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Management and Planning Series
While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated.
All of SBA's programs and services are extended to the public on a nondiscriminatory basis.
TABLE OF CONTENTS
MANAGEMENT BY OBJECTIVES
PREPARING FOR THE MBO PROGRAM
Understanding the Requirements of an MBO Program
Defining Your Business
Devising a Work Plan
INSTALLING THE MBO PROGRAM
THREATS TO AN MBO PROGRAM
APPENDIX: INFORMATION RESOURCES
Many authorities on business management identify the five major functions of management as
The planning and controlling functions of management often receive less attention from the small business owner-manager than they should. One way to more effectively fulfill these two functions is through effective goal setting.
The success of a business will depend on its long-range goals for sales, profits, competitive position, development of personnel and industrial relations. To accomplish these goals, the company will need to identify intermediate goals that it can work toward each year.
MANAGEMENT BY OBJECTIVES
Traditionally, people have worked according to descriptions that list the activities or functions of the job. The management by objectives (MBO) approach, on the other hand, stresses results.
Let's look at two examples.
Suppose a credit manager's job description states that he or she will supervise the credit operations of the company. This description simply lists the functions of the credit manager. Under the MBO approach, the owner-manager and the credit manager would identify five or six goals covering important aspects of the manager's work. For example, one goal might be to increase credit sales enough to support the 15 percent increase in sales expected by the sales department.
The traditional job description for a personnel specialist
may include conducting a recruiting program for the company.
Under the MBO approach, the personnel specialist would
identify five or six appropriate goals, one of which could
be, Recruit ten new employees in specified categories by
With MBO, jobs are viewed in terms of achievements rather than
simply functions. Activity alone is not enough; each activity
must bring the worker closer to achieving his or her goals.
PREPARING FOR THE MBO PROGRAM
Understanding the Requirements
of an MBO Program
Management by objectives has been used by all kinds of
organizations, but not every business has had the same degree of
success. From examining MBO programs that have worked, it is
clear that all met the following minimum requirements:
* Goals were expressed in specific and measurable terms.
* Each employee proposed 5 to 10 goals to cover those aspects
of his or her job crucial to successful performance.
* A final written statement of each goal was prepared,
including a statement of the goal, method of evaluating the
goal, work steps needed to complete the goal and an
estimated time needed to complete the steps.
* Progress was evaluated at regular intervals (at least
quarterly) and compared with the original goals.
* Problems that hindered progress were identified and
* Goals were related to each level of management, both those
above and those below.
Defining Your Business
The first step in developing an effective MBO program is to
define your business. Ask yourself the following questions:
* What business am I in?
* Is my definition right for today's market?
* Do I need to change my business to meet emerging customer
A clear vision of your business is crucial for planning your
marketing, product development, buildings and equipment, and
financial and staff needs. For example, a drop in sales caused a
small business manufacturer of metal trash cans to reexamine its
product. To regain lost sales, the owner decided to redefine the
product as metal containers and to develop a new marketing plan.
Long-range business goals will be the cornerstone of your
company's MBO program. To achieve these goals, you must have a
method to communicate them to your managers and employees. One
way is to bring managers and employees into the process by asking
them to help formulate the company's short- and long-range goals.
If they have a role in establishing the goals, they will be more
committed to achieving them.
All goals should relate to and support the long-range objectives
for the company. In this way, you can ensure that the goals of
all levels of management are consistent. If goals are
incompatible, you may find that employees feel like the middle
manager of a research and development company who exclaimed in a
seminar, How can I set my goals when I don't know where top
management wants to go?
Types of Goals
What areas of your managers' work are suitable for goal setting?
Ask managers to identify the most important aspects of their
work. In each area, they should set both short- and long-term
goals. Carefully developed goals, if attained, should give the
manager better control of the job. Each manager should define one
or two goals in each of the following categories:
* Regular work goals.
* Problem-solving goals.
* Innovative goals.
* Development goals.
By asking your managers to set at least one goal in each of
these four areas, you may open their eyes to new possibilities
they had not seen before. The goal-setting process can be a very
useful educational step.
Regular Work Goals
These include the major part of the manager's responsibilities.
For example, the head of production should focus on the quantity,
quality and efficiency of production and the head of marketing
should concentrate on developing and conducting the market
research and sales programs. In defining their regular work
goals, employees should include ways of
* Operating more efficiently.
* Improving the quality of the product or service.
* Expanding the total amount produced or marketed.
These provide managers an opportunity to define their major
problems and to set a goal to solve each one. There is no danger
of ever running out of problems; new problems or new versions of
old problems are always present.
Because of the push for new products and new methods in today's
marketplace, innovation now gets much attention in seminars and
publications for top managers. Managers and workers should seek
new and better production methods, explore better ways to serve
customers and propose new products for the company. Managers will
need to use innovative approaches to make the company competitive
in a fast-changing national and international economic
In setting development goals, you and your managers recognize the
importance of acquiring new skills. Managers should plan for the
continued growth of each employee, both in technical areas and in
work relations with fellow employees.
Devising a Work Plan
You and your managers should use a miniature work plan to develop
goals that are complete and useful (see Exhibit 1). In developing
the plan, the following five areas should be addressed:
* Goal -- Be specific and concise.
* Measurement -- What benchmarks will you use to measure
whether you have achieved your goals? These usually can be
expressed in quantitative terms.
* Major problems anticipated.
* Work steps -- List three or four of the most essential
steps. Give completion dates for each.
* Supervisor's goals -- Employees should identify which of
their manager's goals relate to their own goals.
On the work plan, managers can show each of the major work steps
(subgoals) necessary to reach a goal. If the work steps are
completed by the indicated date, the goal is reached.
Use the form in Exhibit 1 to discuss goals with your managers. By
looking at the form, you can see not only the goal but also the
plan for reaching that goal. This will allow you to (1) ask
questions about the work steps and any potential problems;
(2) decide the best way to evaluate progress on the goals and
(3) help each of your managers understand how his or her goals
relate to those of the company.
All problems listed on the work plan should include a solution.
For example, suppose the head of a supply department sets a goal
to deliver all packages within one day after they are received.
Because employees may have difficulty meeting the new deadlines,
the work plan should include necessary steps to teach them the
new procedures before the program goes into effect.
Exhibit 1 Plan to Achieve Objectives
OBJECTIVE #1: Increase gross sales margin of my area by
12 percent by 9-1-92 and maintain at that
level for remainder of 1992.
Major Action Steps January - December
J F M A M J J A S O N D
1. Decrease cost of serving
small accounts. X
a. Identify all customers not
purchasing $5000 per month.X
b. Determine sales potential
of each target customer. X
c. If potential is less than
$5000,, transfer to jobber. X
d. Inform customer and
schedule jobber visit with
e. If potential is $5000,
develop cooperative sales
promotion program. X
f. Implement program. X
g. Evaluate & report results. X
2. Increase minimum calls per
salesperson to 10 per day. X
a. Analyze work methods of
high call salespersons. X
b. Identify salespersons with
fewer than 10 calls placed.X
c. Analyze territory and
order of calls. X
d. Determine best routing of
e. Determine most effective
realigning of all
f. Implement plans. X
g. Evaluate & report results. X
An MBO program must include a provision for regular progress
reports. For this reason, the MBO concept is sometimes called
MBO/R, where the R refers to results. You and your managers will
only accomplish your goals or objectives if the MBO program calls
for a regular review of progress. For example, one large
organization issued nearly 100 pages of well-developed goals
prepared by many of its managers. The document was very
impressive, but it lacked a reporting system of any kind. You can
imagine the skeptical reaction of those who set goals for the
first year when they were asked the following year to draw up new
A monthly or quarterly review of progress toward goals will help
you determine where progress is below expectations. For example,
suppose that one of your goals is to reduce overtime work by
50 percent in one year, but you only reduce it by 15 percent in
the first quarter. Based on this information, you can exert a
special effort in the succeeding quarters to regain the lost
When progress is below expectations, you should identify the
problems holding back progress and assign someone to resolve
them. Failure to reach goals can result from
* The wrong objectives being established at the outset.
* Organizational restrictions being overlooked.
* Personal failure or a combination of factors.
In order to solve problems and meet a goal, managers may have to
adjust their time line or change the goal itself. All changes
should be written as new goals and included in the MBO files.
In contrast to traditional methods, which evaluate performance
based on personal qualities such as leadership ability, the MBO
method evaluates performance based on objective results. Such
evaluation is a complex task that must be undertaken with care by
someone who fully understands MBO. (See Exhibit 2 for a
comparison of traditional and MBO evaluation methods.)
Comparison of Traditional and MBO Evaluation Methods
Characteristic Traditional method MBO method
Frequency Usually annually Usually quarterly.
(if at all).
Emphasis Traits. Results versus
Subordinate's Mental block. Positive (feedback
frame of mind (doesn't know how has told employee
traits will be how well he or
evaluated). she is doing).
Suggestions for Poor receptivity Positive (much
improvement (much has been has been based
based on employee's on employee's job
Tie in to Rewards usually not Rewards usually
rewards directly tied in. tied directly to
Summary Little connection Results oriented.
Under the MBO program, you evaluate your managers' performance
based on whether they have achieved their five to eight goals.
You also must determine how well they have performed the
secondary duties that do not fall under goals. (See Exhibits 3
and 4 for examples of traditional and MBO performance evaluation
Example of Traditional Performance Evaluation Form
Factor Excellent Above Average Below Poor
Degree of cost-
Grasp of function X
Ability to develop
Work habits X
company's progress X
Employee:_________________ Rated by: __________________
Date:_____________ Reviewed by: _______________________
I acknowledge this performance appraisal has been
discussed with me. This acknowledgment does not
constitute agreement with the findings.
Signed:____________________ Date: __________
Exhibit 4 -- Results-Oriented Evaluation Form
Quarters Total year
Objectives Measure 1st 2nd 3rd
1. Improve by 1. At least T O T Achieved in 97
10% number of three qualified percent of
qualified candidates cases.
applicants referred for
referred for each job
job openings. opening.
2. Increase by 2. Number of O T T 17 completed
12% number of persons com- course.
qualified pleting basic
welders during welding course
Note: T = On target. No action necessary. O = Off target.
INSTALLING THE MBO PROGRAM
When installing an MBO program, start by asking your managers to
define their jobs, including their major responsibilities. Then,
for each responsibility, you and your managers must decide the
most effective way to measure performance in terms of results.
The outcome of this exercise may surprise you. You and your
managers may not agree on the major responsibilities of a certain
position. Also, you may find that no one is performing some
functions that you consider important. If the MBO system is to
succeed, you must show interest from the beginning and set the
example for your subordinate managers.
The education of your managers may be a formidable task. Until
this time, they have thought in terms of specific functions
managing a sales department, directing a credit office, etc.
rather than in terms of goals that contribute to the
One way to introduce the MBO system to your managers is in a
seminar conducted by you or a consultant. However, if you choose
a consultant, be sure that you are present for the entire
seminar. In this way, you will communicate to your managers that
the MBO system is a management priority.
During the seminar, ask each participant to prepare an actual
goal. Also, in small group sessions, have your managers review
each other's work plans and offer suggestions to improve them.
The experience of setting and reviewing goals makes MBO a
learning experience for all employees.
Encourage your managers to express their doubts, reservations or
opposition to MBO. They should get their feelings out in the open
as soon as possible. You, the consultant or other participants
can help to ease their concerns.
In the beginning of your MBO program, your managers will have to
learn to measure their own performance accurately, anticipate
real problems that will thwart their progress and take steps to
solve delays and other problems. During this learning period,
your managers should set fewer goals than would usually be
expected, perhaps three or four. After they develop and achieve
these goals, they can extend the number and area covered by each
MBO may look simple on the surface, but it requires experience
and skill to make it work effectively. If managers set annual
goals, it may take three to four years before good results from
this new system appear.
THREATS TO AN MBO PROGRAM
Not all MBO programs are successful. Some of the reasons why
programs fail to reach their potential are
* Top management does not become involved.
* Corporate objectives are inadequate.
* MBO is installed as a crash program.
* It is difficult to learn the system because the nature of
MBO is not taught.
It is hard to get people to think in terms of results rather than
the functions of their job; however, it can be done. The sequence
of steps you use may not work for someone else. It is often an
individual matter. No matter what steps you use, the final
results are what count.
If you feel that you are ready to introduce MBO to your company,
why not set it as a goal for yourself? Turn back and follow
through with the work plan. List your goals, method of
measurement, anticipated problems and the work steps necessary to
get your company managing by objectives.
APPENDIX: INFORMATION RESOURCES
U.S. Small Business Administration (SBA)
The SBA offers an extensive selection of information on most
business management topics, from how to start a business to
exporting your products.
SBA has offices throughout the country. Consult the U.S.
Government section in your telephone directory for the office
nearest you. SBA offers a number of programs and services,
including training and educational programs, counseling services,
financial programs and contract assistance. Ask about
* SCORE: Counselors to America’s Small Business, a
national organization sponsored by SBA of over 11,000
volunteer business executives who provide free
counseling, workshops and seminars to prospective and
existing small business people. Free online counseling
and training at www.score.org.
* Small Business Development Centers (SBDCs), sponsored
by the SBA in partnership with state governments, the
educational community and the private sector. They
provide assistance, counseling and training to
prospective and existing business people.
* Women’s Business Centers (WBCs), sponsored by the SBA
in partnership with local non-government organizations
across the nation. Centers are geared specifically to
provide training for women in finance, management,
marketing, procurement and the Internet.
For more information about SBA business development programs and
services call the SBA Small Business Answer Desk at 1-800-U-ASK-
SBA (827-5722) or visit our website, www.sba.gov.
Other U.S. Government Resources
Many publications on business management and other related topics
are available from the Government Printing Office (GPO). GPO
bookstores are located in 24 major cities and are listed in the
Yellow Pages under the bookstore heading. Find a “Catalog of
Government Publications at http://catalog.gpo.gov/F
Many federal agencies offer Websites and publications of interest
to small businesses. There is a nominal fee for some, but most
are free. Below is a selected list of government agencies that
provide publications and other services targeted to small
businesses. To get their publications, contact the regional
offices listed in the telephone directory or write to the
Federal Citizen Information Center (FCIC)
The CIO offers a consumer information catalog of federal
Consumer Product Safety Commission (CPSC)
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.
U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to the USDA. Publications
and programs on entrepreneurship are also available through
county extension offices nationwide.
U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Washington, DC 20230
DOC's Business Liaison Center provides listings of business
opportunities available in the federal government. This service
also will refer businesses to different programs and services in
the DOC and other federal agencies.
U.S. Department of Health and Human Services (HHS)
Substance Abuse and Mental Health Services Administration
1 Choke Cherry Road
Rockville, MD 20857
Helpline: 1-800-workplace. Provides information on Employee
Assistance Programs Drug, Alcohol and other Substance Abuse.
U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.
U.S. Department of Treasury
Internal Revenue Service (IRS)
1500 Pennsylvania Avenue NW
Washington DC 20230
The IRS offers information on tax requirements for small
U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
1200 Pennsylvania Avenue NW
Washington, DC 20480
The EPA offers more than 100 publications designed to help small
businesses understand how they can comply with EPA regulations.
U.S. Food and Drug Administration (FDA)
5600 Fishers Lane
Rockville MD 20857-0001
The FDA offers information on packaging and labeling requirements
for food and food-related products.
For More Information
A librarian can help you locate the specific information you need
in reference books. Most libraries have a variety of directories,
indexes and encyclopedias that cover many business topics. They
also have other resources, such as
* Trade association information
Ask the librarian to show you a directory of trade
associations. Associations provide a valuable network
of resources to their members through publications
and services such as newsletters, conferences and
Many guidebooks, textbooks and manuals on small
business are published annually. To find the names of
books not in your local library check Books In Print,
a directory of books currently available from
* Magazine and newspaper articles
Business and professional magazines provide
information that is more current than that found in
books and textbooks. There are a number of indexes to
help you find specific articles in periodicals.
* Internet Search Engines
In addition to books and magazines, many libraries offer free
workshops, free access to computers and the Internet, lend
skill-building tapes and have catalogues and brochures
describing continuing education opportunities.