Management Will be Management by Objectives and Self Control (MbO)

Drucker’s MbO was not only Management by Objectives, where the manager would be controlled directly by others. For Drucker’s MbO could be regarded as a “philosophy” of management (ibid:33-134). It rested as did the whole structure of modern management on Taylor’s (see Profit 3(ii)) most valuable insight “that planning is different from doing” and Taylor’s emphasis of the importance of planning (ibid:77).

The great advantage of MbO was that it made it possible for managers to control their own performance (ibid:28). To do so, the manager needed to know his goals and then have the information to measure them (ibid:29). MbO was dependent on the manager being able to measure all functions of the business including those that hitherto it had been considered impossible to measure. MbO was an aid to lift not lower performance.

MbO gave genuine freedom under the law. It commenced with Top Management, whose

responsibility was to define the overarching policies (the objectives) of the business as identified in Concept. The starting point for the Chief Executive function was to ask the question “What is

our Business?” (As posed in Society) to which in Practice has been added, “What should it be?”

(ibid:46) Warnings were given that the question was regularly not asked and when it was asked it was more difficult to answer than appeared at first sight. From this starting point the Top

Management in the organisation could proceed to organise their work. In Drucker’s view the job of the CEO was that of a team despite often being portrayed as a one-man job. It required a small team of two but preferably three people. Drucker wrote that there had probably never been a successful Corporation that had had a solitary head. Even Fords during its most successful period had Ford and James Couzens as a team (ibid:71)

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The executive team was responsible for (i) those external relationships of the organisation, which were initially identified in Concept, and although some activities had more detail, their range had not changed; and (ii) internal spirit (esprit de corps), the creation of common citizenship, and the practical conversion of the Christian principles started at the top of a responsible organisation that gave the members freedom, purpose, status, opportunities for all, and promoted integrity as the overriding philosophy. The executive team was also responsible for providing as much security of employment as was possible.

The team had to set the objectives of the business while accepting the practical limit that these could never be a railroad timetable. They could only ever be as “a compass by which a ship

navigates” (ibid:58). Regardless of the type of business, objectives remained the same although

there might be a different emphasis. These objectives were “market standing; innovation;

productivity; physical and financial resources; profitability; manager performance and responsibility; worker performance and attitude and public responsibility” (ibid:60).

Having established that the objectives were the same for every business, illustrations were given of the different emphases. One of these areas was ‘time-span’. Production of a steam turbine will have a time-span of six years, {GE} whereas trees for wood pulp will take fifty years to mature {Crown-Zellerbach} (ibid:81). If a long term view did not prevail within the enterprise, then when “the first cloud appears” sudden cuts can destroy in one day what has taken years to build [Idea: warning against short-termism] (ibid:82). Although the emphasis of the objectives must be balanced against each other, the balance may change from time to time. Objectives also needed have to have regard for the future when obtaining results for today. It was not a mechanical job of staying within budget, but one requiring judgement, which could be achieved only if it was based upon a “social analysis of the business” (ibid:83-84).

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In The Evolution of Management Thought (Wren 1994) referred to George Stanley Odiorne (1920-1992) (1965) and Ronald G. Greenwood (1981). Examination of their work provides the following interpretation of MbO by two close associates of Drucker’s. Their ideas could be said to be the best informed.

Odiorne: Although Odiorne’s Management by Objectives – A System of Managerial Leadership (1965) examined MbO in detail, Schumpeter’s Innovation and Entrepreneurship {probably through Drucker’s influence} was given more prominence than Drucker’s work which only received two references. However Odiorne tracked Drucker’s ideas and offered the following description of MbO. …management by objectives is essentially a system of incorporating into a

more logical and effective pattern to the things many people are already doing, albeit in a somewhat chaotic fashion, or in a way that obscures personal risk and responsibility” (Odiorne

ibid: 56). “MBO is a system of managing, not an additional managers job” (ibid:77). Odiorne, a student of Drucker’s and the first person to write a full-scale book on MbO said, “[Drucker] has

been a voice of sanity in the graduate schools” (Wren 1994:366) {Odiorne was one of Drucker’s

pupils}.

Odiorne followed his 1965 book with a paper MBO: A Backward Glance (Business Horizons October 1978). His research was wide ranging and recorded that a “popular pastime amongst

academics in uncovering the origins of MbO,” which he cited as including Abraham & God, The

Koran, and the philosophers ranging from Plato through to Marx. More objectively Arthur Moxham was recorded as the earliest tutor on MbO with Pierre du Pont as his student at the turn of the 20thc followed by Brown, Sloan, GM and later adherents.

Odiorne continued “Drucker was undoubtedly forced into paying attention to MBO as a natural

product of decentralization by the response of his audience in lectures and books. The fact that Drucker is a political scientist at heart, and a management scientist by request only, is often

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overlooked. For Drucker MBO was necessitated by the need for political changes in the

Corporation. His belief was that structural changes were necessary from within the organisation to enable them and the capitalist system to survive… “[With] the observational skills of

Tocqueville or a Darwin”. He was probably closer to his fellow Austrians, Frederick Hayek and Ludwig Von Mises than he was to Douglas McGregor, Abraham Maslow or Rensis Likert.”

Consequently Drucker was not motivated in his ideas by engineering efficiency

Odiorne recorded not only the impact of Concept and Practice but also work on MbO by a school of competent contributors. He also acknowledged that there were “haters” of the concept, who were vociferous rather than large in numbers. Some were employees of businesses where MbO was incorrectly used as a threat that “employment will be terminated by cause” unless performance targets are met. The malpracticers of MbO were “the antiplanner [who] are a common type in

both business and government”.

Odiorne’s considered conclusion was that: -

“MBO is a philosophy that reacts to the remoteness of bureaucracy and isolation from the

leadership of the Corporation”. It was a response to what Top Management demands and

how people at work can meet the demands. “It depends on human commitment self

development and responsibility to produce results. It is based upon the creation of the future and forward planning rather than reacting to problems. It is about opportunities. MBO is based upon logic and is therefore easily proven to be job-related rather than related to caste, class, or personality”. It helped resolve some chronic areas of

management failure. It is a catalyst for correcting some of the long outstanding retarders to advancement by helping to determine performance, effectiveness, training, and rewards.

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Greenwood: While Odiorne’s references were wide ranging, Ronald Greenwood used Odiorne’s two preceding works and also extensive alternative sources. Greenwood’s work was

Management by Objectives: As Developed by Peter Drucker, Assisted by Harold Smiddy

(Ronald G Greenwood, Academy of Management Review 1981 Vol 6 No2 225 & 230). Greenwood, as the title would suggest, put Drucker much more in the centre of the MbO stage while Odiorne ranked him as the significant contemporary figure. Greenwood’s conclusion was that:

“Drucker is often credited with “inventing” management by objectives. He himself has

never claimed the distinction, but a perusal of the literature would lead one to a proper conclusion that Drucker was first to publish the concept and first to use the term.”

“MBO (was) conceptualized by Peter Drucker and first put into practice by Harold

Smiddy, a long-time vice president of the General Electric Company and a close personal friend of Drucker.’” [1954.p. ix]. “Drucker was the first to identify that objectives have to be identified while earlier management theorists believed they were already known”.

“To Drucker, these activities “the work of managing as planning, organizing, integrating,

and measuring the work of the organization” are the implementation of what he calls the real work of managing: of setting objectives based upon the question what the business is, what it should be? Although Drucker has made this point for the last thirty years it apparently has not yet been understood. For Sloan and Smiddy objectives were obvious; for Drucker they were anything but obvious. Drucker did coin the phrase MBO and made numerous contributions to its philosophy.”

“Drucker, on the other hand, found setting objectives to be the difficult, highly risk-taking

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as a practice around the high risk taking decisions on objectives – something few others understood.” The earlier systematic writers on management had focused on process,

whereas for Drucker setting objectives was an intellectual exercise based upon

conceptualism and analysis “from which the process of management would flow” [William J Greenwood/Ronald G Greenwood Personal Communication 22 November 1979]

“In answer to the question “Did you know anybody who practiced MBO before you wrote

about it?” Drucker replied “A good many people in earlier times managed by objectives as Sloan.” … with probably Pierre Du Pont, before him” and – no doubt – “Donaldson Brown”.

For Greenwood “Peter Drucker put objectives into center stage and made them the core of

the structure of a discipline of managing. Many other managers probably “invented” and used an MBO concept before 1954, but it took Drucker to put it all together, think through its underlying philosophy, and then explain and advocate it in a form others could use”

(Greenwood 1981).

In a later reflection Greenwood was more definite of Drucker’s contribution. “Drucker did

develop the concept there is no doubt about that”. “MBO as it is understood today was conceptualized by Drucker and first put into practice by Harold Smiddy and his staff at GE”

(Wren & Greenwood 1998:230-231).

Greenwood cleared up a misunderstanding that Sloan, was the first to use the term MbO. In his book on Drucker, Tarrant quoted Drucker as saying “I didn’t invent the term ‘management by

objectives’ actually, Alfred Sloan used it in the 1950s” (Tarrant 1976). “Tarrant now says that he misconstrued what Drucker said about Sloan using objectives as a key to his management style to mean he used the term; in fact Sloan used neither the term nor the MBO philosophy (Greenwood

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1981). Drucker reported that neither Sloan nor Brown at GM “had [anything] to do with the

term… [and] nothing to do with the concept as such” (Ibid 1979b). But Drucker also claimed that

Sloan “practiced managing by objectives without considering it central to his management

philosophy or to his style” (Ibid 1981c).” Greenwood acknowledges that for Drucker MbO was

central and the most difficult function for the manager, as confirmed in Practice.

For Drucker objectives had to be decided upon predictions which are always difficult. Predictions of between five to fifteen years in the future were always going to be ‘guesses’ - a ‘gamble’ or a ‘hunch’. But what business needed was not a ‘business forecast’ in the usual sense but some better tools that would enable the business to continue without the fear of unpredictable business cycles neutralising their thinking. This was Sloan’s philosophy. Drucker provided three useful tools (i) Test the assumptions against the sharpest set-back that our experience could lead us to expect; (ii) Use Bedrock Analysis, which was based upon events that have already happened and tries to find ‘the why’ of future events. {This is the start of Drucker’s use of demographics, which should be included in this analysis}. But nothing was inevitable in the future, so Bedrock

Analysis should not be used on its own (1954:89-91). It should always be used with (iii) Trend Analysis to limit risks. Trend Analysis attempted to analyse “how likely” or “how fast”. Drucker also referred to a new set of decision making tools ‘Operations Research’, which he identified as important but not new as most managers think as it was used by the “medieval symbolical

logicians such as St Bonaventure”. However, the new tools had been brought into everybody’s

reach. Although mathematical information theory was in its infancy, potentially it would enable identification of deviations and action patterns (ibid:360-361). On the decision making process Drucker referred to his own wide-ranging advice on the difficulties of making decisions. He described the process of requiring an integrated approach that could never be achieved by a single objective. It was a rational activity based on “definite assumptions” and ‘calculated assumptions’ in his “Management Science and the Manager (January 1955), in which he acknowledged

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assistance for stimulation, advice and criticism to Hurni, Smiddy and Porter. He also referenced

Practice for a fuller description.

Drucker continued that once the executive team has been determined, the objectives of the business could be set in all of the key functions that are identified. What was important was how these decisions were made, in order to allow the business to obtain results for five to fifteen years hence. Drucker suggested three methods to be used to make the primary decisions, Activity Analysis, Decision Analysis and Relation Analysis. By using these methods the business could be analysed and the question of “What is our business” and “What should it be” can be answered in a practical manner. Only then could the structure of an organisation be determined. [Idea: The structure must follow the business not the business following the structure, which is flawed strategy] (1954:190-198). {This conclusion predates Alfred Chandler Jnr, who is generally acknowledged as the first to draw it (Chandler 1962)}.

That others had practised MbO before Drucker is not at issue. What Drucker did was synthesise the ideas and also identify the flaw in the previous methods of setting objectives. In doing so he created something new and made it possible for MbO to be applied as a discipline. In this respect Drucker had a substantial role in originating MbO not just in coining the name. Of Drucker’s seven key ideas, MbO was the weld which brings together the other six. Its application increased the effectiveness of the others and gives them a consequence that they did not possess

independently. What was apparent in this section was that the previously mentioned new

influences were being worked into Drucker’s ideas, including Smiddy’s already highlighted letter between the manager and his subordinate. This was intended to enable the objectives of the business to be identified with the individual’s contribution to which he had agreed.

Despite the large sample of Drucker’s case studies none emphasise that management of a business was founded on it being the “total integration” of all the functions of an enterprise. That it was

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practised in successful enterprises was self-evident, otherwise they could not perform at the levels that they do. Although Drucker wrote that Hopf saw the need, it was Drucker that made it a central necessity followed closely by Smiddy in his 1955 essay Integration and Motivating for

Effective Performance. MbO was described as the integration of all the functions of management

but not in a static pattern because the order and emphasis will change. That management was total integration of all the functions of an enterprise, may be the most important message in Practice because it is timeless and can be applied to all management philosophies not only MbO as he clearly sets down. “At first sight it might seem that different businesses would have entirely

different key areas – so different as to make impossible any general theory. It is indeed true that different key areas require different emphasis in different businesses – and differing emphasis at different stages of the development of each business. But the areas are the same, whatever the business, whatever the economic conditions, whatever the business’s size or stage of growth”

(1954:60). “When it comes to the job itself, however, the problem is not to dissect it into parts or

motions but to ‘put together an integrated whole’. This is the new task” (ibid:289).