7.3 From Management by Objectives to the Balanced Scorecard

Management by Objectives

MBO is a systematic and organized approach that allows leaders to focus on achievable goals and to attain the best possible results from available resources. MBO aims to increase organizational performance by aligning the subordinate objectives throughout the organization with the overall goals that leadership has set. Ideally, employees get strong input to identify their objectives, time lines for completion, and so on. MBO includes ongoing tracking and feedback in the process to reach objectives.

MBO was first outlined by Peter Drucker in 1954 in The Practice of Management. One of Drucker’s core ideas in MBO was where managers should focus their time and energy. According to Drucker, effective MBO managers focus on the result, not the activity. They delegate tasks by “negotiating a contract of objectives” with their subordinates and by refraining from dictating a detailed road map for implementation. MBO is about setting goals and then breaking these down into more specific objectives or key results. MBO involves:

1. Setting company-wide goals derived from corporate strategy
2. Determining team- and department-level goals
3. Collaboratively setting individual-level goals that are aligned with corporate strategy
4. Developing an action plan
5. Periodically reviewing performance and revising goals _{(Greenwood, 1981; Muczyk & Reimann, 1989; Reif & Bassford, 1975)}

A review of the literature shows that 68 out of the 70 studies conducted on this topic showed performance gains as a result of MBO implementation (Rodgers & Hunter, 1991). It also seems that top leadership commitment to the process is the key to successful implementation of MBO programs (Rodgers et al., 1993).

The broader principle behind MBO is to make sure that everybody within the organization has a clear understanding of the organization’s goals, as well as awareness of their own roles and responsibilities in achieving objectives that will help to attain those goals. The complete MBO system aims to get leaders and empowered employees acting to implement and achieve their plans, which automatically achieves the organization’s goals.

The Balanced Scorecard

Developed by Robert Kaplan and David Norton in 1992, the Balanced Scorecard approach to management has gained popularity worldwide since the 1996 release of their text, The Balanced Scorecard: Translating Strategy into Action. In 2001, the Gartner Group estimated that at least 40% of all Fortune 1000 companies were using Balanced Scorecard; however, it can be complex to implement, so it is likely that the format of its usage varies widely across firms.

The Balanced Scorecard is a framework designed to translate an organization’s mission and vision statements and overall business strategy into specific, quantifiable goals and objectives and to monitor the organization’s performance in terms of achieving these goals. Among other criticisms of MBO, one was that it seemed disconnected from a firm’s strategy, and one of Balanced Scorecard’s innovations is explicit attention to vision and strategy in setting goals and objectives. Stemming from the idea that assessing performance through financial returns only provides information about how well the organization did prior to the assessment, the Balanced Scorecard is a comprehensive approach that analyzes an organization’s overall performance in four ways, so that future performance can be predicted and proper actions taken to create the desired future.

Four Related Areas

Balanced Scorecard shares several common features. First, as summarized in the following figure, it spells out goals and objectives for the subareas of customers, learning and growth, internal processes, and financial performance. The customer area looks at customer satisfaction and retention. Learning and growth explore the effectiveness of leadership in terms of measures of employee satisfaction and retention and information system performance. The internal area looks at production and innovation, measuring performance in terms of maximizing profit from current products and following indicators for future productivity. Finally, financial performance, the most traditionally used performance indicator, includes assessments of measures such as operating costs and return-on-investment.

On the basis of how the organization’s strategy is mapped out in terms of customer, learning, internal, and financial goals and objectives, specific measures, and the specific activities for achieving those are defined as well. This deeper Balanced Scorecard logic is summarized in the following figure. The method examines goals, objectives, measures, and activities in four areas. When performance measures for areas such as customer relationships, internal processes, and learning and growth are added to the financial metrics, proponents of the Balanced Scorecard argue that the result is not only a broader perspective on the company’s health and activities, it’s also a powerful organizing framework. It is a sophisticated instrument panel for coordinating and fine-tuning a company’s operations and businesses so that all activities are aligned with its strategy.

As a structure, Balanced Scorecard breaks broad goals down successively into objectives, measures, and tactical activities. As an example of how the method might work, an organization might include in its mission or vision statement a goal of maintaining employee satisfaction (for instance, the mission statement might say something like “our employees are our most valuable asset”). This would be a key part of the organization’s mission but would also provide an “internal” target area for that goal in the Balanced Scorecard. Importantly, this goal, when done correctly, would also be linked to the organization’s total strategy where other parts of the scorecard would show how having great employees provides economic, social, and environmental returns. Strategies for achieving that human resources vision might include approaches such as increasing employee-leader communication. Tactical activities undertaken to implement the strategy could include, for example, regularly scheduled meetings with employees. Finally, metrics could include quantifications of employee suggestions or employee surveys.

The Balanced Scorecard in Practice

In practice, the Balanced Scorecard is supposed to be more than simply a framework for thinking about goals and objectives, but even in that narrow sense, it is a helpful organizing framework. The Balanced Scorecard’s own inventors “rightly insist that every company needs to dig deep to discover and track the activities that truly affect the frameworks’ broad domains (domains such as ‘financial,’ ‘customer,’ ‘internal business processes,’ and ‘innovation and learning’)” (Ittner & Larcker, 2003). In its broadest scope, where the scorecard operates much like a map of the firm’s vision, mission, and strategy, the Balanced Scorecard relies on four processes to bind short-term activities to long-term objectives:

1. Translating the vision. By relying on measurement, the scorecard forces leaders to come to agreement on the metrics they will use to translate their lofty visions into everyday realities.
2. Communicating and linking. When a scorecard is disseminated up and down the organizational chart, strategy becomes a tool available to everyone. As the high-level scorecard cascades down to individual business units, overarching strategic objectives and measures are translated into objectives and measures appropriate to each particular group. Tying these targets to individual performance and compensation systems yields “personal scorecards.” Thus, individual employees understand how their own productivity supports the overall strategy.
3. Business planning. Most companies have separate procedures (and sometimes units) for strategic planning and budgeting. Little wonder, then, that typical long-term planning is, in the words of one executive, where “the rubber meets the sky.” The discipline of creating a Balanced Scorecard forces companies to integrate the two functions, thereby ensuring that financial budgets indeed support strategic goals. After agreeing on performance measures for the four scorecard perspectives, companies identify the most influential “drivers” of the desired outcomes and then set milestones for gauging the progress they make with these drivers.
4. Feedback and learning. By supplying a mechanism for strategic feedback and review, the Balanced Scorecard helps an organization foster a kind of learning often missing in companies: the ability to reflect on inferences and adjust theories about cause-and-effect relationships.

Other Performance Measurement Systems

You can imagine that it might be difficult for organizations to change quickly from something like MBO to a Balanced Scorecard approach. Indeed, both MBO and the Balanced Scorecard fit in the larger collection of tools called performance management systems. Such systems outline “the process through which companies ensure that employees are working towards organizational goals” (Ghorpade & Chen, 1995).

Performance management begins with a senior leader linking her or his goals and objectives to the strategic goals of the organization. That leader then ensures that direct reports develop their goals in relation to the organization’s overall goals. In a multidivisional or multilocation organization, lower-level leaders develop their goals, and thus their departmental goals, to correspond to the organizational goals. Staff members within each department then develop their objectives for the year, in cooperation with their leaders. Using this pattern for planning, all activities, goals, and objectives for all employees should be directly related to the overall objectives of the larger organization.

Performance management systems are more than the performance review because reviews typically are the final event in an entire year of activity. At the beginning of the year, the leader and employee discuss the employee’s goals or objectives for the year. This will form the basis for ongoing discussion recorded in a document called the performance plan. The leader assists employees in developing their objectives by helping them to understand how their work relates to the department goals and the overall goals of the organization. The employee and leader also should work together to determine the measurements for evaluating each of the objectives. It is important that both the leader and employee agree what the objectives are and how they are to be measured.

Employees should not be set up with unrealistic expectations, which will only lead to a sense of failure. If additional support or education is required during the year to help employees meet their objectives, those can also be identified and planned for at this time.

The performance plan will contain the section on goals or objectives. It also should include a section that identifies the organization’s expectations of employee competencies. The set of expectations will involve a range of competencies applicable to employees based on their level in the organization. These competencies include expectations of how employees deal with problems, how proactive they are with respect to changing work, and how they interact with internal and external customers. While less complex than the Balanced Scorecard, you can see how the essential components are related. In addition to basic behavioral traits, supervisors and managers are expected to exhibit leadership, communicate vision, and provide strategic direction. It is important to ensure that employees understand expected competencies in respect to themselves.

Throughout the year, leaders must participate actively in coaching and assisting all employees to meet their individual goals and objectives. Should a problem arise—either in the way that success is being measured or in the nature of the objectives set at the beginning of the year—it can be identified well in advance of any review, feedback can be offered, and adjustments to the goals or support for the employee can be provided. This is referred to as continual assessment.

For example, suppose a staff member predicted that he or she would complete a particular project by a particular date, yet they have encountered problems in receiving vital information from another department. Through active involvement in staff activities, the leader is made aware of the situation and understands that the employee is intimidated by the supervisor of the other department. With coaching, the employee develops a method for initiating contact with the other department and receives the vital information she requires to meet her objective.

“From Management by Objectives to the Balanced Scorecard” in Principles of Management by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.