System Approach to Management by Objectives - Essay Example

 Table of Contents Introduction 2 Management By Objectives ( MBO) 3 Systems Approach to Management By Objectives (SAMBO) 3 A Focus on Goals 4 Realities of SMEs 5 Conclusion 8 References 9 Introduction Goal Setting in small and medium sized business enterprises (SME) is as important a part of the success of these organizations as it is in much larger corporations. The definition of small varies as Odaka indicates,"Statistical definitions of small business vary from one country to another. In the UK, for example, manufacturing enterprises with 200 or fewer employees are defined as small businesses, while the upper limit for 'smallness' is 300 employees in both Japan and Korea, or 500 in France, Germany, Italy, and the USA. 2" (Konosuke Odaka & Minoru Sawai , 1999, p. 4) . The important idea to take away is that smaller firms are composed of individuals and individuals vary tremendously in their motivations, talents and approaches to work. Despite the smaller size of the groups in SME the presence of even small groups of individuals working together necessitates a well thought out plan for a host of reasons, including that all concerned have a clear idea of which direction the company is to head. The best know systematic theory of management via the use of goals is Management By Objectives (MBO); this was a management technique originally introduced by Peter Drueker . This paper will outline the importance of goal setting in SME through the MBO approach and will further offer some insight into how business activity can be influenced by this approach. Management By Objectives ( MBO) First developed by Peter Drucker in the 1950's Management by objectives described a process where in Drucker's own words “ objectives are needed in every area where performance and results directly and vitally effect the survival and prosperity of the business”.( Weihrich p. 1 2002) This is a highly effective method of management but the problem has been that the technique has not been adopted in a systematic approach according to Heinz Weihrich. Weihrich outlines a systematic approach which incorporates Druecker's theories in their purest form along with the rationale for using them. Systems Approach to Management By Objectives (SAMBO) The Systems Approach to Management By Objectives ( SAMBO) offers a systematic approach to MBO principles for small businesses. This approach observes the structure of a SME in terms of an organizational boundary and then views the inputs and output and systematic factors that need attention as well as the vital role of strategy that underlies attention to all of these factors. Input variables are divided into material inputs such as capital from technological devices such as machines and other hardware to educational, in terms of training of the employees and goal inputs which are the motivations of the employees and consumers, government, stockholders, and community. These inputs are channelled toward strategic planning based on a hierarchy of relative importance in terms of objectives. These objectives are modified by an interdependent relationship with plans and implementations and controls and appraisals. The result of these interactions lead to the outputs which are such outcomes as products, profits, services and essentially all goal achievements.( Weihrich. p.3. 2002) The hierarchy of objectives need further elaboration. The higher objectives relate to to the socio-economic purpose of the company and the mission statement of the company. Below these, are the the goals that relate to the subdivision of work within the various departments. These objectives can be placed in such a hierarchy if they fulfil certain requirements that relate to quantitative values so that they can be measured. Objectives by these standards should be measurable by values such as quantities, quality, time and cost. ( Weihrich. p. 4 2002). The SAMBO approach is a good outline of the MBO approach but further study of the nature and importance of goals needs to be explored. A Focus on Goals The Management planning series put out by the U.S government identifies four different types of goals: 1. Regular work goals. 2. Problem solving goals. 3. Innovative goals. 4. Development goals.( Management planning series p.4. 2003) 1. Regular work goals relate to quantity, quality and efficiency, that is improving performance of employees on a day to day basis. 2. Problem solving goals are concerned with the identification of major problems that arise in the company and solutions to these problems. 3. Innovative goals are the creative heart of the company where new approaches to the companies established ways of production are explored. 4. Development goals are the most complex from an administrative viewpoint. Here it is where managers develop a goal for a team that is clear and focused and then measured over time in terms of progress. Any goal development should anticipate problems that will occur and have measured intervals to identify when the goals will be completed. This method is very specific in the requirement for regular evaluations which are result oriented. These theories are very useful but they need to be applied to some of the realities of SMEs. Realities of SMEs The role of SMEs in future economies are becoming more and more important as Leisch and Knight attest: While conventional explanations have long implied that international business is the domain of large, resource-rich companies (e.g., Johanson and Vahlne, 1990; Anderson, 1993), recent evidence on the emergence of internationally oriented small and medium enterprises (SMEs) is presenting an important challenge to this conventional thinking (e.g., Oviatt and McDougall, 1994; Knight and Cavusgil, 1996; The Wall Street Journal, 1996). In Europe, Asia (including Australia), and the United States, with advances in information and communications technologies, the globalization of markets, and other facilitating factors, more and more SMEs are venturing abroad. In many countries, SMEs now account for a substantial portion of export growth, current employment and future growth prospects (Bell, 1995; Chuushoo Kigyoo Cho, 1995; Craig and Douglas, 1996; The Economist, 1993) (Liesch & Knight, 1999, p. 383) Given this emerging reality it is important to examine how management techniques emphasizing goals will improve the overall profile of these SMEs. “The utilisation of better management techniques is far more dependent on time as Bannock indicates: “It is no exaggeration to say that for most start-ups, management is a race against time, in which the fast learners and the best financed are most likely to survive, though having an immediately marketable product or service is also important. There are several danger periods in the life of a business and the first three years, for that reason, are certainly the most crucial, since that is when failure rates are highest.” (Bannock, 2005, p. 95) Given the greater effect of business variability on these smaller companies it is more vitally important to utilise a goal oriented management approach. Growth in SMEs is more difficult proposition than it is in larger corporations as Orser states “ Growth in small businesses is rare. This study expands on Penrose's (1957) concept of managerial capacity and links it to firm growth. Growth is hypothesized to occur when a threshold of administrative or managerial acumen is attained by the management team. (Barbara J. Orser, Hogarth-Scott & Riding, 2000, p. 42) When it growth does occur it does so as Orser elaborates as a result of better management techniques. The importance of fostering this growth is no less important in the United States than anywhere else in the world as SMEs are fairly considered the engine of growth of the U.S economy as Orser states in no uncertain terms, “ From the early work of Birch (1979) to more recent work by Mend et al. (1997), longitudinal employment data consistently suggest that the growth of SMEs accounts for a disproportionate share of job creation in North America. Moreover, research also demonstrates that much job creation is attributable to a minority of firms that grow very quickly --the so-called "gazelles" (Barbara J. Orser, Hogarth-Scott & Riding, 2000, p. 42) A study put out by Queens business school, the association of Canadian Exporters and Importers and Royal Bank has identified certain stages that are vitally important in the evolution of SMEs that is the Start-up stage, the Fast-growth stage, the Sustainability Stage and the Global Enterprise Stage. The most important factor in dealing with business variability to foster growth through these various stages, according to the authors of this work, is the through Goal Innovation planning. Here the ideas of Peter Druecker are again employed when he “ defines innovation as the application of knowledge to produce new knowledge – not the exclusive domain of “loners in their garage” but the product of systematic efforts.” (Drueker. p. 56. (1993)) Conclusion SMEs are a vitally important part of the modern Global economy. They comprise an important aspect of future economic prosperity of nations across the world. Defined by their smaller size they are subject to greater systemic stress from variability in the business cycle. As Orser suggests relatively few SME's achieve significant growth but for the well being of the economy more measures need to be taken to ensure a smoother transition to growth. The Queens University study has shown there are certain recognizable phases in the life cycle of successful SMEs. This same study has shown that the most important factor in the transition to growth has been through better management techniques. The most widely used management technique in goal oriented planning has been the MBO approach introduced by Peter Druecker. This paper has attempted to outline the ideas of the MBO approach and offer some support for why it is a successful approach for SMEs in the face of the variability of the business cycle. References Ali, A., & Swiercz, P. M. (1991). Firm Size and Export Behavior: Lessons from the Midwest. Journal of Small Business Management, 29(2), 71+. Retrieved June 2, 2006, from Questia database: http://www.questia.com/PM.qst?a=o&d=5000128507 Bannock, G. (2005). The Economics and Management of Small Business: An International Perspective. New York: Routledge. 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