Management by Objective

Efforts in Organizations Are Interdependent, Not Additive

In M.B.O. as practiced, the company’s objective is parceled out to the various components or divisions. The usual assumption in practice is that if every component or division accomplishes its share, the whole company will accomplish its objective…

Unfortunately, efforts of the various components do not add up. There is interdependence. Thus, the purchasing people may accomplish a saving of 10 per cent over last year, and in so doing raise the costs of manufacture and impair quality. They may take advantage of a high volume discount and thus build up inventory, which will hamper flexibility and responsiveness to meet unforeseen changes in the business.

Peter Drucker was clear on this point with deep understanding. It is unfortunate that many people do not bother to read his warning (Management Tasks, Responsibilities, Practices, Harper & Row, 1973).

- Dr. W.E. Deming, The New Economics, 3rd ed. (p. 22)

The efforts of various divisions in a company are not additive. Their efforts are interdependent. One division, to achieve its goals, may, left to itself, kill off another division. Peter Drucker is clear on this point.

- Ibid. (p. 66)

A system must be managed. It will not manage itself. Left to themselves in the Western world, components become selfish, independent profit centres, and thus destroy the system.

The secret is cooperation between components toward the aim of the organization.

- Ibid. (p. 36)

IN the second chapter of The New Economics, Dr. Deming introduces us to the “faulty” management practice of Management by Objective (M.B.O.) By definition it occurs when we see our organization as a collection of parts that may be optimized independently from one another for improvement of the whole. It’s a method tailor-made for Western organizations that are comprised of departments and divisions with limited cooperation and significant competition between them for “scarce” resources. Deming provides us with this pithy Rx: “Manage the components for the optimization of the aim for the system.” In other words, we need to focus more on interactions between the components instead of independent actions within them.

For example, suppose top-management provided the budgeting directive for four departments to cut $2,000 each from their budgets: Is the total savings $8,000?

Consider: What actions would each department undertake to find the savings in a typical, siloed organization where each is rated and ranked in competition with the other? What would be the predisposition of each manager? Would the cut affect each department’s ability to contribute equally? What would be the impact to the quality of product or service they contribute to providing? Who would be blamed for problems arising out of the exercise? What would the real, total cost of the cuts be to the organization?

Alternatively, suppose the management and teams for each of the four departments were engaged by top-management to work cooperatively to find ways to save $8,000. For example, one department might choose to “invest” $2,000 of their budget to help offset $10,000 of savings in another for a net savings of $8,000 with an agreement for help in the other direction should it be needed.

Consider: What is the difference with this method and the prior one that focuses on actions? What interactions would need to be managed to support it? What would be the predisposition of each manager and team member involved? What considerations would they have when making the decision to find savings? Who would be accountable?

(I am indebted to friend and mentor Dr. Bill Bellows whose original thought exercise on Addition/Active Thinking vs. Investment/Interaction Thinking inspired this interpretation)

Some Thoughts on Dr. Drucker’s Influence

As noted in the above quotes, Deming took pains to be explicit about his criticisms of Management by Objective as practiced, and the shared understanding he had with Dr. Drucker about the intent of his original work on MBO. This care and concern likely originated from their time as colleagues at NYU, as retold by Ken Craddock and Kelly Allan in a 2011 article for the Process Excellence Network:

During the time that MBO was catching on in corporations, Dr. Drucker was a professor at the New York University School of Business. Across the hall from his office was that of another NYU professor, Dr. W. Edwards Deming. The two had a cordial, collegial relationship.

As Dr. Deming recounted the story, one day he approached Dr. Drucker and told Drucker that he (Deming) had been seeing MBO implemented with short-term numerical goals, not as a strategic management tool – as Drucker had intended it to be. Drucker thanked Deming and then investigated the actual practice of MBO in organizations. He determined that MBO too often was not being used properly. In fact, it was being used frequently in ways exactly opposite of what Drucker had intended.

Drucker set out in future writings to further clarify MBO – and to stop the spread of MBO malpractice.

It’s these “future writings” that Deming refers to in the quotes above, which were gathered in Drucker’s book, Management: Tasks, Responsibilities, Practices. While Deming did not provide a chapter or page reference for his assertions, my past research indicates that he was probably referring to the passage below from Part 2, The Manager and Management Sciences (p. 508) - emphasis mine. It is certainly well-aligned with the thinking behind Dr. Deming’s System of Profound Knowledge:

Why Management Science Fails to Perform

There is one fundamental insight underlying all management science. It is that the business enterprise is a system of the highest order: a system the parts of which are human beings contributing voluntarily of their knowledge, skill, and dedication to a joint venture. And one thing characterizes all genuine systems, whether they be mechanical, like the control of a missile, biological like a tree, or social like the business enterprise: it is interdependence. The whole of a system is not necessarily improved if one particular function or part is improved or made more efficient. In fact, the system may well be damaged thereby, or even destroyed. In some cases the best way to strengthen the system may be to weaken a part—to make it less precise or less efficient. For what matters in any system is the performance of the whole; this is the result of growth and of dynamic balance, adjustment, and integration rather than of mere technical efficiency.

Primary emphasis on the efficiency of parts in management science is therefore bound to do damage. It is bound to optimize precision of the tool at the expense of the health and performance of the whole.

Additionally, Dr. Drucker devotes an entire chapter to Management by Objectives and Self Control where he elaborates on MBO as a strategic tool for aligning on objectives “derived from the goals of the business enterprise” that “spell out… contribution[s] to the attainment of company goals in all areas of the business” and not a means for enforcing compliance or local sub-optimization. In particular he is careful to separate the meaning of control from that of domination in favour of under self-direction.

Reflection Questions

Consider the above quotes from Dr. Deming about Management by Objective as practiced, as well as Dr. Drucker’s overlapping thoughts on the topic: In what ways do you find MBO practiced in your organization or business? As Dr. Drucker intended, or as Dr. Deming warned against? What are the predispositions of management toward each other and the objectives? How are employees affected? What is the impact on quality of product or customer service? What behaviours do you notice it encouraging? Would departments or divisions be inclined to “invest” in each other to improve the whole organization? Why or why not? What would need to change to move away from focusing on actions and toward interactions?

Extra Credit Reading

• Craddock, Ken and Allan, Kelly. Organizational Sabotage - The Malpractice of Management By Objective. Process Excellence Network, July 11, 2011.

• Drucker, Peter F. Management: Tasks, Responsibilities, Practices. HarperCollins, 1985, 1993.