsibility for their work and align their efforts
with the organization’s mission and objectives. MBO also promotes ongoing communication and
collaboration between managers and employees, which can help to identify and address
performance issues and provide opportunities for coaching and development.
What is Management by Exception(MBE)?
Management by Exception (MBE) is a management approach that identifies and addresses
significant deviations from expected performance. The idea behind MBE is that managers should
focus their attention on addressing exceptions or issues that deviate from the norm, rather than
spending time monitoring routine operations. In MBE, managers establish performance standards
and thresholds for various areas of the organization, such as sales, production, or customer service.
Managers intervene to address the issue when actual performance falls outside these standards or
thresholds. This allows managers to focus their time and resources on areas of the organization that
require attention, rather than micromanaging routine operations. MBE is particularly useful in
organizations with large volumes of data or complex operations, where it can be challenging to
monitor all activities effectively. By focusing on exceptions or deviations, managers can prioritize
their efforts and ensure that they address the organization’s most critical issues.

Difference Between Management by Objectives (MBO) and Management by Exception

(MBE)

Bases Management by Objectives (MBO) Management by Exception (MBE)

Focus MBO focuses on setting specific, MBE focuses on identifying

measurable, achievable, relevant, and significant deviations from expected
time-bound objectives for individuals and performance. It focuses to address
teams. It focuses to achieve objectives issues or exceptions that deviate
 Bases Management by Objectives (MBO) Management by Exception (MBE)

that contribute to the organization’s

from expected performance.
overall success.

MBE is based on exception

MBO is based on goal setting. The basis of reporting. The basis of MBE is to
Basis MBO is to establish specific objectives and identify significant deviations from
measure progress toward achieving them. expected performance and take
corrective action.

MBO is a proactive approach to MBE is a reactive approach to

management. It involves setting goals and management. It involves identifying
Approach
proactively managing progress toward issues or exceptions and reacting to
them. them.

MBE, managers only monitor

MBO, managers actively monitor progress
deviations from expected
toward objectives. It requires managers to
performance. It requires managers
Monitoring monitor ongoing progress toward
to intervene when significant
objectives and provide feedback and
deviations from expected
guidance to employees.
performance occur.

MBO emphasizes ongoing communication

MBE communication is typically
and feedback between managers and
limited to reporting exceptions or
employees. It requires ongoing
Communication issues. Its communication is limited
communication between managers and
to reporting significant deviations or
employees to ensure that progress is being
issues.
made toward objectives.

MBE, managers intervene to address

MBO, managers intervene to support and
significant deviations from expected
guide employees toward achieving
performance. It places more
Accountability objectives. It encourages employees to
accountability on managers to
take ownership of their objectives and be
identify and address significant
accountable for achieving them.
deviations.

MBO, managers intervene to support and MBE, managers intervene to address

guide employees toward achieving significant deviations from expected
Intervention objectives. In this managers intervene to performance. In this managers
provide guidance and support to intervene to address issues that
employees. deviate from expected performance.