management by objective (mbo)

What is MBO?

MBO tracks the performance of the manager against number of specific objectives expected to be achieved during a given measurement period.

It is a model which aims at improving the overall performance of the organization by clearly defining the objective. The objectives are set both by management and employees by mutual understanding.

The forgoing description of budget emphasized monetary information because such information is incorporated in an accounting system. However, accounting information alone cannot provide an adequate benchmark for the performance of a responsibility center.

It only measures the profitability. Though profitability is a useful measure in profit oriented company, it is far less than a perfect measure.

Management by Objective – A Quick Glance

Managers can take many actions that can increase their firm’s short term profits but that decrease their firm’s value and vice versa. For example, they can ignore spending on promoting research and employee development. When talk about non profit organisations, profit is not the goal whereas a constraint.

So in order to overcome these shortcomings, many organizations supplement the monetary accounting information with non financial information. This additional information results in providing leading indicators of revenues to be received and profits to be earned in future management periods. A system in common use that does this is called Management by Objective.

MBO Approach Suitability

The Management by Objective approach is especially useful in expense centers. This is because in these responsibility centers comparisons of actual costs with standard costs are of very limited use in evaluation of the performance.

For example, an organization is expecting a sales manager to open three new sales offices next year.  It also expects an engineer manager to develop a new employee training program. Such type of action results in additional expenses which reduces the current year profits. However, these actions also brings profitability in the upcoming year. Now here comes the role of MBO. Management by Objective helps to ensure that these objectives are not forgone just to improve the short term performance.

In combination, the areas for which objectives are developed should reflect all of the critical success factors in the responsibility center.