IT 107 Organization and Management

HandOut #009

MANAGEMENT BY OBJECTIVES Management by Objectives (MBO) is a technique for involving employees at all levels in planning and controlling activities, MBO brings together superiors and subordinates to jointly define objectives. The MBO Process Major strategic objectives are articulated by senior executives. Then they join with subordinates to formulate the next level of objectives. This process continues downward throughout the organization at each level, superiors join with their subordinates to establish objectives that are consistent with, and reinforce, higher level objectives. During the planning period, superiors and subordinates meet periodically to review performance and to redefine objectives. Four specific steps are involved in the MBO process: 1. Determine objectives. Managers meet with their employees individually to inform them of higher-level plans and to help them develop their own objectives. Ideally, this is a joint decision-making process, and employees are encouraged to take a leading role in expressing their ideas. 2. Specify action plans. Realistic action plans are agreed upon by managers and their subordinates, and these are written down with sufficient elaboration for periodic review. 3. Performance review. Each planning cycle has a specific time frame, and managers periodically meet with their subordinates to review progress toward objectives. By systematically monitoring progress and reviewing plans, managers help subordinates fine-tune their efforts. Reviews should occur at least once each year, but can be more frequentweekly monthly, quarterly, in times of crisis. 4. Correction and adaptation. Corrective action is taken after each performance review. This can include changes in activities to achieve objectives or changes in the objectives themselves. At predetermined intervals, usually each year, new objectives are established. These build on past results and changes in higher-level plans that provide planning premises for the next cycle in an MBO process. Benefits of MBO Participation encourages a more cohesive work environment and a stronger commitment to objectives by subordinates. High priority activities receive clear and purposeful attention. Better communication is achieved between managers at various organizational levels. This enhances collaboration and keeps subordinates better informed about plans and activities in other parts of the organization. Drawbacks of MBO Many organizations are simply too complex to adopt MBO, which is itself a complex process. MBO also requires a tremendous amount of time and effort. Managers and subordinates must regularly meet, separately and together, to regularly document plans, review performance, discuss corrective actions, and revise objectives. Thus the process tends to get bogged down in paperwork and schedules. To succeed, MBO requires a strongly committed top management and individual managers capable of working comfortably within a participative environment. When either condition is lacking, MBO can backfire. A poorly implemented MBO program will seem like a gimmick rather than a legitimate effort to improve participations. COMMUNICATING PLANS Planning requires clear and effective communication at all levels before performance begins to mirror expectations. Objectives are written, performance targets are documented, and plans are expressed to give employees direction. Two Broad Categories of Documented Plans Standing-use plans are plans that are used on a continuous basis to achieve consistently repeated objectives. Standing plans take the form of policies, procedures, and rules. Single-use plans are plans that will be used once to achieve unique objectives or to achieve objectives seldom repeated. These are communicated through programs, projects, and budgets. STANDING-USE PLANS Policies A policy is a statement that provides a general framework for decision-making. For instance, if a company develops a strategy of quality service and product reliability, a policy statement might be circulated that says all customer complaints are to be handled as quickly as possible with free product replacement. Then the customer service department will have a mandate for performance that reinforces strategy. Policy statements are close to "standing orders." Policies may be concerned with a wide variety of issues. They are meant to provide guidelines for behavior to ensure consistency over time. For instance, policies on hiring standards may improve the work force and stabilize employment, and policies on product designs and material purchasing may be created to improve a company's productivity.

Policies are also instruments of delegation that alert subordinates to their obligations. Effective policy statements have three characteristics: They are clear and understandable, stable over time, and communicated to everyone involved. Examples of Corporate Policy Areas Major Objectives Profitability targets and expectations for investment efficiency Profitability trends including returns to assets and equity interests Dividend payments and commitments to stockholders Growth of the firm through long-range technological/market innovations Social responsibility for employee health and safety, public safety Social considerations for ecology, pollution, employment, economy Customer considerations, image of the firm Facilitating Objectives Product development and research development Equal employment opportunities, affirmative action Market penetration, new-customer development, foreign expansion Advertising and promotion policies, pricing considerations Cost containment, materials management, inventory, purchasing Cash flow management, credit position, payables and receivables polices Customer credit, financing of sales, collection Production and quality control criteria Supporting Operations Wage and salary administration considerations Personnel management, hiring, training, promotion, termination Layoff and cutbacks, labor relations, grievances Vacation, holidays, leaves, travel, employee theft, security Performance appraisal, standards for work, absenteeism Procedures Procedures lay down the "how" of doing activitiesthe step-by-step ways of doing certain tasks. Good procedures provide a sequence of actions that, once completed, fulfill specific objectives. These objectives reinforce policies and help employees achieve results efficiently and safely. Rules

Rules spell required action or inaction, allowing no discretion unlike policies. Rules guide action without specifying a time sequence, unlike procedures.
AMBIVALENT PLAN Program A program is a single-use plan comprising multiple activities orchestrated to achieve one important objective. Itis supported by budget. Programs have several special features that set them apart in the planning process. They are like stories or stage plays in that they have clear beginnings and definite endings. Program managers are given scripts to follow that reflect a systematic completion of activities that cultimate in fulfilled program objectives. Although we have said that programs are single-use plans, some types of programs are designed to be repeated. For example, universities develop academic programs, such as an undergraduate business degree program, that are replicated by hundred of students. Each student follows a format of courses that must be completed to satisfy degree objectives. There is a clear beginning when the student matriculates into the program, and a definite ending when the student receives a degree upon graduation. In the sense that every student completes a degree program only once, it is a "single-use" plan; in so far as it is replicated for many students, it is a "standing-use" plan. SINGLE-USE PLANS Project A project is a single- use plan with a specific and uncomplicated short-term objective. Projects are similar to programs but distinguished from them in three important ways. First, projects are unambiguously planned with single objective. The single activity to build luxury box seats for a theater is a project within the larger scope of a program. Second, a project is not repeated. Third, projects tend to be accomplished in short period of time. Budgets A budget describes in numerical terms resources allocated to organizational activities. A budget communicates organizational expectations for results.

By budgeting, managers identify resources, such as money, materials, human resources, and overhead support, allocated to an activity. Budgets are clear statement of expected results expressed in measurable terms, usually dollars/ pesos. Production budgets, for example, can be expressed in number of units produced. There are budgets for man-hours, machine hours, inventory levels, computer time, customer credit, and many other activities. Marketing sales quotas, which are really budgets, are used to express sales activity in both dollar/ peso and unit volume figures. o All budgets define resource and results in quantified terms. o They are set, within a fixed period of time. Marketing quotas may be budgeted monthly and quarterly, production budgets may be specified for weekly, monthly, and quarterly operations, and financial budgeting may reflect monthly, quarterly, and annual planning periods. o Budgets help to coordinate activities by providing specific information to monitor performance. They are used to control activities, track results, and restrain managers from misallocating resources. By having consistent measurement criteria, such as dollars or pesos, they provide excellent documentation that all employees can understand. o Unfortunately, budgets are too often viewed only as restrictive controls, and can, in fact, become repressive. Used effectively, they are valuable management tools. o Budget projections, called pro forma budgets, anticipate future results. These projections typically include a set of strategic budgets based on sales forecasts, and contain pro forma income statements, pro forma cash flow statement and pro forma balance sheets. o Strategic budgets are broken down into tactical budgets with specific annual projections for divisions or functional departments; tactical budgets are also called annual operating budgets. o Lower-level operational budgets describe in detail weekly, monthly, and quarterly activities, and provide the numerical information for operating schedules. Schedule A schedule is a commitment of resources and labor to tasks with specific time frames. Therefore, budgets and schedules reinforce each other to clarify expectations in measurable terms. FLEXIBILITY IN PLANNING Planning is a process of looking into the future, and since the future is uncertain, so are plans. Plans must have a degree of flexibility so that managers can adapt to circumstances. Policies are only guidelines, and procedures are preferred sequences for activities. In both instances, managers have discretion to adapt behavior to situations. Rules are not flexible, although they can be changed. In fact, few plans are so certain that we can afford to take away management prerogatives. Flexible planning allows for reasonable deviations in performance, recognizing that wherever human beings are involved, there will be some variation in behavior. This was known to Frederick Taylor, who measured work in steel mills and observed as much as 300 percent variation among workers doing the same task. Similarly, Elton Mayo discovered that circumstances affected performance tremendously during the Hawthorne experiments. These men did their research more than half a century ago, yet current research suggests that even today companies with sophisticated information processing have great difficulty predicting performance. Flexibility in planning suggests nothing more than using common sense. Customer demand is a function of so many variables that even the best forecasting methods often fail to predict it. Flexible planning allows managers to adjust to circumstances in order to minimize huge variations in results. This does not imply that anything goes. It simply means that every manager must recognize how the best plans can change. Plans are dynamic, and planning itself is an ongoing process of approximation. CONTINGENCY PLANNING Contingency plan is a conscious effort to develop alternative plans to be prepared for future conditions. A contingency plan is an alternative set of objectives and activities that can be implemented if circumstances change so drastically as to make the preferred plan infeasible. Effective planning provides a range of contingency actions based on reasonable assumptions about future circumstances. Planning premises are those considerations or variables taken into account by managers that are expected to influence a company's objectives or its activities. Some of the most sensitive considerations are changes in government legislation, effects of tax regulations, access to raw materials, costs of resources such as energy, and the availability of personnel with the skills needed to accomplish an organization's work. Planning premises can extend to hundreds of factors that affect performance, ranging from high interest rates that can disrupt expansion plans to war in the Middle East that can affect oil supplies. Technological changes are particularly important because a firm's products or manufacturing processes can be made obsolete by rapid scientific changes. Contingency planning implies the development of alternatives for both expected and unexpected future events. COMPREHENSIVE PLANNING Comprehensive planning is the total involvement of an organization in systematic planning at all levels to integrate objectives and coordinate formal planning processes.

Comprehensive planning means involving an entire organization in systematic and formal planning that results in fully integrated objectives. Thus, operating schedules, budgets, and projects are closely tied to tactical plans, annual budgets, and programs, which in turn are closely coordinated with long-term strategic objectives. Comprehensive planning also relies on a formal system of performance checkpoints within the plan to reassure managers when things are going right and to alert them to take action when things are going wrong.
APPROACHES TO PLANNING While the planning describes how managers in most companies develop plans, there are three distinct approaches that describe who have responsibility for formulating plans. Each approach involves different managers, and each reflects a different philosophy of planning. Centralized Top-down Planning Top- down planning is the prevalent approach in small and highly centralized organizations. It is the traditional approach, embracing a philosophy of hierarchal authority in which strategic planning is first done by executives, tactical planning follows to reinforce strategic objectives, and operational planning is accomplished after tactical plans are in place. The term centralized is used because planning responsibilities are assigned to a few executives at the organization' highest echelons. The term top-down is used because these executives assume the burden of establishing a firm's major objectives, writing policies and communicating to lower-level managers expectations for formulating progressively more detailed plans. In larger, more complex organizations, executives charged with planning responsibilities have a planning department with staff experts who do most of the actual planning work. Decentralized Bottom-up Planning Bottom-up planning is in approach to planning in which authority to establish objectives any planning responsibilities is delegated to lower-level managers who are expected to initiate planning activities. Bottom-up planning is an approach that delegates planning authority to division and department managers, who are expected to formulate plans under the general strategic umbrella of corporate objectives. Companies using this approach have a headquarters planning staff, much like the planning department in a centralized top-down system, but the headquarters staff coordinates, rather than develops, plans. The term decentralized is used to emphasize that authority is pushed downward and throughout a company for independent planning initiatives. The term bottom-up is used to emphasize that planning decisions made at lower levels are aggregated at higher echelons to form a comprehensive company plan. Lower-level decisions can be vetoed by executives, but it is more likely they will be reviewed by company executives and revised with the help of headquarters planning staff. This approach involves more managers in planning, and it appeals to those who advocate participation in decision-making. However, it is an effective approach only when company leaders truly believe in a philosophy of shared responsibility and have the organizational structure necessary to allow divisions and departments to function some what independently. Team Planning Team planning is a participative approach to planning whereby planning teams comprised of managers and staff specialists initiate plans and formulate organizational objectives. Team planning is a participative approach that relies on task force teams comprising managers and planning specialists temporarily assigned responsibilities for formulating plans. Westinghouse, Hewlett Packard, Delta Airlines, Mariott Corporation, and Lockheed are a few of the major companies that endorse team planning, but many companies are moving toward it to encourage participation by more employees. Each of these companies has designed a unique team system, but their planning activities are generally similar. Top management sets the process in motion with articulated strategies supported through executive planning committees. These executive committees comprise staff planners and managers who generate information for planning premises needed by lower-level teams. Guidelines are then drawn up by top management for division-level teams with the responsibility for formulating tactical plans. Division managers are often given a menu of strategies for product development, market expansion, and financial results. Division teams coordinate their plans with strategic planning teams, and managers at both levels jointly determine the tactical plans to reinforce strategic objectives. Division managers in turn articulate these objectives and tactical plans to lower-level operation managers. Operating teams repeat the planning process, and the accumulated decisions are aggregated into a comprehensive company plan. Team planning is not a compromise between the top down and bottom-up approaches; it is the integration of the best features of both. The major top-down element is that as much information as Possible is passed downward, together with as many guidelines as possible for supporting the company's major strategic objectives. The major bottom-up element is a commitment to participation by subordinates, who are given tremendous latitude for making planning decisions even though these decisions must be carefully coordinated with higher-level teams. Team planning benefit companies by bringing together staff and operating managers, by integrating plans between organizational strata, and by improving communication through participation.
By JinAd