25

Management by Objectives and Self-Control

Each member of the enterprise contributes something different, but all must con- tribute toward a common goal. Their efforts must all pull in the same direction, and their contributions must fit together to produce a whole—without gaps, with- out friction, without unnecessary duplication of effort.

Every job in the company must be directed toward the objectives of the whole organization if the overall goals are to be achieved. In particular, each manager’s job must be focused on the success of the whole. The performance that is expected of managers must be directed toward the performance goals of the business. Re- sults are measured by the contribution they make to the success of the enterprise. Managers must know and understand what the business goals demand of them in terms of performance, and their superiors must know what contribution to de- mand and expect. If these requirements are not met, managers are misdirected and their efforts are wasted.

Management by objectives requires major effort and special techniques. In a business enterprise managers are not automatically directed toward a common goal. On the contrary, organization, by its very nature, contains four factors that tend to misdirect: the specialized work of most managers, the hierarchical struc- ture of management, the differences in vision and work and the resultant isolation of various levels of management, and the compensation structure of the manage- ment group.

To overcome these obstacles requires more than good intentions. It requires policy and structure. It requires that management by objectives be purposefully organized and be made the living law of the entire management group.

THE SPECIALIZED WORK OF MANAGERS

An old story tells of three stonecutters who were asked what they were doing. The first replied, “I am making a living.” The second kept on hammering while he said, “I am doing the best job of stonecutting in the entire country.” The third one

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looked up with a visionary gleam in his eyes and said, “I am building a cathe- dral.”

The third man is, of course, the true manager. The first man knows what he wants to get out of the work and manages to do so. He is likely to give a “fair day’s work for a fair day’s pay.” But he is not a manager and will never be one. It is the second man who is the problem. Workmanship is essential—an organization de- moralizes if it does not demand of its members the highest workmanship they are capable of. But there is always a danger that the true workman, the true profes- sional, will believe that he is accomplishing something when, in effect, he is just polishing stones or collecting footnotes. Workmanship must be encouraged in the business enterprise. But it must always be related to the needs of the whole.

Most managers and career professionals in any business enterprise are, like the second man, concerned with specialized work. A person’s habits as a manager, his vision and values, are usually formed while he does functional and specialized work. It is essential that the functional specialist develop high standards of work- manship, that he strive to be “the best stonecutter in the country.” For work with- out high standards is dishonest; it corrupts the worker and those around him. Emphasis on, and drive for, workmanship produces innovations and advances in every area of management.

That managers strive to do the best job possible—to do “professional human re- source management,” to run “the most up-to-date plant,” to do “truly scientific market research”—must be encouraged. But this striving for professional workman- ship in functional and specialized work is also a danger. It tends to divert the man- ager’s vision and efforts from the goals of the business. The functional work becomes an end in itself. In far too many instances the functional managers no longer measure their performance by its contribution to the enterprise but only by professional crite- ria of workmanship. They tend to appraise subordinates by their craftsmanship and to reward and to promote them accordingly. They resent demands made for the sake of organizational performance as interference with “good engineering,” “smooth pro- duction,” or “hard-hitting selling.” The functional manager’s legitimate desire for workmanship can become a force that tears the enterprise apart and converts it into a loose association of working groups. Each group is concerned only with its own craft. Each jealously guards its own “secrets.” Each is bent on enlarging its own do- main rather than on building the business. The remedy is to counterbalance the concern for craftsmanship with concern for the common goal of the enterprise.

MISDIRECTION BY HIERARCHY

The hierarchical structure of management makes the danger even greater. Because of his rank, whatever the boss does and says—his most casual remarks, his habits, even his mannerisms—tend to appear to his subordinates as calculated, planned,

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and meaningful. “All you ever hear around the place is human-relations talk; but when the boss calls you on the carpet, it is always because overtime is too high; and when it comes to promoting a guy, the plums always go to those who do the best job filling out accounting-department forms.” This is one of the most com- mon tunes, sung with infinite variations, at every level of management. It leads to poor performance—even in cutting overtime. It also expresses loss of confidence in, and absence of respect for, the company and its management.

Yet the manager who misdirects subordinates in this way does not intend to do so. He genuinely considers human relations to be the most important task of his plant managers. But he talks about overtime because he feels that he has to estab- lish himself with his men as a “practical man,” or because he thinks that he shows familiarity with their problems by talking “shop” with them, by expressing con- cern for their workload. He stresses the accounting-department forms only because they annoy him as much as they do his men—or he may just not want to have any more trouble with the controller than he can help. But to his subordinates these reasons are hidden; all they see and hear is the question about overtime, the em- phasis on forms.

The solution to this problem requires a structure of management that focuses the eyes of managers and their bosses on what the job—rather than the boss—de- mands. To stress style and manner is likely, instead, to worsen the problem. Indeed, everyone familiar with organizations today has seen situations in which a manager’s attempt to avoid misdirection through changing his style has converted a fairly satisfactory relationship into a nightmare of embarrassment and misunderstanding. The manager himself becomes so self-conscious as to lose all easy relationship with his people. And his people, in turn, react with, “So help us, the old man has read a book; we used to know what he wanted of us, now we have to guess.”

Misdirection can result from a difference in concern between various levels of management. This problem, too, cannot be solved by attitudes and good intentions; for it is rooted in the structure of any enterprise. Nor can it be solved by “better communications,” for communications presuppose common language, and it is precisely that which is usually lacking.

It is no accident that the old story of the blind men meeting up with an ele- phant on the road is so popular among management people. Each level of manage- ment sees the same “elephant”—the business—from a different angle of vision. The supervisor in operations, like the blind man who felt the elephant’s leg and decided that a tree was in his way, tends to see only the immediate operations problems. Top management—the blind man touching the trunk and deciding a snake bars his way—tends to see only the enterprise as a whole. It sees sharehold- ers, financial problems, altogether a host of highly abstract relations and figures.

261 Management by Objectives and Self- Control

Operating management—the blind man feeling the elephant’s belly and thinking himself up against a landslide—tends to see things functionally.

Each level needs its particular vision; it could not do its job without it. Yet, these visions are so different that people on different levels talking about the same thing often do not realize it—or, as frequently happens, believe that they are talk- ing about the same thing when in reality they are poles apart.

MISDIRECTION BY COMPENSATION

The most serious force for misdirection within the management group may be the pay structure. At the same time, it is the hardest one to remove. Somehow management people have to be paid, but every compensation system is liable to misdirect.

Compensation is cost to the enterprise and income to the recipient. It also al- ways expresses status, both within the enterprise and in society. It entails judg- ments on the managers’ worth as much as on their performance. It is emotionally tied to all our ideas of fairness, justice, and equity. Money is, of course, quantita- tive. But the money in any compensation system expresses the most intangible, but also the most sensitive, values and qualities. For this reason, there can be no truly simple or truly rational compensation system.

Any compensation system determines a person’s place within the group. How one’s pay relates to the pay of others, and especially to the pay of one’s peers, is al- ways more important than the absolute amount of the salary. Compensation must always try to balance recognition of the individual with stability and maintenance of the group. No attempt at a “scientific formula” for compensation can, therefore, be completely successful. The best possible compensation plan is of necessity a compromise among the various functions and meanings of compensation, for the individual as well as for the groups. Even the best plan will still misdirect, as well as direct and encourage the wrong as well as the right behavior.

Yet, there is hardly a more powerful signal for managers than compensation and compensation structure. Its importance to them goes far beyond the economic meaning of money. It conveys to them the values of their top management and their own worth within the management group. It expresses in clear and tangible form a manager’s position, rank, and recognition within the group. At today’s tax rates, a little more money means, as a rule, very little to senior managers. But the status symbol of a little more money and its emotional impact are incalculable.

The most damaging misdirection may result from those apparently eminently “fair” compensation systems that relate a manager’s pay directly to performance. Performance is often measured by return on investment during the current year. If we want to measure performance, there is no other way. Yet, if return on investment

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or current profits are overemphasized, the managers of a decentralized business will be misdirected toward slighting the future in favor of the present.

An able management team heading one of the major divisions of a chemical company failed for years to develop a badly needed new product. Year after year, they reported to their top management that the new product was not yet quite ready. Finally, when the division manager was asked bluntly why he was stalled on a project that was clearly vital to the success of his business, he answered, “Have you looked at our compensation plan? My management group and I are compen- sated primarily on the basis of return-on-investment. The new product is the fu- ture of this business. But for five or eight years there will be only investment and no return. I know we are three years late. But do you really expect me to unjustly penalize my closest associates by reducing their compensation?” This story had a happy ending. The compensation plan was changed—somewhat in line with the plan Du Pont has had for years with respect to new developments. Du Pont does not put the cost of a development into the investment base of a division or a sub- sidiary until the new product has been introduced on the market.

And within a year or two the new product was out and selling. The preference should be for simple compensation systems rather than for com-

plex ones. It should be for compensation systems that allow judgment to be used and that enable pay to be fitted to the job of the individual rather than imposing one formula on everybody. But I would be the last person to claim that a “fair,” let alone a “scientific,” system can be devised. All one can do, to repeat, is to watch lest the compensation system reward the wrong behavior, emphasize the wrong results, and direct people away from performance for the common good.

WHAT SHOULD THE OBJECTIVES BE?

Just as “eternal vigilance is the price of freedom,” constant effort is needed to pre- vent misdirection. The superior needs to understand what to expect of subordinate managers. The subordinates, in turn, need to be able to know what results they should hold themselves accountable for. Without special effort, superior or subor- dinate will not know and understand this, and their ideas will not be compatible, let alone identical.

Each manager, from the “big boss” down to the operations supervisor, needs clearly spelled-out objectives. Otherwise confusion can be guaranteed. These ob- jectives should lay out what performance each managerial unit is supposed to achieve. They should lay out what contribution a manager and his or her unit are expected to make to help other units obtain their objectives. Finally, they should spell out what contribution the manager can expect from other units toward the attainment of these objectives. Right from the start, in other words, emphasis should be on teamwork and team results.

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These objectives should always derive from the goals of the business enterprise. A statement of his own objectives based on those of the company and of the opera- tions department should be demanded even of the first-line supervisor. The com- pany may be so large as to make the distance between the individual operations supervisor and the company’s total output enormous. Yet the supervisor must fo- cus on the objectives of the company and needs to define his or her results in terms of the unit’s contribution to the whole of which it is a part.

The objectives of every manager should spell out his or her contribution to at- tainment of company goals in all areas of the business. Obviously, not every man- ager has a direct contribution to make in every area. The contribution that marketing makes to productivity, for example, may be indirect and hard to define. But if a manager’s unit is not expected to contribute toward one of the areas that signifi- cantly affect prosperity and survival of the business, this fact should be clearly brought out. For managers must understand that business results depend on a bal- ance of efforts and results in a number of areas. This is necessary both to give full scope to the craftsmanship of each function and specialty, and to prevent the em- pire-building and jealousy of the various functions and specialties. It is necessary also to avoid overemphasis on any one key area.

This is particularly important for service staffs and for highly specialized groups such as the people in information technology. They may not always be able to relate their work directly to organizational objectives and organizational results. But unless they try to, they are likely to direct their work away from organiza- tional objectives and organizational results.

To obtain balanced efforts, the objectives of all managers on all levels and in all areas should also be keyed to both short-range and long-range considerations. And, of course, all objectives should always contain both the tangible business objectives and such “intangible” objectives as manager development, worker performance and attitude, and social responsibility. Anything else is shortsighted and impractical.

MANAGEMENT BY DRIVES

Proper management requires balanced emphasis on objectives, especially by top management. It avoids the all-too-common business malpractice—management by crisis and drives.

That things always revert to their original state three weeks after a drive is over, everybody knows and apparently expects. The only result of an economy drive is likely to be that messengers and typists get fired, and that six-figure executives are forced to do clerical work typing their own letters—and doing it badly. And yet many managements fail to draw the obvious conclusion that drives are, after all, not the way to get things done.

Over and above its ineffectiveness, management by drive misdirects. It puts all

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emphasis on one phase of the job to the detriment of all other aspects. “For four weeks we cut inventories,” one hardened veteran of management-by-crisis once summed it up. “Then we have four weeks of general cost-cutting, followed by four weeks of human relations. We just have time to push customer service and cour- tesy for a month. And then the inventory is back where it was when we started. We don’t even try to do our job. All top management talks about, thinks about, preaches about, is last week’s inventory figure or this week’s customer complaints. How we do the rest of the job, they don’t even want to know.”

In an organization that manages by drives, people either neglect their job to get on with the current drive or silently organize to sabotage the drive in order to get the work done. In either event, they become deaf to the cry of “wolf.” And when the real crisis comes, when all hands really should drop everything and pitch in, they treat it as just another case of management-created hysteria. Management-by-drive is a sure sign of confusion. It is an admission of incompetence. It is a sign that management does not think. Above all, it is a sign that the company does not know what to expect of its managers and that, not knowing how to direct them, it misdirects them.

HOW SHOULD OBJECTIVES BE SET AND BY WHOM?

The goals for the jobs of all managers must be defined by the contribution they have to make to the success of the larger unit of which they are a part. The objec- tives of the direct sales manager’s job should be defined by the contribution she and her district sales force have to make to the sales department; the objectives of the project engineer’s job, by the contribution he and his engineers and technolo- gists make to the engineering department. The objectives of the general manager of a decentralized division should be defined by the contribution the division has to make to the objectives of the parent company.

Higher management must reserve the power to approve or disapprove these objectives. But their development is part of a manager’s responsibility; indeed, it is the manager’s first responsibility. It means, too, that every manager should re- sponsibly participate in the development of the objectives of the higher unit of which he is a part. To “give a sense of participation” is not only not enough. It is the wrong thing. Being a manager means having responsibility. Precisely because his aims should reflect the objective needs of the business—rather than merely what the boss, or the manager himself, wants—he must be committed to the objectives with a positive act of assent. Managers must know and understand the ultimate business goals, what is expected of them and why, and what they will be measured against and how. There must be a meeting of minds within the entire manage- ment of each unit. This can be achieved only when all the contributing managers are required to think through what the unit objectives are and are led to partici-

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pate actively and responsibly in the work of defining them. And only if lower managers participate in this way can the higher managers know what to expect of them and make exacting demands.

This is so important that some of the most effective managers I know go one step further. They have each of their subordinates write a manager’s letter twice a year. In this letter to the superior, managers first define the objectives of the supe- rior’s job and of their own job, as they see them. They then set down the perfor- mance standards that they believe are being applied to them. Next, they list the things they must do to attain these goals and the things within their own units they consider the major obstacles. They list the things the superiors and the com- pany do that help them and the things that hamper them. Finally, they outline what they propose to do during the next year to reach their goals. If their superiors accept this statement, the manager’s letter becomes the charter under which the manager operates.

This device, like no other I have seen, brings out how easily the unconsidered and casual remarks of even the best boss can confuse and misdirect. One large company has used the manager’s letter for ten years. Yet almost every letter still lists as objectives and standards things that baffle the superior to whom the letter is addressed. And whenever she asks, “What is this?” she gets this sort of answer, “Don’t you remember what you said last spring going down in the elevator with me?”

The manager’s letter also brings out whatever inconsistencies there are in the de- mands made on a person by his or her superior and by the company. Does the su- perior demand both speed and high quality when she can get only one or the other? And what compromise is needed in the interest of the company? Does the boss demand initiative and judgment of her people but also that they check back with her before they do anything? Does the superior ask for ideas and suggestions but never uses them or discusses them? Does the company expect of a small engi- neering force that it be available immediately whenever something goes wrong in the plant and yet bend all its efforts to the completion of new designs? Does it expect managers to maintain high standards of performance but forbid them to remove poor performers? Does it create the conditions under which people say, “I can get the work done as long as I can keep the boss from knowing what I am do- ing”?

As the manager’s letter illustrates, managing managers requires special efforts not only to establish common direction, but to eliminate misdirection. Mutual understanding can never be attained by “communications down,” can never be cre- ated by talking. It results only from “communications up.” It requires both the superior’s willingness to listen and a tool especially designed to make lower man- agers heard.

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SELF-CONTROL THROUGH MEASUREMENTS The greatest advantage of management by objectives is perhaps that it makes it pos- sible for managers to control their own performance. Self-control means stronger motivation: a desire to do the best rather than do just enough to get by. It means higher performance goals and broader vision. Even if management by objectives were not necessary to give the enterprise the unity of direction and effort of a management team, it would be necessary to make possible management by self-control.

Indeed, one of the major values of management by objectives is that it enables us to substitute management by self-control for management by domination.

To control their own performance, managers need to know more than what their goals are. They must be able to measure their performance and results against the goal. Managers must have clear and common measurements in all key areas of an organization. These measurements need not be rigidly quantitative nor need they be exact. But they have to be clear, simple, and rational. They have to be reliable—at least to the point where their margin of error is acknowledged and understood. And they have to be self-explanatory, understandable without compli- cated interpretation or philosophical discussion.

All managers should have the information they need to measure their own per- formance, and they should receive it soon enough to make any changes necessary for the desired results. This information should go to the managers themselves, and to their superiors. It should be the means of self-control, not a tool of control from above.

This needs particular stress today, when the ability to obtain such information is growing rapidly as a result of technological progress in information gathering, analysis, and synthesis. In the past, information on important facts was either not obtainable at all or could only be assembled so late as to be of little use. This was not an unmixed curse. It made effective self-control difficult; but it also made domination of a manager from above difficult. In the absence of information with which to control him, the manager had to be allowed to work as he saw fit.

The new ability to assemble measuring information will make possible effec- tive self-control. If used properly, it will lead to a tremendous advance in the ef- fectiveness and performance of management. But if this ability is abused to impose control on managers from above, the new information technology will inflict in- calculable harm by demoralizing management and by seriously lowering the ef- fectiveness of managers.

SELF-CONTROL AND PERFORMANCE STANDARDS

Management by objectives and self-control asks for self-discipline. It forces the managers to make high demands on themselves. It is anything but permissive. It may well lead to demanding too much rather than too little. This has, indeed,

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been the main criticism leveled against the concept. (See chapter 7, especially the discussion of Abraham Maslow’s criticism of Theory Y.)

Management by objectives and self-control assumes that people want to be re- sponsible, want to contribute, want to achieve. That is a bold assumption. Yet we know that people tend to act as they are expected to act.

A manager who starts out by assuming that people are weak, irresponsible, and lazy will get weakness, irresponsibility, and laziness. A manager who assumes strength, responsibility, and desire to contribute may experience a few disappoint- ments. But the first task of managers is to make effective the strengths of people. And this they can do only if they start out with the assumption that people—and especially managers and professional contributors—want to achieve.

Above all, they must make this assumption with regard to the young educated people of today who will be tomorrow’s managers. These young people may not know exactly what they mean when they demand to be allowed to “make a contri- bution.” But their demand is the right one. They are right also that management, as it has been practiced so far, does not act on the assumption that the young educated people want to make a contribution. Such people need to be subjected—and to subject themselves—to the discipline and the demands of management by objec- tives and self-control.

A PHILOSOPHY OF MANAGEMENT

What the business enterprise needs is a principle of management that will give full scope to individual strength and responsibility, as well as common direction to vision and effort, one that will establish teamwork and harmonize the goals of the individual with the common good. Management by objectives and self-con- trol makes the interest of the enterprise the aim of every manager. In place of control from outside, it substitutes the stricter, more exacting, and more effec- tive control from inside. It motivates managers to action, not because somebody tells them to do something or talks them into doing it, but because the objective task demands it. They act not because somebody wants them to but because they themselves decide that they have to—they act, in other words, as free men and women.

I do not use the word “philosophy” lightly. Indeed, I prefer not to use it at all; it’s much too big a word. But management by objectives and self-control may properly be called a philosophy of management. It rests on a concept of the job of management. It rests on an analysis of the specific needs of the management group and of the obstacles it faces. It rests on a concept of human action, behavior, and moti- vation. Finally, it applies to every manager, whatever his or her level and function, and to any organization, whether large or small. It ensures performance by con- verting objective needs into personal goals. And this is genuine freedom.

268 THE MANAGER’S WORK AND JOBS

SUMMARY Each member of the enterprise contributes something different; but all must con- tribute toward a common goal, a common performance. Each should strive toward workmanship in his or her work. Yet professional excellence

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