MBO and MBE

What is MBO?
• Management by objectives (MBO) is a systematic and
organized approach that aims to increase organizational
performance by aligning goals and subordinate
objectives throughout the organization.

• It allows management to focus on achievable goals and
to attain the best possible results from available
resources.

• One of the concepts of MBO is that all managers should
participate in the strategic planning process for better
implementation of plans. It includes ongoing tracking
and feedback in the process to reach objectives.

Origin of the MBO Concept:
• MBO was first outlined by Peter Drucker in 1954 in his
book 'The Practice of Management'.

• Since the book introduced the concept, MBO has been
accepted and implemented in many businesses like:

General Motors,
General Electrics,
General Foods, etc

Core Concept of MBO:
According to Drucker managers should "avoid the activity
trap", that is, getting so involved in their day to day activities
that they forget their main purpose or objective.

MBO is primarily a tool for strategic planning, employee
motivation, and performance enhancement.

It intends to improve communication between employees and
management, increase employee understanding of company
goals, focus employee efforts upon organizational objectives,
and provide a concrete link between pay and performance.

The emphasis is on the results achieved by employees
rather than the activities performed in their jobs.

Basic Principles of MBO:
Unity of management action is more likely to occur
when there is pursuit of a common objective.

The greater the focus on results on a time scale, the
greater likelihood of achieving them.

The greater the participation in setting meaningful
work with accountable results, the greater the
motivation for completing it. These call for:

Clarification Specific
Participative Explicit Performance
of objectives Decision time Evaluation
Organization for each Making and feedback
al objectives period
member

Applications of MBO:

• The MBO concept is appropriate for knowledge-based
enterprises where staff is competent.

• Appropriate in situations where one wishes to build;
 employees' management and self-leadership skills
 and tap their creativity, tacit knowledge and initiative.

• Used by Chief Executives of Multinational Corporations
for their country managers abroad.

Process of MBO:
Setting Objectives

Setting Employees’ Targets

Monitoring Performance

Evaluating Performance

Performance based Incentives

Setting Objectives:
• In MBO systems, objectives are written down for each
level of the organization, and individuals are given
specific aims and targets.

• It provides focus and emphasizes on team and
individual targets in congruance with organizational
goals.

• For MBO to be effective, individual managers must
understand the specific objectives of their job and how
those objectives fit in with the overall company
objectives set by the Board of Directors.

Setting Employees’ Targets:
• The management has to set the targets for each
employee and outline their accountability for the timely
fulfillment of the same.

• Thus, the organizational goals are bifurcated into
individual objectives and targets.

• A successful MBO program requires each employee to
produce five to ten specific, measurable goals.

• Each target should be supported with a means of
measurement and a series of steps toward completion.

• These targets should be proposed to the employee's
manager in writing, then discussed and approved.

Monitoring and Evaluating Performance:

• To monitor the performance of employees in pursuit of
the targets assigned to them, a proper review system
and Management Information System has to be
designed and made operational.

• Periodical and strict performance appraisals form a
crucial part of the MBO process. Actual Performance is
compared to the standards and employees are
appraised accordingly.

Performance Based Incentives:
• The performances of employees at all levels of
management are assessed and evaluated and based on
the same, performance incentives are given to
employees. These incentives can be:

Negative Incentives
Positive incentives
Reprimand
Rewards
Fines and penalties
Bonus
Warnings
Promotions
Retrenchment

Advantages of MBO:
 Better utilization of resources,

 Aid in Planning,

 Development of personnel,

 Better Team Work,

 Concentration on Key Result Areas,

 Objective Evaluation,

 Result Orientation,

 Sound Organizational Structure.

Disadvantages of MBO:
Incurs Time & Cost,

Failure to teach MBO Philosophy to employees,

Problems in Objective setting,

Emphasis on short-term objectives,

Inflexibility,

Frustration of employees.

Strengths of MBO:
• One of the best reviews on the strengths of MBO programs is
reported by Henry J.Tosi and Stephen J. Carroll. They opine:

• MBO stresses collaborative efforts between managers and
subordinates which aids in planning.

• MBO lets subordinates know what is expected of them by
forcing managers and subordinates to establish attainable
objectives within specified periods of time.

• MBO improves communication between managers and
subordinates and makes individuals cognizant of
organizational objectives and goals.

• MBO improves the performance review and evaluation
process by focusing on results and by providing systematic
feedback.

MBO at Hyundai Motors:
• Like many organizations, Hyundai Motors applies the
concept of MBO in their managerial spans.

• Annual, quarterly and weekly targets are determined for
employees at all levels of the organization and various
constraints and performance measurement criteria are
explained to them.

• Periodical reviews are done to evaluate the degree of
achievement of employees’ targets and their congruance
with the organizational goals.

• Hyundai Motors incentivizes employees’ performances
through non - monetary rewards and punishments.

What is MBE?
• Management by Exception (MBE) is a "policy by
which management devotes its time to investigating
only those situations in which actual results differ
significantly from planned results.’’

• The concept of MBE was propounded by:
Frederick Winslow Taylor.

• Attention and priority is given only to material
deviations requiring investigation and correction. It is
a part of motivational and control techniques.

• Its objective is to facilitate management's focus on
really important tactical and strategic tasks.

Significance of MBE:
• Proper and timely decision making and appropriate
flow of action and employees’ activities.

• Better utilization of managers’ time by bringing to their
attention only those conditions that appear to need
managerial action.

• Easy identification of discrepancies.

• Benefit to customers since MBE makes it easier for the
business to grow and improve its service rather than
use valuable resources on routine tasks.

Types of Exceptions:
• There are two types of exceptions which are identified
and managed through MBE:

Problems Below Opportunities Above
standard standard
performance performance
and results. and results.

Need to be strategized and Need to be identified and
solved in time. tapped.

Process of MBE:
Identifying and specifying Key Result Areas (K.R.A.s)

Setting standards and outlining permissible deviations, especially for K.R.A.’s

Comparing actual results with the standards

Computing and analyzing deviations

Identifying non - permissible, that is, critical deviations in K.R.A.s

Strategizing and taking corrective actions

Variance Analysis and Management By
Exception:
• Variance analysis and performance reports are
important elements of MBE.

• MBE aims at directing the managers’ attention towards
those parts of the organization where plans are not
working out for one reason or another.

• If actual results do not conform to the budget and to
standards, the performance reporting system sends a
signal to the management that an "exception" has
occurred.

Material Variances:

• Variances may and do occur for a variety of reasons. But,
only some of them are significant and warrant
management attention and action.

• The materiality of a variance may be determined by:
the size of a variance.
the size of the variance relative to the amount of spending
involved.
Plotting variance on a Statistical Control Chart.

Statistical Control Chart
• Some random fluctuations in variances from period to
period are normal and to be expected even when costs
are well under control.

• A variance should only be investigated when it is
unusual relative to the normal level of random
fluctuation.

• Typically the standard deviation of the variance is used
as the measure of the normal level of fluctuations.

• A rule of thumb is adopted such as "investigate all
variances that are more than X standard deviations from
zero, where X is the permissible Standard deviation.’’

Statistical Control Chart
Above
- plus
Favorable one
Plus
- - one

Permissible
S.D. Zero
(+1 to - 1) S.D. of
the
Minus Variance
- one
Below
Unfavorable minus
- one

1 2 3 4 5
Weeks

MBE At Cisco Systems:
 Cisco Systems is a Multinational Corporation with its Headquarters
in San Jose, California. It designs and sells consumer electronics,
networking, voice, and communications technology and services.

 Cisco's network of contract manufacturers, component suppliers
and distributors for its Internet Routers business are linked through
Cisco's extranet to form a virtual, just-in-time supply chain.

Application of MBE:

 When a customer orders a router through Cisco's website, the order
triggers a flurry of messages to contract manufacturers of printed
circuit board assemblies.

 Meanwhile, component suppliers are alerted to supply the generic
components of the router, such as a power supply.

MBE At Cisco Systems: Continued
 Soon after the contract manufacturers reach into Cisco's extranet, the
extranet starts looking around the contractor's assembly line to make
sure everything is in order.

 Factory assemblers slap a bar code on the router, scan it and plug in
cables that simulate those of a typical corporate network.

 One of those cables is a fire hose for Cisco's automated testing
software. It looks up the bar code, matches it to a customer's order and
then probes the nascent router to see if it has all the ports and memory
that the customer wanted.

 If everything checks out and only then - Cisco's software releases the
customer name and shipping information so that the subcontractor can
get it off the shop floor.

 The chain runs itself until there's a problem, in which case the system
alerts some employee to fix the problem. Nothing needs to be done
unless there is something wrong.

Presented By:
Ms. Akshita Morani

Ms. Kavita Varghese

Ms. Khushbu Singh

Ms. Mohita Sadhwani

Ms. Pragya Shrivastava

MBO and MBE

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