How it Works: Management By Objectives (MBO)

The idea of management by objectives (MBO), first outlined by Peter Drucker and then developed by George Odiorne, his student, was popular in the 1960s and 1970s. In his book “The Practice of Management”, published in 1954, Drucker outlined a number of priorities for the manager of the future. Top of the list was that he or she “must manage by objectives”. John Tarrant, Drucker’s biographer, reported in 1976 that Drucker once said he had first heard the term MBO used by Alfred Sloan, author of the influential “My Years with General Motors”.

With the benefit of hindsight, it may seem obvious that managers must have somewhere to go before they set out on a journey. But Drucker pointed out that managers often lose sight of their objectives because of something he called “the activity trap”. They get so involved in their current activities that they forget their original purpose. In some cases it may be that they become engrossed in this activity as a means of avoiding the uncomfortable truth about their organisation’s condition.

MBO received a boost when it was declared to be an integral part of “The HP Way”, the widely acclaimed management style of Hewlett-Packard, a computer company. At every level within Hewlett-Packard, managers had to develop objectives and integrate them with those of other managers and of the company as a whole. This was done by producing written plans showing what people needed to achieve if they were to reach those objectives. The plans were then shared with others in the corporation and coordinated.

Bill Packard, one of the two founders of Hewlett-Packard, said of MBO:

"No operating policy has contributed more to Hewlett-Packard’s success … MBO … is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type … Management by objectives, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility."

MBO urged that the planning process, traditionally done by a handful of high-level managers, should be delegated to all members of the organisation. The plan, when it finally emerged, would then have the commitment of all of them. As the plan is implemented, MBO demands that the organisation monitor a range of performance measures, designed to help it stay on the right path towards its objectives. The plan must be modified when this monitoring suggests that it is no longer leading to the desired objective.

One critic claimed that MBO encouraged organisations to tamper with their plans all the time, as and when they seemed no longer to be heading towards their latest objective. Many firms came to prefer the vague overall objectives of a mission statement to the firm, rigid ones demanded by MBO.

After a while, Drucker himself downplayed the significance of MBO. He said:

"MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don’t."

Management by objectives is now largely ignored. Its once widely used abbreviation, MBO, has been taken over by management buy-out, the purchasing of a company by a group of its managers with the aim of making as much money for themselves as possible.