Definition

Management by objectives with self-control is a conceptual and practical process that has been in existence since the 1930s in one form or another. Peter Drucker gave it central prominence in his landmark book The Practice of Management, published in 1954.

In The Future of Industrial Man (Drucker 1942), Peter Drucker began to address the question of how individual freedom can be preserved in an industrial society given the dominance of managerial power and the corporation. Management by objectives (MBO) coupled with self-control is the managerial philosophy he proposed, originally in The Practice of Management (Drucker 1954: 121–136), for resolving the tension between individual freedom and the authority the individual must yield to the corporation. Even in professional service organizations within today’s knowledge economies, evidence suggests that MBO with self-control is the best answer we have to the dilemma of how to protect individual freedom in organizations (Dirsmith et al. 1997).

Achieving freedom in the corporation and in other institutions of society requires that all individuals assume responsibility for their own objectives. MBO incorporates methods for setting objectives and for monitoring performance within organizations. The MBO process, if properly designed and used, requires both freedom for individuals and responsibility from individuals.

Peter Drucker, in an interview, defined the nature of individual responsibility required to realize individual freedom in organizations.

Responsibility is both external and internal. Externally it implies accountability to some person or body and accountability for specific performance. Internally it implies commitment. The Responsible Worker is not only a worker who is accountable for specific results but also who has the authority to do whatever is necessary to produce these results, and who, finally, is committed [italics mine] to these results as a personal achievement. (Beatty 1998: 79)

This is the nature of responsibility that will provide conditions for genuine freedom for individuals in organizations. It is also the kind of responsibility required to make MBO with self-control effective.

The History of Management by Objectives

Drucker provides a historical account of the origins of MBO in his article ‘What results should you expect? A users’ guide to MBO’ (Drucker 1976: 12–19):

The basic concepts are strongly advocated by Luther Gulick and his associates in the mid- and late ’30s, in their studies of the organization and administration of the federal government. Yet, the concept of management by objectives and self-control originated with the private sector. It was first practiced by the DuPont Company after World War I. By the mid-’20s, Alfred P. Sloan (1875–1966) Jr., of General Motors used the term ‘Management by Objectives and Self-Control’ systematically and with great conceptual clarity. (Drucker 1976: 12)

While Drucker did not actually invent the term ‘management by objectives’, he did invent its central position in management. In John J. Tarrant’s The Man Who Invented the Corporate Society (1976: 77), Drucker clarifies his contribution to the development of MBO: ‘I didn’t invent the term “Management by Objectives”; actually alfred sloan used it in the 1950s. But, I put it in a central position [italics mine], whereas to him it was just a side show.’

Drucker’s full development of management by objectives and self-control followed shortly after his work with General Motors and the publication of his Concept of the Corporation (1946). With assistance from Harold Smiddy, a vice-president of general electric (GE) and many others at the company, including CEO Ralph Cordiner, Drucker developed MBO as a philosophy of management. MBO was implemented as an integral part of GE’s massive reorganization from departments to autonomous decentralized units in the early 1950s (Greenwood 1981).

Two significant passages cited by Greenwood (1981) from the third volume of the series Professional Management in General Electric: The Work of a Professional Manager (General Electric 1953) describe the central relationship of MBO and self-control to the implementation of GE’s corporate decentralization.

One does not need to be ‘controlled’ or ‘commanded’ if he knows what is to be done and why; if he knows, from continual measurements of results, whether the work is getting done as planned, and on schedule, or if not, why not. (General Electric, cited in Greenwood 1981: 73)

And:

Decentralization of managerial decision-making requires that objective goals and objective measurements of progress towards these goals be substituted for subjective appraisals and personal supervision. Through a program of objective measurements, managers will be equipped to focus attention on the relevant, the trends, and on the future. To the extent, therefore, that we are able to develop sound, objective measurements of business performance, our philosophy of decentralizing authority and responsibility will be rendered more effective. (General Electric, cited in Greenwood 1981: 133)

MBO coupled with self-control is the managerial philosophy Drucker proposes in The Practice of Management (Drucker 1954: 121–136) for resolving the tension between individual freedom and the authority the individual must yield to the organization upon employment. When properly designed and supported, MBO with self-control is the best solution we have to the central concern of Drucker’s, how to protect individual freedom while individuals yield to authority in organizations. Achieving freedom in the corporation, and in other institutions of society, requires individuals at every level to assume responsibility for their objectives and results. Therefore, MBO with self-control provides methods for setting objectives, for establishing commitments to objectives, and for monitoring performance against objectives for each individual in an organizational unit.

Key Features of the MBO Process

MBO is characterized by upward communications in which each manager clarifies the objectives of his or her superior and then sets objectives that are both achievable by the manager and congruent with the superior’s objectives. Next, the superior reviews all objectives and negotiates agreement with each manager while seeking to integrate the objectives of all subordinates on whose performance the superior depends. In the process, the superior seeks to gain enthusiastic acceptance and commitment for agreed-upon objectives from subordinates. If the superior is successful, this process of communication and participation will encourage subordinates to internalize their agreed-upon objectives as their own.

Next, the superior coaches subordinates to achieve objectives and seeks to eliminate any known barriers that might impede achievement of objectives. Finally, the superior ensures that subordinates have timely and accurate information to assess their own progress towards objectives and take their own corrective action without any interference.

The Management Letter

Drucker proposed the ‘management letter’ as a tool to assist with upward communications in MBO. Each manager clarifies the objectives of his or her superior in the letter and then sets objectives that are both achievable by the manager and congruent with the superior’s objectives. The letter should contain proposed performance objectives applied to the manager along with work the manager must do to attain these objectives. The manager then identifies the assistance she needs from her superior and from her colleagues to attain her objectives. If the superior accepts the recommendations in the letter, these recommendations become the agreed-upon set of objectives and actions for the manager during the subsequent period.

MBO with self-control is neither easy to accomplish, nor is it fun. For Drucker, these are ideals to aspire to, and he readily acknowledged that MBO is more widely used than is self-control. For MBO to function at all, executives must clearly define their objectives. These and many additional difficulties of achieving both freedom and individual responsibility in organizations should eradicate any belief that Drucker proposed a ‘utopian’ approach to the practice of management, as has been alleged by some critics (Kanter 1985).

Evidence of MBO Effectiveness

There is abundant evidence of the effectiveness of MBO and numerous other concepts that have been patterned after it. This evidence takes the form of testimonials from executives, such as the following from Bill Packard, co-founder of Hewlett-Packard:

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. (The Economist2009)

Empirical evidence supporting MBO also can be found within the huge body of MBO literature. This literature shows that MBO is effective if it is enthusiastically modelled and supported by top management, if clear specifications of objectives exist, and if the management team is trained in each step of the MBO process.

The most impressive evidence is contained in Rodgers and Hunter’s meta-analysis of 30 years of research on the positive impact of management by objectives upon productivity in companies whose top management was highly committed to the process. In 68 of the 70 studies examined, gains in productivity were found after the introduction of MBO. The support and participation of top management was the defining attribute of successful MBO applications. ‘The gain in productivity dropped from 56.5% to 32.9% to 6.1% as top management commitment dropped from high to moderate to low’ (Rodgers and Hunter 1991: 329, 331).

The study by Dirsmith et al. (1997) contains impressive evidence on the effective use of MBO in professional service firms. The ‘Big Six’ public accounting firms in their study integrated the use of a formal MBO control process, which included personal incentives for achieving objectives and an informal mentoring process. These combined processes were helpful in the development of professionals in these firms.

Conclusion

MBO and self-control is a philosophy of management that has proven itself effective in many different industries as well as in the public sector. It is not a panacea and does not substitute for effective management. But, properly used, it is likely to provide the context for achieving individual freedom and personal responsibility as well as desirable results for organizations.

See Also