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.

Core Concept of MBO
1.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.
2.MBO is primarily a tool for strategic planning, employee motivation, and performance enhancement.
3.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.
4.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 based Incentives
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 employees 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.

Management by Exception

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 managements 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. Ciscos
network of contract manufacturers, component suppliers and distributors for its Internet Routers business are linked
through Ciscos extranet to form a virtual, just-in-time supply chain.
Application of MBE: When a customer orders a router through Ciscos 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.
Soon after the contract manufacturers reach into Ciscos extranet, the extranet starts looking around the contractors
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 Ciscos automated
testing software. It looks up the bar code, matches it to a customers 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 - Ciscos software
releases the customer name and shipping information so that the subcontractor can get it off the shop floor. The
chain runs itself until theres a problem, in which case the system alerts some employee to fix the problem. Nothing
needs to be done unless there is something wrong.