Management by objectives and the Balanced Scorecard: will Rome fall again?

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David Dinesh Arthur Andersen, Auckland, New Zealand Elaine Palmer MSIS Department, School of Business and Economics, University of Auckland, New Zealand Drucker introduced management by objectives (MBO) in the late 1950s. Kaplan and Norton introduced the Balanced Scorecard in the early 1990s. MBO and the Balanced Scorecard are management systems that align tangible objectives with an organisation’s vision. This article compares and contrasts the two management systems. The examination concludes that the philosophical intents and practical application of MBO and the Balanced Scorecard stem from similar precepts. The examination of patterns of MBO implementation also illuminates possible problems in the...

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Management by objectives and the Balanced Scorecard: will Rome fall again? David Dinesh Arthur Andersen, Auckland, New Zealand Elaine Palmer MSIS Department, School of Business and Economics, University of Auckland, New Zealand Drucker introduced manage- This focus on goal alignment as a way to ment by objectives (MBO) in Introduction improve organisational performance was, at the late 1950s. Kaplan and The adage that “there is no such thing as a the time, thought to provide the best path to Norton introduced the Bal- increased proﬁtability (D’Aveni, 1995). new idea” seems to be true with respect to anced Scorecard in the early 1990s. MBO and the Bal- management concepts. Management by objec- Drucker’s initial ideas about organisational anced Scorecard are manage- tives (MBO), which Drucker (1955) introduced goal congruence were extended and put into ment systems that align more than four decades ago, is a system of practice as a managerial performance system tangible objectives with an management based on goal congruence as a used at General Mills, known as “manage- organisation’s vision. This means of improving performance. The Bal- ment by objectives” (McGregor, 1960). McGre- article compares and con- anced Scorecard, which Kaplan and Norton gor’s practical use of this goal congruence trasts the two management (1992) introduced almost 40 years later, is also system was tied to his own development of a systems. The examination a management system based on goal congru- managerial assumption about human behav- concludes that the philosoph- ical intents and practical ence as a means of improving performance. iour which he called Theory Y. application of MBO and the This article takes the view that the Balanced McGregor (1960) argued that the traditional Balanced Scorecard stem Scorecard is essentially similar to MBO, and managerial assumption, which he called from similar precepts. The that differences can be explained by business Theory X, assumes that: examination of patterns of changes during the years separating their …the average human being has an inherent MBO implementation also inception. The main purpose of this article is dislike of work and will avoid it if he can… illuminates possible problems to extend knowledge about the Balanced in the application of the Therefore employees must be controlled, Scorecard, by examining problems that have intimidated, or coerced to produce. Balanced Scorecard. Imple- mentation of MBO suffers occurred as part of the earlier goal congru- Theory Y, on the other hand, assumes the from two main problems. ence system (MBO). opposite about the nature of people: Partial implementation: The paper starts by describing MBO’s …the average person ﬁnds work as natural taking a portion of a prescrip- philosophical intent as well as its implemen- as play or rest… tion does not provide the tation guidelines. This is repeated for the cure. Second, a patent disre- Balanced Scorecard. A section describing the Based on this theory, McGregor argued that gard for MBO’s core philoso- practical application of MBO (which has been an employee, if directly involved in the goal phy that calls for goal congru- setting process, can be relied upon for self- largely unsuccessful) follows, and concludes ence through collaboration. control. Therefore productivity can best be Our forecast is that partial with an examination of reasons for its failure. This is followed by a discussion about the improved by clarifying strategically aligned implementation will remain as a problem for the Balanced application of the Balanced Scorecard, focus- goals (coupled with related rewards for Scorecard. An increasing rate ing on the likely recurrence of MBO- achievement). In other words, a system such of change in business encour- evidenced problems. The paper ﬁnishes with as MBO (which is based on goal congruency) ages this (because develop- a summary of the key points and conclusions, should improve employee productivity if used ment of organisation-wide and extends the ﬁndings to a larger ongoing collaboratively . scorecards takes too long). McGregor’s work on Theory Y, together debate about the value of performance mea- However, we think that cur- surement systems in business. with the development of the MBO system, rent management will use more collaboration than was codiﬁed a shift in managerial thinking that the case with MBO, because took place during the 1950s (Bartol and Mar- of the inﬂuence of total qual- Management by objectives tin, 1991). Before this time, traditional west- ity management (TQM, which ern management practices were mostly cen- encourages collaboration). MBO was ﬁrst introduced to businesses in the tered on, and driven by, the rational goal 1950s as a system called “management by model (also known as the economic model) objectives and self-control” (Drucker, 1955). (Quinn et al., 1996). Drucker (1955) states that the basis for this Grant et al. (1994) suggest that the rational system is that an organisation will be more goal model places a strong emphasis on com- successful if: mand and control, and utilises scientiﬁc …their efforts … all pull in the same direc- Management Decision tion, and their contributions … ﬁt together management concepts together with Tay- 36/6 [1998] 363–369 to produce a whole, without gaps, without lorism principles (Freedman, 1992) which are © MCB University Press friction, without unnecessary duplication of based on one best way to do things. Thus the [ISSN 0025-1747] rational goal model parallels McGregor’s effort… [ 363 ]
David Dinesh and Theory X, in terms of its implicit assump- MBO system. Research on linking rewards Elaine Palmer tions about human behaviour. to measurement (Dewey, 1995; Shaw and Management by objectives The shift in managerial thinking repre- Schneier, 1995) shows that collaborative and the Balanced Scorecard: sented by MBO is related to a movement away goal and reward setting is successful as a will Rome fall again? from assumptions about human behaviour motivational tool. Management Decision based on scientiﬁc management principles 4 Development of action plans. 36/6 [1998] 363–369 (Freedman, 1992). MBO principles differ An action plan helps identify problem markedly from the command and control areas and assists in resource allocation. model of scientiﬁc management related to Action plans encourage innovation and goal setting, instead illustrating a move empower subordinates, and should again towards a paradigm known as the “human be developed by subordinates in collabora- relations” model. The human relations model tion with their supervisors (Bartol and reﬂects employee empowerment and collabo- Martin, 1991; Neale, 1991). ration (Guillen, 1994), and supports McGre- 5 Cumulative periodic review of subordinate gor’s Theory Y assumptions that work is a results against targets. natural state. Management need to be kept informed In summary, while MBO is still based on the about progress and unexpected problems, rational goal model in terms of its emphasis so that they can provide a coaching and on goal and measurement setting, employee supporting role if subordinates are having involvement and collaborative efforts are also difficulties. For this reason, an MBO sys- integral to its philosophy As such MBO could . tem includes periodic performance be viewed as a ﬁrst attempt to merge two reviews. The focus of the review should be contrasting paradigms (the rational goal on gaps between the set goals and actual model and the human relations model), and performance. The review should include represents what Quinn et al. (1996) describe praise and recognition for areas where the as a major shift in managerial thinking to the subordinate has performed well, as well as human relations model. Further support for discussion of areas in which the subordi- this shift in thinking is evidenced by one of nate could improve (Reddin and Kehoe, the best selling books of the 1950s: How to Win 1974). Friends and Inﬂuence People (Carnegie, 1981). 6 Review of organisational performance. Following the successful application of The ﬁnal step of MBO implementation is a MBO to General Mills, MBO systems became regular review of the entire system, which increasingly common in organisations dur- feeds back into the ﬁrst step. The overall ing the 1960s and 1970s. The commonly agreed review provides an opportunity to ensure elements of an MBO system (Reddin, 1971; that organisational plans are being imple- Reddin and Kehoe, 1974) are: mented as expected and that strategic • objectives established for all jobs in the goals remain as the focus (Bartol and Mar- ﬁrm; tin, 1991; Odiorne, 1987; Reddin and Kehoe, • use of joint objective setting; 1974). • linking of objectives to strategy; • emphasis on measurement and control; • establishment of a review and recycle The Balanced Scorecard system. This section details the development of the As business acceptance of MBO principles Balanced Scorecard, and deﬁnes the charac- became widespread, a set of MBO implemen- teristics of its use as a management system. tation steps were developed to allow the con- The Balanced Scorecard measurement sistent application of MBO across organisa- system (Kaplan and Norton, 1992, 1993a) was tions. These steps are: ﬁrst introduced to address what its authors 1 Identiﬁcation of organisational strategy. perceive as the shortcomings of traditional All organisations should start by identify- performance systems, which they link to a ing their long-term strategic goals reliance on ﬁnancial measures. In order to (Drucker, 1955; Odiorne, 1979). overcome this “singular” focus, Kaplan and 2 Collaborative goal setting. Norton (1992) introduce three additional Goals should be set in collaboration with measurement categories that highlight non- superiors and subordinates. These goals ﬁnancial aspects. These are: customer satis- should be consistent throughout all levels faction, internal processes, and learning/ of the organisation (Drucker, 1955; Reddin innovation. and Kehoe, 1974). Kaplan and Norton think of these three 3 Rewards linked to goals. additional categories as the drivers of future Attempts should be made to link rewards performance, whereas the category of ﬁnan- to the individual goals developed by the cial measures emphasises past performance. [ 364 ]
David Dinesh and By using all four categories, the Balanced One notable difference between the two Elaine Palmer Scorecard draws together a wide variety of systems is their degree of explicitness. MBO Management by objectives disparate yet important competitive strategic is an open-ended management system based and the Balanced Scorecard: priorities (Newing, 1994). will Rome fall again? on the collaborative determination of goals A central tenet of the Balanced Scorecard and measures (without detailing what those Management Decision system is its focus on goal congruence (Hof- goals and measures should be). The Balanced 36/6 [1998] 363–369 fecker and Goldenberg, 1994; Newing, 1995). Scorecard is also based on the collaborative The objectives and measures for each of the determination of goals and measures, but is four Balanced Scorecard categories (ﬁnan- more focused than MBO as it prescribes the cials, customers, internal processes, learn- four categories of customer satisfaction, ing/innovation) are directly derived from the internal processes, innovation and learning, organisation’s vision and strategy Hence the . and ﬁnancial measures. resultant measures are aligned with the The creators of the Balanced Scorecard strategic direction of the ﬁrm. This consis- claim that such explicitness is needed tency with strategic goals is expected to apply because using open-ended systems has across all functional areas within the organi- resulted in too much focus on easily quantiﬁ- sation (Hoffecker and Goldenberg, 1994), as able ﬁnancials (Kaplan and Norton, 1992). well as through existing hierarchical levels The creators argue that the speciﬁc targeting (Beischel and Smith, 1991). of non-ﬁnancials reminds management of Kaplan and Norton (1996a) describe their other equally important concerns. system as “…more than a tactical or an opera- In summary, it appears that MBO and the tional measurement system…” Rather, the Balanced Scorecard are essentially similar. authors show that the Balanced Scorecard They are both based on the development of has evolved into a strategic management strategic measurements (although the Bal- system, with organisations using it to man- anced Scorecard is more explicit about what age their strategy over the long term. This is those strategic measurements are). They both done by using the measurement focus of the focus on goal congruence (the rational goal Scorecard for the following critical manage- model), as well as collaboration throughout ment processes (Kaplan and Norton, 1996b): all levels of the ﬁrm (the human relations • clarify and translate vision and strategy; model). Likewise, they both imply Theory Y • communicate and link strategic objectives as they assume that employees will be moti- and measures; vated by rewards and incentives associated • plan, set targets, and align strategic initia- with goals that they have helped determine. tives; • enhance strategic feedback and learning; • link measures with rewards. MBO failure in practice This section examines problems with the Similarities and differences implementation of MBO. Given the similari- between MBO and the Balanced ties between MBO and the Balanced Score- Scorecard card, identifying these problems may provide The management processes described for the useful information about the current system. Balanced Scorecard are very similar to the Despite MBO’s objectives of improving MBO system elements and six implementa- organisational performance through goal tion steps. In essence, both systems are based congruency, and its initial success in such on goal congruence throughout an organisa- organisations as General Mills, successful tion, and each details an iterative process implementation overall has been disappoint- based on collaboration between and within ing. Growth in the introduction of MBO pro- all levels of an organisation. grammes was especially rapid during the In terms of managerial paradigms, the 1960s and 1970s (Odiorne, 1979). Ironically, the Balanced Scorecard, like MBO, seems to have same organisations that adopted MBO as a at its core the rational goal model (clear mea- performance management system later sures and goals) extended to include the claimed that MBO proved to be more of a human relations model (requiring collabora- hindrance rather than a help (Van Tassel, tion). A further similarity between the two 1995). systems is that the Balanced Scorecard mea- Analysing the results of an empirical study sures have been tied to rewards and incen- carried out on 48 organisations that intro- tives as a useful motivational tool (Kaplan duced MBO in the 1960s and 1970s (Reddin and Norton, 1996b). This parallels Dewey’s and Kehoe, 1974) gives some initial insights (1995) and Shaw and Schneier’s (1995) about possible reasons for its failure. Table I research on MBO. illustrates the reasons that top management [ 365 ]
David Dinesh and in this study gave for introducing an MBO extend down to the operating (shopﬂoor) Elaine Palmer system. level. Management by objectives Table I shows that the most frequent reason Other authors support the MBO implemen- and the Balanced Scorecard: for introducing MBO (more than 35 per cent tation patterns observed in the Reddin and will Rome fall again? of the organisations surveyed) was its use as Kehoe (1974) and Poister and Streib (1995) Management Decision an appraisal scheme. And yet individual studies. For instance, Bechtell (1996) argues 36/6 [1998] 363–369 appraisal is only one of the six MBO imple- that MBO has not worked because of a lack of mentation steps described earlier. collaborative communication, coupled with a failure to link objectives when required. Bechtell’s work supports the Reddin and Table I Kehoe view (1974) that the failure of MBO Philosophy and rationale for MBO may well be because two core premises of MBO, goal congruence and a focus on the Rationale n (48) Per cent human elements, have simply been ignored in 1 To link evaluation to performance 17 35.4 practice. 2 Aid manager in planning 12 25.0 Further literature supports this view. For 3 Motivate managers 11 22.9 instance, Landau and Stout (1979) suggest 4 To increase boss/subordinate interaction and feedback 11 22.9 that MBO centralises the organisation 5 Development of management potential 8 16.6 through rigid controls at the expense of the 6 Link company objectives to department objectives 8 16.6 need for ﬂexible response and coalition build- 7 Managers know what their job is 8 12.5 ing. Odiorne (1979) argues that a main reason 8 Give management information about what is going on at lower levels 4 8.3 for MBO’s lack of success is that it requires a 9 Management club to pressure performance 3 6.25 major change in the way things are done, and 10 No mention 7 14.5 also in the way of thinking. In particular, Source: Reddin and Kehoe, 1974 Odiorne suggests that MBO requires a shift from viewing employees as “labour” to “peo- ple” and also requires a shift from an auto- cratic power base to one more widely shared. This ﬁts with McGregor’s (1960) emphasis on Next, the Table I ﬁgures show that only 16.6 the need to move from Theory X to Theory Y per cent of the organisations surveyed stated assumptions. goal alignment (6. Link company objectives The absence of the human relations model to department objectives) as a reason for in MBO implementation is supported by introducing MBO. Further, this stated aspect some authors who consider MBO to be of goal alignment does not include the need against total quality management (TQM) for alignment throughout all levels of the principles (Poister and Streib, 1995; Van Tas- organisational hierarchy This is in contrast . sel, 1995). TQM is a philosophy based on the to the overall stated purpose of MBO, which human relations model (Bowen and Lawler, (as stated by its initiators) is to avoid goal 1992; Guillen, 1994) in its focus on collabora- misalignment (Drucker, 1955; McGregor, tion, empowerment, and teamwork. The mis- 1960). match of MBO with TQM is explained as too In summary, these ﬁndings suggest that much focus on individual performance MBO’s failure may be due to a lack of under- (therefore de-emphasising teamwork) and too standing by management of one of MBO’s much focus on quantitative goals rather than core philosophies (organisational goal con- the goal of continuous improvement. gruence), while at the same time implement- In summary, it appears that MBO’s wide- ing MBO for performance appraisal purposes spread failure to work in practice may be alone (hence focusing on only one step in the partly explained by two key factors, which MBO system). are: A recent survey carried out among public 1 Partial implementation of the system (as organisations in the USA supports the wide- an individual performance appraisal sys- spread use of MBO as an individual appraisal tem rather than an overall goal congru- system (Poister and Streib, 1995). Only 28 per ence system). cent of the respondents in this study used 2 A lack of paradigm shift from scientiﬁc MBO on a company-wide basis, while the management principles to the human remaining 72 per cent used MBO as an relations model (which is endorsed by the appraisal system in selected areas within the creators of MBO as key to the system). organisation. In most cases the use was restricted to individual appraisal of senior Thus it appears that MBO in practice has level managers. Congruent goal setting failed because neither the prescribed process throughout the organisation was rare, with steps nor the original philosophical intent only 10 per cent implementing systems that have been followed. [ 366 ]
David Dinesh and are based on the human relations model Elaine Palmer Balanced Scorecard (Bowen and Lawler, 1992; Guillen, 1994)). Management by objectives implementation Because of this general business accep- and the Balanced Scorecard: tance of the human relations model, it is will Rome fall again? The Balanced Scorecard is currently being adopted as the management system of choice plausible that the problems associated with Management Decision the “command and control” aspect of MBO 36/6 [1998] 363–369 by many organisations, which include FHC Corporation, Rockwater Engineering, Apple implementation (Bechtell, 1996; Odiorne, Computer Company, Advanced Micro 1979) should be reduced for the Balanced Devices, DHC Chemical Division, NatWest Scorecard. In other words, Balanced Score- card implementation should beneﬁt from 40 Bank, and Mobil’s US Marketing and Reﬁning years of experience with the human relations Division (Corrigan, 1996; Kaplan and Norton, model, in contrast to MBO (which is related 1993b; Newing, 1994; Vitale et al., 1994). to the initial introduction of the model). Despite the Balanced Scorecard’s well- publicised success to date in improving goal congruence (Kaplan and Norton, 1993a), there Conclusion have also been a number of weaknesses noted in its implementation. Newing (1994) suggests The discussions of MBO and the Balanced that one of the main weaknesses is the com- Scorecard have described many similarities plexity and time involved in its development. between the two management systems. It The development of many Scorecards for seems that the Balanced Scorecard is based different levels (and in some cases, for all on the same philosophies as MBO. That is, individuals) is needed if the Balanced Score- there is a need for goal congruence within an card is to be carried out as intended. This organisation in order to improve process is very complex and time-consuming, performance, and the best way of obtaining and Newing (1994) argues that the costs of this is through a process of collaborative goal setting and review. This parallels a manager- such a procedure may well outweigh improve- ial approach using the human relations ments in organisational performance. model as an extension of the rational goal This complexity might encourage organisa- model. tions to attempt partial application of the MBO has proven to be largely unsuccessful system, for instance to develop senior level in practice, with two key failures identiﬁed as measures only If this is the case, the Balanced . partial implementation of the system, and Scorecard may become subject to some of the non-recognition of the need to adopt a human same problems as MBO. That is, it may not be relations view. used as the overall goal congruency system Because of the increased complexity of the for which it was intended. business environment associated with the Partial implementation is likely to be an 1990s and Scorecard development, it seems attractive option for businesses operating in that the Balanced Scorecard might be even current conditions. The competitive environ- more prone to partial implementation. The ment in the 1990s is far more turbulent than time and energy needed to develop company- the stable business environment that existed wide business goals may be viewed as uneco- during the 1950s (Hamel and Prahalad, 1994). nomic when coupled with rapidly changing The competition faced by organisations today external factors (hence needing new sets of moves faster and is more aggressive. D’Aveni appropriate goals). (1995) has termed this new competitive envi- There is a more positive outlook in terms of ronment “hyper competition”. If the environ- whether or not Balanced Scorecard imple- ment that a company operates in is changing mentation will also fail for philosophical faster than its ability to develop organisation- reasons. If the human relations model is wide measures, partial implementation may indeed more widespread than has been the well be encouraged. case in the past, it is reasonable that the Bal- A second main cause of MBO’s failure has anced Scorecard may be applied in a collabo- been detailed as the failure of management to rative fashion as intended. shift their thinking to the human relations model. It is worthwhile considering the impli- cations of this with respect to the Balanced Wider implications and areas for Scorecard. It is likely that the business envi- further study ronment of the 1990s is more conducive to the In a wider context, this examination of two use of the human relations model than was measurement systems illustrates some larger the case with MBO implementation. This is issues that are being debated about the role of associated with the widespread adoption of measurement systems in business. Quinn et TQM principles in the 1980s (which in turn al. (1996) state that understanding measure- [ 367 ]
David Dinesh and ment’s impact on performance is emerging as Bowen, D.E. and Lawler, E.E. (1992), “Total qual- Elaine Palmer one of the most widely debated topics of the ity-oriented human resource management”, Management by objectives 1990s. Organisational Dynamics, Vol. 20 No. 4, Fall, and the Balanced Scorecard: pp. 29-41. One such debate relates to the tension that will Rome fall again? Carnegie, D. (1981), How to Win Friends and Inﬂu- exists between ﬂexibility and measurement Management Decision ence People, Simon & Schuster, New York, NY. 36/6 [1998] 363–369 (Quinn et al., 1996). Hoffecker and Goldenberg Corrigan, J. (1996), “The Balanced Scorecard: the (1994) argue that in an environment of rapid new approach to performance measurement”, change and ﬁerce competition, attempting to Australian Accountant, Vol. 66 No. 7, August, measure performance is anti-systemic. This pp. 47-8. view of ﬂexibility and measurement being at D’Aveni, R.A. 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