0

lanniiig and Goal 

Setting for Small 

Business

While we consider the contents of this publication to be of general meri4 its sponsorship by the U.S. Small Business Administration does not 

necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are 

affiliated.

All of SBA's programs and services are extended to the public on a nondiscriminatory basis.
TABLE OF CONTENTS

INTRODUCTION .............................

MANAGEMENT BY OBJECTIVES

PREPARING FOR THE MBO PROGRAM

Understanding the Requirements of an MBO 

Program

Defining Your Business .......................................

Setting Goals ....................................

Devising a Work Plan .........................

Repor

ting Progress 

..........................

.

Evalu

ating 

Performance 

.......................

INSTALLING 

THE MBO PROGRAM

THREATS TO AN MBO PROGRAM

SUMMARY ....

APPENDIX: INFORMATION RESOURCES

............................................................................................................................ 1

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U.S. Small Business Administration

Many authorities on business management identify the The planning and controlling functions of management

five major functions of management as often receive less attention from the small business

owner-manager than they should. One way to more

• Planning. effectively fulfill these two functions is through effective

• Organizing. goal setting.

'Me success of a business will depend on its long-range

• Directing. goals for sales, profits, competitive position, development

of personnel and industrial relations. To accomplish these

• Controlling. goals, the company will need to identify intermediate

• Coordinating. goals that it can work toward each year.

Traditionally, people have worked 

according to

descriptions that list the activities orfunctions of the job. percent increase in sales expected by the sales

The management by objectives (MBO) approach, on the departinenl

other hand, stresses results. The traditional job description for a personnel

Let's look at two examples. specialist may include conducting a recruiting

program for the company. Under the NEBO

Suppose a credit manager's job description approach, the personnel specialist would identify

states that he or she will supervise the credit five or six appropriate goals, one of which could

operations of the company. This description be, "Recruit ten new employees in specified

simply lists the functions of the credit manager. categories by July l."

Under the M]30 approach, the owner-manager With MBO, jobs are viewed in terms of achievements

and the credit manager would identify five or rather than simply functions. Activity alone is not enough;

six goals covering important aspects of the each activity must bring the worker closer to achieving his

manager's work. For example, one goal might be or her goals.

1:1 011 LILMors-s I so l:l iTi I: loj:i In wm

Understanding the Requirements of an MBO

A final written statement of each goal was

Program prepared, including a statement of the goal,

method of evaluating the goal, work steps needed

Management by objectives has been used by all kinds of to complete the goal and an estimated time

organizations, but not every business has had the same needed to complete the steps.

degree of success. From examining MEBO programs that

have worked, it is clear that all met the following Progress was evaluated at regular intervals (at

minimum requirements: least quarterly) and compared with the original

goals.

• Goals were expressed in specific and measurable

terms. * Problems that hindered progress were identified

and corrected.

• Each employee proposed 5 to 10 goals to cover

those aspects of his or her job crucial to 0 Goals were related to each level of management,

successful performance. both those above and those below.
U.S. Small Business Administration 1
Defining Your Business By asking your managers to set at least one goal in each of

these four areas, you may open their eyes to new

The first step in developing an effective MBO program is possibilities they had not seen before. The goal-setting

to define your business. Ask yourself the following process can be a very useful educational step.

questions:

• What business am I in? Regular Work Goals

• Is my definition right for today's market? These include the major part of the manager's

responsibilities. For example, the head of production

• Do I need to change my business to meet should focus on the quantity, quality and efficiency of

emerging customer needs? production and the head of marketing should concentrate

on developing and conducting the market research and

A clear vision of your business is crucial for planning your sales programs. In defining their regular work goals,

marketing, product development, buildings and employees should include ways of

equipment, and financial and staff needs. For example, a

drop in sales caused a small business manufacturer of o Operating more efficiently.

metal trash cans to reexamine its product. To regain lost * Improving the quality of the product or service.

sales, the owner decided to redefine the product as metal

'containers" and to develop a new marketing plan. 9 Expanding the total amount produced or marketed.

Problem-SolWng Goals

Seffing Goals

These provide managers an opportunity to define their

Long-range business goals will be the cornerstone of your major problems and to set a goal to solve each one. There

company's MEBO program. To achieve these goals, you is no danger of ever running out of problems; new

must have a method to communicate them to your problems or new versions of old problems are always

managers and employees. One way is to bring managers present.

and employees into the process by asking them to help

formulate thecompany's short- and long-range goals. If Innovafive Goals

they have a role in establishing the goals, they will be

more committed to achieving them. Because of the push for new products and new methods

All goals should relate to and support the long-range in today's marketplace, innovation now gets much

objectives for the company. In this way, you can ensure attention in seminars and publications for top managers.

that the goals of all levels of management are consistent. Managers and workers should seek new and better

If goals are incompatible, you may find that employees production methods, explore better ways to serve

feel like the middle manager of a research and customers and propose new products for the company.

development company who exclaimed in a seminar, Managers will need to use innovative approaches to make

"How can I set my goals when I don't know where top the company competitive in a fast-changing national and

international economic environment.

management wants to go?"

Types of Goals Development Goals

In setting development goals, you and your managers

What areas of your managers' work are suitable for goal recognize the importance of acquiring new skills.

setting? Ask managers to identify the most important Managers should plan for the continued growth of each

aspects of their work. In each area, they should set both employee, both in technical areas and in work relations

short- and long-term goals. Carefully developed goals, if with fellow employees.

attained, should give the manager better control of the

job. Each manager should define one or two goals in each

of the following categories: Devising a Work Plan

• Regular work goals. You and your managers should use a miniature work plan

• Problem-solving goals. to develop goals that are complete and useful (see

Exhibit 1). In developing the plan, the following five

• Innovative goals. areas should be addressed:

• Development goals. Goal--Be specific and concise.

2 U.S. Small Business AdMiniStration
• Measurentent--What benchmarks will you use to any potential problems; (2) decide the best way to

measure whether you have achieved your goals? evaluate progress on the goals and (3) help each of your

These usually can be expressed in quantitative managers understand how his or her goals relate to those

terms. of the company.

• Major problems anticipated. All problems listed on the work plan should include a

solution. For example, suppose the head of a supply

• Work steps-List three or four of the most department sets a goal to deliver all packages within one

essential steps. Give completion dates for each. day after they are received. Because employees may have

difficulty meeting the new deadlines, the work plan

• Supervisor's goals--Employees should identify should include necessary steps to teach them the new

which of their manager's goals relate to their own procedures before the program goes into effect.

goals.

On the work plan, managers can show each of the major

work steps (subgoals) necessary to reach a goal. If the Reporting Progress

work steps are completed by the indicated date, the goal is

reached. An MEBO program must include a provision for regular

progress reports. For this reason, the MBO concept is

Use the form in Exhibit 1 to discuss goals with your sometimes called MEBO/P,, where the "R" refers to results.

managers. By looking at the form, you can see not only You and your managers will only accomplish your goals

the goal but also the plan for reaching that goal. This will or objectives ff the MEBO program calls for a regular

allow you to (1) ask questions about the work steps and review of progress. For example, one large organization

Exhibit 1 - Plan to Achieve Objectives

SUPERVISOR:

OBJECTIVE

#

L

:Increase gross sales margin of my area by 12 percent by 9-1-92 and maintain at that level for 

remainder of 1992.

January-December

Major Action Steps J F MIAIM J J JA S OIN D

1. Decrease cost of serving small accounts.

a. Identify all customers not purchasing $5000 per month. A

b. Determine sales potential of each target customer.

C. If potential is less than $5000, transfer to jobber.

d. Inform customer and schedule jobber visit with customer.

e. If potential is $5000, develop cooperative sales promotion

program.

L Implement program.

g. Evaluate and report results.

2. Increase minimum calls per salesperson to 10 per day.

a. Analyze work methods of "high call" salespersons. A

b. Identify salespersons with fewer than 10 calls placed. A

C. Analyze territory and order of calls. A

d. Determine best routing of calls.

e. Determine most effective realigning of all territories.

f. Implement plans.

g. Evaluate and report results.
U.S. Small Business Administration 3
issued nearly 100 pages of well-developed goals prepared In order to solve problems and meet a goal, managers may

by many of its managers. The document was very have to adjust their time line or change the goal itsell All

impressive, but it lacked a reporting system of any kind. changes should be written as new goals and included in

You can imagine the skeptical reaction of those who set the MEBO files.

goals for the first year when they were asked the

following year to draw up new goals. Evaluating Performance

A monthly or quarterly review of progress toward goals

will help you determine where progress is below In contrast to traditional methods, which evaluate

expectations. For example, suppose that one of your goals performance based on personal qualities such as

is to reduce overtime work by 50 percent in one year, but leadership ability, the MDO method evaluates

you only reduce it by 15 percent in the first quarter. performance based on objective results. Such evaluation

Based on this information, you can exert a special effort is a complex task that must be undertaken with care by

in the succeeding quarters to regain the lost ground. someone who fully understands MEBO. (See Exhibit 2 for

a comparison of traditional and MBO evaluation

When progress is below expectations, you should identify methods.)

the problems holding back progress and assign someone

to resolve them. Failure to reach goals can result from Under the M[BO program, you evaluate your managers'

The wrong objectives being established at the performance based on whether they have achieved their

outset. five to eight goals. You also must determine how well

they have performed the secondary duties that do not fall

Organizational restrictions being overlooked. under goals. (See Exhibits 3 and 4 for examples of

Personal failure or a combination of factors. traditional and MBO performance evaluation forms,

respectively.)

Exhibit 2 - Comparison of Traditional and MBO Evaluation Methods

Characteristic Traditional method MBO method

Frequency Usually annually (if at all). Usually quarterly.

Emphasis Traits. Results versus objectives.

Subordinate's frame of mind Mental block (doesn't know how Positive (feedback has told

"traits" will be evaluated). employee how well he or she is

doing).

Suggestions for improvement Poor receptivity (much has been Positive (much has been based on

based on employee's traits). employee's job performance).

Tie in to rewards Rewards usually not directly tied in. Rewards usually tied directly to

results.

Summary Little connection to results. Results oriented.

4 U.S. SMII BuSineSS AdMiniStration
Exhibit 3 - Example of Traditional Performance Evaluation Form

Above Below

Factor Excellent average Average average Poor

Degme of cost-consciousness x

Grasp of function x

Initiative x

Decision-making ability x

Application x

Judgment x

Health x

Appearance x

Loyalty x

Relationship with people x

Ability to develop subordinates x

Work habits x

Contribution to company's progress x

Potential for advancement x

Employee: Rated by:

Date: Reviewed by:

Acknowledgment: I acknowledge this performance appraisal has been discussed with me. This acknowledgment does not 

constitute agreement with the findings.

Signed: Date:

Exhibit 4 - Results-Oriented Evaluation Form

Results achieved

Quarters

Objectives Measure lst 2nd I 3rd Total year

1. Improve by 10 percent I . At least three qualified T 0 T Achieved in 97 percent of

number of qualified candidates referred for each cases.

applicants referred for job job opening.

openings.

2. Increase by 12 percent 2. Number of persons 0 T T 17 completed course.

number of qualified welders completing basic welding

during 19xx. course #5.

Note: T = On target. No action necessary. 0 Off target. Action necessary.
U.S. Simil Business Admlnlsftvtion 5
When installing an MBO program, start by asking your managers review each other's work plans and offer

managers to defme their jobs, including their major suggestions to improve them. The experience of setting

responsibilities. Then, for each responsibility, you and and reviewing goals makes MEBO a learning experience

your managers must decide the most effective way to for all employees.

measure performance in terms of results.

Encourage your managers to express their doubts,

The outcome of this exercise may surprise you. You reservations or opposition to MBO. They should get their

and your managers may not agree on the major feelings out in the open as soon as possible. You, the

responsibilities of a certain position. Also, you may consultant or other participants can help to ease their

find that no one is performing some functions that concerns.

you consider important. If the MEBO system is to

succeed, you must show interest from the beginning In the beginning of your MBO program, your managers

and set the example for your subordinate managers. will have to learn to measure their own performance

accurately, anticipate real problems that will thwart their

The education of your managers may be a formidable progress and take steps to solve delays and other

task. Until this time, they have thought in terms of problems. During this learning period, your managers

specific functions-managing a sales department, should set fewer goals than would usually be expected,

directing a credit office, etc.-rather than in terms of perhaps three or four. After they develop and achieve

goals that contribute to the organization. these goals, they can extend the number and area covered

by each goal.

One way to introduce the MEBO system to your managers

is in a seminar conducted by you or a consultant. MSO may look simple on the surface, but it requires

However, if you choose a consultant, be sure that you experience and skill to make it work effectively. If

are present for the entire seminar. In this way, you will managers set annual goals, it may take three to four years

communicate to your managers that the NMO system before good results from this new system appear.

is a management priority.

During the seminar, ask each participant to prepare an

actual goal. Also, in small group sessions, have your

Not all MBO programs 

are successful. Some of 

the

reasons why programs 

fail to reach their 

potential are o It is difficult to learn the system because the

• Top management does not become involved. nature of M30 is not taught.

• Corporate objectives are inadequate.

It is hard to get people to think in terms of results rather

than the functions of their job; however, it can be done.

The sequence of steps you use may not work for someone and follow through with the work plan. List your goals,

else. It is often an individual matter. No matter what steps method of measurement, anticipated problems and the

you use, the final results are what counl work steps necessary to get your company managing by

objectives.

6 U.S. Small Business Administration
U.S. Smafl Business Administration (SBA) Many federal agencies offer publications of interest to

small businesses. There is a nominal fee for some, but

The SBA offers an extensive selection of information on most are free. Below is a selected list of government

most business management topics, from how to start a agencies that provide publications and other services

business to exporting your products. targeted to small businesses. To get their publications,

contact the regional offices listed in the telephone

This information is listed in The Simll Business directory or write to the addresses below:

Directory. For a free copy write to: SBA Publications, Consumer Information Center (CIC)

P.O. Box 1000, Fort Worth, TX 76119. P.O. Box 100

Pueblo, CO 81002

SBA has offices throughout the country. Consult the U.S. The CIC offers a consumer information catalog of

Government section in your telephone directory for the federal publications.

office nearest you. SBA offers a number of programs and

services, including training and educational programs, Consumer Product Safety Commission (CPSC)

counseling services, financial programs and contract Publications Request

assistance. Ask about Washington, DC 20207

• Service Corps of Retired Executives (SCORE), The CPSC offers guidelines for product safety

a national organization sponsored by SBA of requirements.

over 13,000 volunteer business executives U.S. Department of Agriculture (USDA)

who provide free counseling, workshops and 12th Street and Independence Avenue, SW

seminars to prospective and existing small Washington, DC 20250

business people. The USDA offers publications on selling to the USDA.

• Small Business Development Centers (SBDCs), Publications and programs on entrepreneurship are also

sponsored by the SBA in partnership with available through county "tension offices nationwide.

state and local governments, the educational

community and the private sector. They U.S. Department of Commerce (DOC)

provide assistance, counseling and training Office of Business Liaison

to prospective and existing business people. 14th Street and Constitution Avenue, NW

Room 5898C

• Small Business Institutes (SBIs), Washington, DC 20230

organized through SBA on more than DOC's Business Assistance Center provides listings of

500 college campuses nationwide. The business opportunities available in the federal government.

institutes provide counseling by students. This service also will refer businesses to different

and faculty to small business clients. programs and services in the DOC and other federal

For more information about SBA business development agencies.

programs and services call the SBA Small Business U.S. Department of Health and Human Services (HHS)

Answer Desk at 1-800-U-ASK-SBA (827-5722). Public Health Service

Alcohol, Drug Abuse and Mental Health

Other U.S. Government Resources Administration

5600 Fishers Lane

Rockville, MD 20857

Many publications on business management and other Drug Free Workplace Helpline: 1-800-843-4971. Provides

related topics are available from the Government Printing information on Employee Assistance Programs.

Office (GPO). GPO bookstores m located in 24 major National Institute for Drug Abuse Hotline:

cities and are listed in the Yellow Pages under the 1-800-662-4357. Provides information on preventing

"bookstore" heading. You can request a Subject substance abuse in the workplace.

Bibliography by writing to Government Printing Office, The National Clearinghouse for Alcohol and Drug

Superintendent of Documents, Washington, DC Information: 1-800-729-6686 toll-free. Provides pamphlets

20402-9328. and resource materials on substance abuse.

U.S. Small Business Administration 7
U.S. Department of Labor (DOL) For More lnfotmation

Employment Standards Administration

200 Constitution Avenue, NW

Washington, DC 20210 A librarian can help you locate the specific information

'Me DOL offers publications on compliance with you need in reference books. Most libraries have a variety

labor laws. of directories, indexes and encyclopedias that cover many

business topics. They also have other resources, such as

U.S. Department of Treasury

Internal Revenue Service (IRS) Trade association information

P.O. Box 25866 Ask the librarian to show you a directory of trade

Richmond, VA 23260 associations. Associations provide a valuable

1-800-424-3676 network of resources to their members through

The IRS offers information on tax requirements for small publications and services such as newsletters,

businesses. conferences and seminars.

Books

U.S. Environmental Protection Agency (EPA) Many guidebooks, textbooks and manuals on

Small Business Ombudsman small business are published annually. To find the

401 M Street, SW (A-149C) names of books not in your local library check

Washington, DC 20460 Books In Print, a directory of books currently

1-800-368-5888 except DC and VA available frorr~ publishers.

703-557-1938 in DC and VA Magazine and newspaper articles

The EPA offers more than 100 publications designed to Business and professional magazines provide

help small businesses understand how they can comply information that is more current than that found in

with EPA regulations. books and textbooks. There are a number of

indexes to help you find specific articles in

U.S. Food and Drug Administration (FDA) periodicals.

FDA Center for Food Safety and Applied Nutrition

200 Charles Street, SW In addition to books and magazines, many libraries offer

Washington, DC 20402 free workshops, lend skill-building tapes and have

The FDA offers information on packaging and labeling catalogues and brochures describing continuing education

requirements for food and food-related products. opportunities.
8 U.S. Smil Business Administration
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