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 Management and Planning Series


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     Understanding the Requirements of an MBO Program


     Defining Your Business 


     Setting Goals


     Devising a Work Plan   


     Reporting Progress


     Evaluating Performance 























Many authorities on business management identify the five major functions of management as


  • Planning.


  • Organizing.


  • Directing.


  • Controlling.


  • Coordinating.


 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.




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


     July 1.




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.










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.




Setting Goals




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.




Problem-Solving Goals




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.




Innovative Goals




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






Development Goals




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




     SUPERVISOR: ____________________________________




     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


          customer.                      X


       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


          calls.                         X


       e. Determine most effective


          realigning of all 


          territories.                     X


       f. Implement plans.                 X


       g. Evaluate & report results.         X






Reporting Progress




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.




Evaluating Performance




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.)






                            Exhibit 2


       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


                      traits).             performance).




     Tie in to        Rewards usually not  Rewards usually 


     rewards          directly tied in.    tied directly to 






     Summary          Little connection    Results oriented.


                      to results.  






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


forms, respectively.)






                            Exhibit 3


       Example of Traditional Performance Evaluation Form




     Factor            Excellent Above   Average Below  Poor


                                 average         average




     Degree of cost-               


      consciousness                X


     Grasp of function      X


     Initiative                    X




      ability               X


     Application            X


     Judgment                      X 


     Health                 X


     Appearance             X 


     Loyalty                X


     Relationship with 


      people                       X


     Ability to develop


      subordinates                            X


     Work habits                   X


     Contribution to 


      company's progress    X


     Potential for 


      advancement                  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




                                          Results achieved


                                      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


     19xx.            #5. 




    Note: T = On target. No action necessary. O = Off target.


    Action necessary.










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.










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.










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 




     *     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, 




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 




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 


addresses below:




Federal Citizen Information Center (FCIC)






The CIO offers a consumer information catalog of federal






Consumer Product Safety Commission (CPSC)


Publications Request


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


Hotline: 1-800-368-5888


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


Hotline: 1-888-463-6332


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






     *     Books


           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.

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