Management by Objectives: Drucker's 1954 Idea and Deming's War on Quotas

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Management by objectives, or MBO, grew out of a reaction against the top-down, assembly-line view of workers as interchangeable hands. Mary Parker Follett questioned blind obedience in her 1926 essay The Giving of Orders, and Peter Drucker popularized MBO in his 1954 book The Practice of Management. In the 1960s Drucker's student George Odiorne defined its core: superior and subordinate jointly identify common goals and areas of responsibility. Companies scaled it into a five-step cycle of reviewing organizational goals, cascading objectives down to each worker, monitoring, evaluating and tying rewards to results. Hewlett-Packard, Xerox, DuPont and Intel adopted it, and in the late 1990s large Japanese firms used it to introduce seika shugi, a performance-based system replacing seniority and lifetime employment.

Management information systems began tracking each employee's reach ratio toward a numerical target, and W. Edwards Deming became MBO's fiercest critic. He argued that isolated quotas ignore how departments depend on each other and push people to hit numbers by any means, deferring maintenance or degrading quality, and in his 14 points urged leaders to eliminate numerical quotas and management by objective. Deming noted that Drucker himself had warned that a systems view was required. A 1991 meta-analysis of 30 years of data found that high CEO commitment produced a 56% productivity gain versus 6% under low commitment. MBO's descendants include agile methods and the OKR system popularized by John Doerr at Google.

• The episode compares MBO to agreeing on a road trip map together rather than taking orders from a backseat driver.
• Traditional Japanese employment contracts were intentionally vague about daily output.
• Locking January targets into software made firms brittle when markets shifted months later.
• A factory manager paid to hit 10,000 units may hit the number and lose customers to defects.
• OKRs are often decoupled from compensation and made public across the company to break down silos.