(EN) The Evolution of Strategic Management—Management by Objectives

Strategic management is the art of planning, monitoring, analyzing, and assessing all that is necessary for an organization to meet its goals and objectives. This is the third post in my series on the evolution of strategic management, and we will be looking in more detail at management by objectives (MBO).

History of Management by Objectives

Management by objectives (MBO), or sometimes management by planning (MBP), is the fundamental business concept of setting appropriate targets and then following up with a plan and its implementation to achieve these targets.

While not invented by him, the concept was popularized by famous consulting guru Peter Ferdinand Drucker (1909–2005) in his book The Practice of Management in 1954. Actually, the full term for MBO, according to Drucker, is „management by objectives and self-control.“

Drucker was born in Vienna, Austria. The economist Joseph Schumpeter was a friend of his father, and he influenced young Peter quite a bit with his ideas. After graduating from school, Drucker moved first to Hamburg and then Frankfurt (where he also got a doctorate in law). When Nazi Germany started to oppress Jewish citizens in 1933, he moved to the United Kingdom, and in 1937 he moved to the United States, where he received citizenship in 1943.

His writings caught the attention of General Motors, who invited him to study their corporate structure. Different from contemporary practice, his focus was on the relationship of human beings in a business context, rather than merely crunching numbers to meet. He saw management as a liberal art rather than a military command and control. He tried to understand how authority works in industry, and also quickly realized that employees often knew more about their business than their bosses. This study resulted in the book Concept of the Corporation, having lots of recommendations for GM… which GM did not like at all. Alfred Sloan simply pretended that the book did not exist.

Overall, Drucker was an extremely famous, even legendary, consultant, and was often called a management guru. However, he said about himself that „we are using the word ‚guru‘ only because ‚charlatan‘ is too long to fit into a headline.“ His ideas are still fresh even nowadays: that a company should serve its customers and not its shareholders; that the company should respect the worker; that the government is often unwilling to provide needed services; that there should be planned abandonment of outdated products in favor of new ones; that there is a need for community; and that to manage business, management needs to balance a variety of needs and goals, rather than subordinating an institution to a single value. Actually, reading his books feels surprisingly modern. He died in California in 2005.

One of his students, George Odiorne (1920–1992), continued the concept, publishing his own book, Management Decisions by Objectives, in 1969. Quite a few companies started to use this approach, including Hewlett-Packard, Xerox, DuPont, and Intel. A lot of Japanese companies also used management by objectives, like Bridgestone from around 1960, and Toyota from 1963–64. However, Toyota was not satisfied with management by objectives, which later led to the development of Hoshin Kanri. But overall, the 1960s to 1980s were the heydays of management by objectives.

What Is Management by Objectives?

In its simplest from, management by objectives is the use of numerical targets to give the people and units in the company a direction. It is a way for the manager to give the subordinates goals, without telling him or her what exactly to do. The full term used by Drucker is „management by objectives and self-control.“
The “self-control” represents the ability of “the manager to control his own performance. Self-control means stronger motivation” (The Practice of Management, p. 130).

Management by objectives is customarily divided into five steps:

• Review organizational goals
• Set employee objectives
• Monitor progress
• Evaluation
• Give rewards

Drucker is also famous for giving SMART Goals, where “SMART” is a mnemonic for

• Specific: Targets a particular area
• Measurable: Quantified if possible
• Achievable: Achievable with effort
• Relevant: Important for company
• Time-bound: Includes a deadline

Criticism of Management by Objectives

From a modern point of view, management by objectives falls a bit short on aligning the goals (the objectives) with the overall vision and direction of the company. It is a great tool to set goals and follow up on them, but it is not a tool to figure out what goals would be good in the first place.

Subsequent methods like objectives and key-results (OKR) and Hoshin Kanri (which I will describe in subsequent posts) actually expand on this issue, and expand the management by objectives framework to include proper alignment of the goals with the overall direction the company wants to move.

Another critique is actually not a flaw of management by objectives, but rather a flawed usage of it. It is quite easy to create a wishlist of goals that management wants to have, only to overload the employee with too many goals. Having too many goals merely brings the performance of the employee down. Here, too, both objectives and key-results (OKR) and Hoshin Kanri have limitations on the number of goals (albeit they are not always followed either).

It is also often used in a command-and-control style, where the manager decides the goals for the subordinate. A much better approach would be to develop the goals cooperatively (and Drucker at least hinted on that), but this did not fit the management style of the 1980s. Hoshin Kanri and its Catchball process actually improved that and put a lot of emphasis on the cooperative development of the goals.

Nowadays, management by objectives is mostly used either as a subset of larger methods like objectives and key-results and Hoshin Kanri, or simply as a performance evaluation tool for the annual performance review. There is also not one single, well-defined framework, but a lot of different flavors and variations. Modern management by objectives also integrates concepts again from objectives and key-results and Hoshin Kanri, and tries to align the goals with the vision, as well as has a cooperative goal-setting process (albeit that is an uphill battle in many companies).

In my next post, I will look a the next step in the evolution of strategic management and go into more detail about objectives and key-results (OKR). Now, go out, make sure you have proper goals, and then implement them and organize your industry!