MANILA BULLETIN Business & Society September 22, 2008 LIMITATIONS OF MANAGEMENT BY OBJECTIVES Management by Objectives (MBO) is still

the predominant paradigm followed by many Philippine corporations. Most of our business schools and management consultants still focus on the formulation of corporate objectives as the first step in devising long-term strategic plans and short-term operational plans. SMART goals and KRAs (Key Results Areas) are the common ingredients of management systems. MBO is a necessary condition for effective management. It is increasingly the

experience of many organizations--whether or not for profit--that it is no longer a sufficient condition for business success. Management by Objectives should be complemented by a new paradigm that is increasingly being adopted by corporations in Europe, thanks to the advocacy of professors from the IESE Business School. This new approach is called Management by Competencies. Just exactly what is this new approach? To understand the gradual evolution of management systems from Management by Results to Management by Objectives and finally Management by Competencies, it would be worthwhile to briefly review business history in the West. At the beginning of the industrial revolution that first occurred in the United Kingdom and spread to the European continent and the U.S. in the nineteenth and early twentieth centuries, most businesses had predominantly hierarchical structures. There were the bosses on one hand the workers on the other. The focus of those running the organization was on "management," i.e. achieving certain results or performing certain tasks through other people. It was the responsibility of the manager to make sure that the people working under him would perform certain pre-determined tasks and

2 achieve pre-ordained results. That is why the phrases "Management by Tasks" or

"Management by Results" became fashionable. Under Management by Tasks, the element that linked the work that people did in a company to the company's objectives was the job, understood as a set of tasks that the employee had to perform in order for the company to achieve its objectives. Management by tasks forced the employee into a purely reactive position. He received a set of orders that informed him of the tasks to be performed: all he was expected to do was to perform them. He was not expected to know or share the company's objectives, nor to contribute value, nor to try to make the company's processes more efficient. His role was merely to understand the orders he was given and carry them out. The management style was "command and control." The organization was rigid, hierarchical and not readily adaptable to change nor to the current business environment. In the 1970s and 1980s, especially through the pioneering work and writings of management guru the late Peter Drucker, people in Philippine business realized that management by tasks seriously limited the initiative and creativity of their employees, especially as businesses became ever more complex and the tasks that had to be performed increasingly inter-related. There was need to focus on the objectives of the firm and to motivate the workers and managers to freely contribute to these objectives in as many ways that their creativity and individual talents would allow. Management by Objectives (MBO) became the byword in Philippine business. Under this system, top management set the Then the

objectives of the organization--unilaterally or through a participative process.

employees were motivated--by carrot or stick or a combination of both--to contribute to the attainment of the objectives in their respective ways. Management by Objectives represents a major step forward as compared with management by tasks. The employee is considered as more than a mere subordinate who cannot be trusted to make decisions. He has more freedom in designing and performing the

3 tasks that will enable him to achieve the corporate objectives. The objectives themselves define what he must do, but not how he must do it. This freedom produces a richer pool of talents than the hierarchical organization. MBO, however, has its limitations. It permits suboptimal outcomes: the possibility that individual objectives will be achieved in ways that are unsatisfactory or even harmful to the company in the medium to long term. Furthermore, the focus on objectives generates

competitive relations between the company and its employees, and very often among employees themselves. That gives rise to multiple inefficiencies when it comes to setting and accomplishing objectives, with bargaining and even cheating by employees to ensure that objectives are met. This defensive attitude towards the company becomes more apparent the more aggressive the objectives are. By the early part of the twenty first century, there was disenchantment with the MBO approach because it became obvious from the experiences of such formerly "exemplary" companies as Enron and Northern Rock that employees may be contributing to the objectives of a company in dishonest or unethical ways. The insufficiency of the MBO approach for business sustainability was dramatized during the subprime crisis when some banks suffered billions of dollars or euros in losses, not because their star traders were trying to enrich themselves at the expense of their employers, but because they were determined to meet their profit targets set by top management in ways that violated business ethics. It became even clearer that a keen awareness of the corporate objectives and the determination to achieve them do not guarantee ethical behavior. It is the responsibility of top management to inculcate the appropriate competencies and virtues among the employees and managers so that they would freely achieve the objectives in ways respectful of corporate values. In short, it is time for Philippine corporations to adopt a new paradigm: Management by Competencies. We shall explain this innovative approach introduced by some professors of the IESE Business School in

4 a future column. For comments, my email address is bvillegas@uap.edu.ph.