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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 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 application of the Balanced Scorecard. Implementation of MBO suffers from two main problems. Partial implementation: taking a portion of a prescription does not provide the cure. Second, a patent disregard for MBO’s core philosophy that calls for goal congruence through collaboration. Our forecast is that partial implementation will remain as a problem for the Balanced Scorecard. An increasing rate of change in business encourages this (because development of organisation-wide scorecards takes too long). However, we think that current management will use more collaboration than was the case with MBO, because of the influence of total quality management (TQM, which encourages collaboration). Management Decision 36/6 [1998] 363–369 © MCB University Press [ISSN 0025-1747] Introduction The adage that “there is no such thing as a new idea” seems to be true with respect to management concepts. Management by objectives (MBO), which Drucker (1955) introduced more than four decades ago, is a system of management based on goal congruence as a means of improving performance. The Balanced Scorecard, which Kaplan and Norton (1992) introduced almost 40 years later, is also a management system based on goal congruence as a means of improving performance. This article takes the view that the Balanced Scorecard is essentially similar to MBO, and that differences can be explained by business changes during the years separating their inception. The main purpose of this article is to extend knowledge about the Balanced Scorecard, by examining problems that have occurred as part of the earlier goal congruence system (MBO). The paper starts by describing MBO’s philosophical intent as well as its implementation guidelines. This is repeated for the Balanced Scorecard. A section describing the practical application of MBO (which has been largely unsuccessful) follows, and concludes with an examination of reasons for its failure. This is followed by a discussion about the application of the Balanced Scorecard, focusing on the likely recurrence of MBOevidenced problems. The paper finishes with a summary of the key points and conclusions, and extends the findings to a larger ongoing debate about the value of performance measurement systems in business. Management by objectives MBO was first introduced to businesses in the 1950s as a system called “management by objectives and self-control” (Drucker, 1955). Drucker (1955) states that the basis for this system is that an organisation will be more successful if: …their efforts … all pull in the same direction, and their contributions … fit together to produce a whole, without gaps, without friction, without unnecessary duplication of effort… This focus on goal alignment as a way to improve organisational performance was, at the time, thought to provide the best path to increased profitability (D’Aveni, 1995). Drucker’s initial ideas about organisational goal congruence were extended and put into practice as a managerial performance system used at General Mills, known as “management by objectives” (McGregor, 1960). McGregor’s practical use of this goal congruence system was tied to his own development of a managerial assumption about human behaviour which he called Theory Y. McGregor (1960) argued that the traditional managerial assumption, which he called Theory X, assumes that: …the average human being has an inherent dislike of work and will avoid it if he can… Therefore employees must be controlled, intimidated, or coerced to produce. Theory Y, on the other hand, assumes the opposite about the nature of people: …the average person finds work as natural as play or rest… Based on this theory, McGregor argued that an employee, if directly involved in the goal setting process, can be relied upon for selfcontrol. Therefore productivity can best be improved by clarifying strategically aligned goals (coupled with related rewards for achievement). In other words, a system such as MBO (which is based on goal congruency) should improve employee productivity if used collaboratively. McGregor’s work on Theory Y, together with the development of the MBO system, codified a shift in managerial thinking that took place during the 1950s (Bartol and Martin, 1991). Before this time, traditional western management practices were mostly centered on, and driven by, the rational goal model (also known as the economic model) (Quinn et al., 1996). Grant et al. (1994) suggest that the rational goal model places a strong emphasis on command and control, and utilises scientific management concepts together with Taylorism principles (Freedman, 1992) which are based on one best way to do things. Thus the rational goal model parallels McGregor’s [ 363 ] David Dinesh and Elaine Palmer Management by objectives and the Balanced Scorecard: will Rome fall again? Management Decision 36/6 [1998] 363–369 Theory X, in terms of its implicit assumptions about human behaviour. The shift in managerial thinking represented by MBO is related to a movement away from assumptions about human behaviour based on scientific management principles (Freedman, 1992). MBO principles differ markedly from the command and control model of scientific management related to goal setting, instead illustrating a move towards a paradigm known as the “human relations” model. The human relations model reflects employee empowerment and collaboration (Guillen, 1994), and supports McGregor’s Theory Y assumptions that work is a natural state. In summary, while MBO is still based on the rational goal model in terms of its emphasis on goal and measurement setting, employee involvement and collaborative efforts are also integral to its philosophy. As such MBO could be viewed as a first attempt to merge two contrasting paradigms (the rational goal model and the human relations model), and represents what Quinn et al. (1996) describe as a major shift in managerial thinking to the human relations model. Further support for this shift in thinking is evidenced by one of the best selling books of the 1950s: How to Win Friends and Influence People (Carnegie, 1981). Following the successful application of MBO to General Mills, MBO systems became increasingly common in organisations during the 1960s and 1970s. The commonly agreed elements of an MBO system (Reddin, 1971; Reddin and Kehoe, 1974) are: • objectives established for all jobs in the firm; • use of joint objective setting; • linking of objectives to strategy; • emphasis on measurement and control; • establishment of a review and recycle system. As business acceptance of MBO principles became widespread, a set of MBO implementation steps were developed to allow the consistent application of MBO across organisations. These steps are: 1 Identification of organisational strategy. All organisations should start by identifying their long-term strategic goals (Drucker, 1955; Odiorne, 1979). 2 Collaborative goal setting. Goals should be set in collaboration with superiors and subordinates. These goals should be consistent throughout all levels of the organisation (Drucker, 1955; Reddin and Kehoe, 1974). 3 Rewards linked to goals. Attempts should be made to link rewards to the individual goals developed by the [ 364 ] MBO system. Research on linking rewards to measurement (Dewey, 1995; Shaw and Schneier, 1995) shows that collaborative goal and reward setting is successful as a motivational tool. 4 Development of action plans. An action plan helps identify problem areas and assists in resource allocation. Action plans encourage innovation and empower subordinates, and should again be developed by subordinates in collaboration with their supervisors (Bartol and Martin, 1991; Neale, 1991). 5 Cumulative periodic review of subordinate results against targets. Management need to be kept informed about progress and unexpected problems, so that they can provide a coaching and supporting role if subordinates are having difficulties. For this reason, an MBO system includes periodic performance reviews. The focus of the review should be on gaps between the set goals and actual performance. The review should include praise and recognition for areas where the subordinate has performed well, as well as discussion of areas in which the subordinate could improve (Reddin and Kehoe, 1974). 6 Review of organisational performance. The final step of MBO implementation is a regular review of the entire system, which feeds back into the first step. The overall review provides an opportunity to ensure that organisational plans are being implemented as expected and that strategic goals remain as the focus (Bartol and Martin, 1991; Odiorne, 1987; Reddin and Kehoe, 1974). The Balanced Scorecard This section details the development of the Balanced Scorecard, and defines the characteristics of its use as a management system. The Balanced Scorecard measurement system (Kaplan and Norton, 1992, 1993a) was first introduced to address what its authors perceive as the shortcomings of traditional performance systems, which they link to a reliance on financial measures. In order to overcome this “singular” focus, Kaplan and Norton (1992) introduce three additional measurement categories that highlight nonfinancial aspects. These are: customer satisfaction, internal processes, and learning/ innovation. Kaplan and Norton think of these three additional categories as the drivers of future performance, whereas the category of financial measures emphasises past performance. David Dinesh and Elaine Palmer Management by objectives and the Balanced Scorecard: will Rome fall again? Management Decision 36/6 [1998] 363–369 By using all four categories, the Balanced Scorecard draws together a wide variety of disparate yet important competitive strategic priorities (Newing, 1994). A central tenet of the Balanced Scorecard system is its focus on goal congruence (Hoffecker and Goldenberg, 1994; Newing, 1995). The objectives and measures for each of the four Balanced Scorecard categories (financials, customers, internal processes, learning/innovation) are directly derived from the organisation’s vision and strategy. Hence the resultant measures are aligned with the strategic direction of the firm. This consistency with strategic goals is expected to apply across all functional areas within the organisation (Hoffecker and Goldenberg, 1994), as well as through existing hierarchical levels (Beischel and Smith, 1991). Kaplan and Norton (1996a) describe their system as “…more than a tactical or an operational measurement system…” Rather, the authors show that the Balanced Scorecard has evolved into a strategic management system, with organisations using it to manage their strategy over the long term. This is done by using the measurement focus of the Scorecard for the following critical management processes (Kaplan and Norton, 1996b): • clarify and translate vision and strategy; • communicate and link strategic objectives and measures; • plan, set targets, and align strategic initiatives; • enhance strategic feedback and learning; • link measures with rewards. Similarities and differences between MBO and the Balanced Scorecard The management processes described for the Balanced Scorecard are very similar to the MBO system elements and six implementation steps. In essence, both systems are based on goal congruence throughout an organisation, and each details an iterative process based on collaboration between and within all levels of an organisation. In terms of managerial paradigms, the Balanced Scorecard, like MBO, seems to have at its core the rational goal model (clear measures and goals) extended to include the human relations model (requiring collaboration). A further similarity between the two systems is that the Balanced Scorecard measures have been tied to rewards and incentives as a useful motivational tool (Kaplan and Norton, 1996b). This parallels Dewey’s (1995) and Shaw and Schneier’s (1995) research on MBO. One notable difference between the two systems is their degree of explicitness. MBO is an open-ended management system based on the collaborative determination of goals and measures (without detailing what those goals and measures should be). The Balanced Scorecard is also based on the collaborative determination of goals and measures, but is more focused than MBO as it prescribes the four categories of customer satisfaction, internal processes, innovation and learning, and financial measures. The creators of the Balanced Scorecard claim that such explicitness is needed because using open-ended systems has resulted in too much focus on easily quantifiable financials (Kaplan and Norton, 1992). The creators argue that the specific targeting of non-financials reminds management of other equally important concerns. In summary, it appears that MBO and the Balanced Scorecard are essentially similar. They are both based on the development of strategic measurements (although the Balanced Scorecard is more explicit about what those strategic measurements are). They both focus on goal congruence (the rational goal model), as well as collaboration throughout all levels of the firm (the human relations model). Likewise, they both imply Theory Y as they assume that employees will be motivated by rewards and incentives associated with goals that they have helped determine. MBO failure in practice This section examines problems with the implementation of MBO. Given the similarities between MBO and the Balanced Scorecard, identifying these problems may provide useful information about the current system. Despite MBO’s objectives of improving organisational performance through goal congruency, and its initial success in such organisations as General Mills, successful implementation overall has been disappointing. Growth in the introduction of MBO programmes was especially rapid during the 1960s and 1970s (Odiorne, 1979). Ironically, the same organisations that adopted MBO as a performance management system later claimed that MBO proved to be more of a hindrance rather than a help (Van Tassel, 1995). Analysing the results of an empirical study carried out on 48 organisations that introduced MBO in the 1960s and 1970s (Reddin and Kehoe, 1974) gives some initial insights about possible reasons for its failure. Table I illustrates the reasons that top management [ 365 ] David Dinesh and Elaine Palmer Management by objectives and the Balanced Scorecard: will Rome fall again? Management Decision 36/6 [1998] 363–369 in this study gave for introducing an MBO system. Table I shows that the most frequent reason for introducing MBO (more than 35 per cent of the organisations surveyed) was its use as an appraisal scheme. And yet individual appraisal is only one of the six MBO implementation steps described earlier. Table I Philosophy and rationale for MBO Rationale n (48) Per cent 1 To link evaluation to performance 2 Aid manager in planning 3 Motivate managers 4 To increase boss/subordinate interaction and feedback 5 Development of management potential 6 Link company objectives to department objectives 7 Managers know what their job is 8 Give management information about what is going on at lower levels 9 Management club to pressure performance 10 No mention Source: Reddin and Kehoe, 1974 17 12 11 11 8 8 8 4 3 7 35.4 25.0 22.9 22.9 16.6 16.6 12.5 8.3 6.25 14.5 Next, the Table I figures show that only 16.6 per cent of the organisations surveyed stated goal alignment (6. Link company objectives to department objectives) as a reason for introducing MBO. Further, this stated aspect of goal alignment does not include the need for alignment throughout all levels of the organisational hierarchy. This is in contrast to the overall stated purpose of MBO, which (as stated by its initiators) is to avoid goal misalignment (Drucker, 1955; McGregor, 1960). In summary, these findings suggest that MBO’s failure may be due to a lack of understanding by management of one of MBO’s core philosophies (organisational goal congruence), while at the same time implementing MBO for performance appraisal purposes alone (hence focusing on only one step in the MBO system). A recent survey carried out among public organisations in the USA supports the widespread use of MBO as an individual appraisal system (Poister and Streib, 1995). Only 28 per cent of the respondents in this study used MBO on a company-wide basis, while the remaining 72 per cent used MBO as an appraisal system in selected areas within the organisation. In most cases the use was restricted to individual appraisal of senior level managers. Congruent goal setting throughout the organisation was rare, with only 10 per cent implementing systems that [ 366 ] extend down to the operating (shopfloor) level. Other authors support the MBO implementation patterns observed in the Reddin and Kehoe (1974) and Poister and Streib (1995) studies. For instance, Bechtell (1996) argues that MBO has not worked because of a lack of collaborative communication, coupled with a failure to link objectives when required. Bechtell’s work supports the Reddin and Kehoe view (1974) that the failure of MBO may well be because two core premises of MBO, goal congruence and a focus on the human elements, have simply been ignored in practice. Further literature supports this view. For instance, Landau and Stout (1979) suggest that MBO centralises the organisation through rigid controls at the expense of the need for flexible response and coalition building. Odiorne (1979) argues that a main reason for MBO’s lack of success is that it requires a major change in the way things are done, and also in the way of thinking. In particular, Odiorne suggests that MBO requires a shift from viewing employees as “labour” to “people” and also requires a shift from an autocratic power base to one more widely shared. This fits with McGregor’s (1960) emphasis on the need to move from Theory X to Theory Y assumptions. The absence of the human relations model in MBO implementation is supported by some authors who consider MBO to be against total quality management (TQM) principles (Poister and Streib, 1995; Van Tassel, 1995). TQM is a philosophy based on the human relations model (Bowen and Lawler, 1992; Guillen, 1994) in its focus on collaboration, empowerment, and teamwork. The mismatch of MBO with TQM is explained as too much focus on individual performance (therefore de-emphasising teamwork) and too much focus on quantitative goals rather than the goal of continuous improvement. In summary, it appears that MBO’s widespread failure to work in practice may be partly explained by two key factors, which are: 1 Partial implementation of the system (as an individual performance appraisal system rather than an overall goal congruence system). 2 A lack of paradigm shift from scientific management principles to the human relations model (which is endorsed by the creators of MBO as key to the system). Thus it appears that MBO in practice has failed because neither the prescribed process steps nor the original philosophical intent have been followed. David Dinesh and Elaine Palmer Management by objectives and the Balanced Scorecard: will Rome fall again? Management Decision 36/6 [1998] 363–369 Balanced Scorecard implementation The Balanced Scorecard is currently being adopted as the management system of choice by many organisations, which include FHC Corporation, Rockwater Engineering, Apple Computer Company, Advanced Micro Devices, DHC Chemical Division, NatWest Bank, and Mobil’s US Marketing and Refining Division (Corrigan, 1996; Kaplan and Norton, 1993b; Newing, 1994; Vitale et al., 1994). Despite the Balanced Scorecard’s wellpublicised success to date in improving goal congruence (Kaplan and Norton, 1993a), there have also been a number of weaknesses noted in its implementation. Newing (1994) suggests that one of the main weaknesses is the complexity and time involved in its development. The development of many Scorecards for different levels (and in some cases, for all individuals) is needed if the Balanced Scorecard is to be carried out as intended. This process is very complex and time-consuming, and Newing (1994) argues that the costs of such a procedure may well outweigh improvements in organisational performance. This complexity might encourage organisations to attempt partial application of the system, for instance to develop senior level measures only. If this is the case, the Balanced Scorecard may become subject to some of the same problems as MBO. That is, it may not be used as the overall goal congruency system for which it was intended. Partial implementation is likely to be an attractive option for businesses operating in current conditions. The competitive environment in the 1990s is far more turbulent than the stable business environment that existed during the 1950s (Hamel and Prahalad, 1994). The competition faced by organisations today moves faster and is more aggressive. D’Aveni (1995) has termed this new competitive environment “hyper competition”. If the environment that a company operates in is changing faster than its ability to develop organisationwide measures, partial implementation may well be encouraged. A second main cause of MBO’s failure has been detailed as the failure of management to shift their thinking to the human relations model. It is worthwhile considering the implications of this with respect to the Balanced Scorecard. It is likely that the business environment of the 1990s is more conducive to the use of the human relations model than was the case with MBO implementation. This is associated with the widespread adoption of TQM principles in the 1980s (which in turn are based on the human relations model (Bowen and Lawler, 1992; Guillen, 1994)). Because of this general business acceptance of the human relations model, it is plausible that the problems associated with the “command and control” aspect of MBO implementation (Bechtell, 1996; Odiorne, 1979) should be reduced for the Balanced Scorecard. In other words, Balanced Scorecard implementation should benefit from 40 years of experience with the human relations model, in contrast to MBO (which is related to the initial introduction of the model). Conclusion The discussions of MBO and the Balanced Scorecard have described many similarities between the two management systems. It seems that the Balanced Scorecard is based on the same philosophies as MBO. That is, there is a need for goal congruence within an organisation in order to improve performance, and the best way of obtaining this is through a process of collaborative goal setting and review. This parallels a managerial approach using the human relations model as an extension of the rational goal model. MBO has proven to be largely unsuccessful in practice, with two key failures identified as partial implementation of the system, and non-recognition of the need to adopt a human relations view. Because of the increased complexity of the business environment associated with the 1990s and Scorecard development, it seems that the Balanced Scorecard might be even more prone to partial implementation. The time and energy needed to develop companywide business goals may be viewed as uneconomic when coupled with rapidly changing external factors (hence needing new sets of appropriate goals). There is a more positive outlook in terms of whether or not Balanced Scorecard implementation will also fail for philosophical reasons. If the human relations model is indeed more widespread than has been the case in the past, it is reasonable that the Balanced Scorecard may be applied in a collaborative fashion as intended. Wider implications and areas for further study In a wider context, this examination of two measurement systems illustrates some larger issues that are being debated about the role of measurement systems in business. Quinn et al. (1996) state that understanding measure- [ 367 ] David Dinesh and Elaine Palmer Management by objectives and the Balanced Scorecard: will Rome fall again? Management Decision 36/6 [1998] 363–369 ment’s impact on performance is emerging as one of the most widely debated topics of the 1990s. One such debate relates to the tension that exists between flexibility and measurement (Quinn et al., 1996). Hoffecker and Goldenberg (1994) argue that in an environment of rapid change and fierce competition, attempting to measure performance is anti-systemic. This view of flexibility and measurement being at odds with one another is shared by systemsthinking analysts such as Senge (1990) and Kim (1994). The contra view (Kaplan and Norton, 1996b) is that measurement systems add more value than the measures themselves, because they develop a clearer picture of the organisation, and the process of developing measures provides focus and strategic alignment even as the measures themselves change. Renaissance Solutions Inc. Website (1996) supports the view that the use of measurement systems remains a critical driver of improved performance in the 1990s. A second debate relates to the tension that exists between the rational goal model and the human relations model. Despite the widespread adoption of the human relations model through TQM principles during the 1980s, some authors support the view that management is still failing to adopt collaborative approaches (Delavigne and Robertson 1994; Guillen, 1994). Quinn et al., (1996) assert that tension between goal setting and empowerment of employees will always be present, and that it is a matter of determining when to direct others versus when to collaborate. The development of guidelines for managing this tension is an area that deserves further study. In conclusion, the likely success of a measurement system such as the Balanced Scorecard will depend on addressing the larger issues that have been described here. 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(1995), “Team measurement and rewards: how some companies are getting it right”, Human Resource Planning, Vol. 18 No. 3, pp. 34-49. Van Tassel, J.D. (1995), “Death to MBO”, Training & Development, Vol. 49 No. 3, March, pp. 2-5. Vitale, M., Mavrinac, S.C. and Hauser, M. (1994), “DHC: the chemical division’s Balanced Scorecard”, Planning Review, Vol. 22 No. 4, July/August, pp. 17-45. Application questions 1 What are the ways your organization uses to measure and manage performance? Evaluate their effectiveness? 2 What is wrong with MBO as a management technique (if anything)? [ 369 ]