[ 363 ]
Management Decision
36/6 [1998] 363–369
© MCB University Press
[ISSN 0025-1747]
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 manage-
ment by objectives (MBO) in
the late 1950s. Kaplan and
Norton introduced the Bal-
anced Scorecard in the early
1990s. MBO and the Bal-
anced Scorecard are manage-
ment systems that align
tangible objectives with an
organisation’s vision. This
article compares and con-
trasts the two management
systems. The examination
concludes that the philosoph-
ical intents and practical
application of MBO and the
Balanced Scorecard stem
from similar precepts. The
examination of patterns of

new idea” seems to be true with respect to
management concepts. Management by objec-
tives (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 Bal-
anced Scorecard, which Kaplan and Norton
(1992) introduced almost 40 years later, is also
a management system based on goal congru-
ence 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 congru-
ence system (MBO).
The paper starts by describing MBO’s
philosophical intent as well as its implemen-
tation 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, focus-
ing on the likely recurrence of MBO-
evidenced problems. The paper finishes with

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 self-
control. 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 Mar-
tin, 1991). Before this time, traditional west-
ern management practices were mostly cen-
tered 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

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 dur-
ing 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 implemen-
tation steps were developed to allow the con-

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 sys-
tem 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 subordi-
nate 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 imple-
mented as expected and that strategic
goals remain as the focus (Bartol and Mar-
tin, 1991; Odiorne, 1987; Reddin and Kehoe,
1974).
The Balanced Scorecard
This section details the development of the
Balanced Scorecard, and defines the charac-
teristics of its use as a management system.
The Balanced Scorecard measurement
system (Kaplan and Norton, 1992, 1993a) was

four Balanced Scorecard categories (finan-
cials, customers, internal processes, learn-
ing/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 consis-
tency with strategic goals is expected to apply
across all functional areas within the organi-
sation (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 opera-
tional measurement system…” Rather, the
authors show that the Balanced Scorecard
has evolved into a strategic management
system, with organisations using it to man-
age their strategy over the long term. This is
done by using the measurement focus of the
Scorecard for the following critical manage-
ment processes (Kaplan and Norton, 1996b):
• clarify and translate vision and strategy;
• communicate and link strategic objectives
and measures;
• plan, set targets, and align strategic initia-
tives;
• enhance strategic feedback and learning;
• link measures with rewards.
Similarities and differences
between MBO and the Balanced

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 quantifi-
able 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 Bal-
anced 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 moti-
vated 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 similari-
ties between MBO and the Balanced Score-
card, identifying these problems may provide
useful information about the current system.

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 imple-
mentation steps described earlier.
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 under-
standing by management of one of MBO’s
core philosophies (organisational goal con-
gruence), while at the same time implement-
ing 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 wide-
spread use of MBO as an individual appraisal
system (Poister and Streib, 1995). Only 28 per
cent of the respondents in this study used

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 “peo-
ple” and also requires a shift from an auto-
cratic 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 Tas-
sel, 1995). TQM is a philosophy based on the
human relations model (Bowen and Lawler,
1992; Guillen, 1994) in its focus on collabora-
tion, empowerment, and teamwork. The mis-
match 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 wide-
spread 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 sys-
tem rather than an overall goal congru-

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 well-
publicised 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 com-
plexity 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 Score-
card 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 improve-
ments in organisational performance.
This complexity might encourage organisa-

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 accep-
tance 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 Score-
card 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 manager-
ial approach using the human relations
model as an extension of the rational goal
model.
MBO has proven to be largely unsuccessful

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 systems-
thinking 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 pro-
vides focus and strategic alignment even as
the measures themselves change. Renais-
sance Solutions Inc. Website (1996) supports
the view that the use of measurement sys-
tems remains a critical driver of improved

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[ 369 ]
David Dinesh and
Elaine Palmer
Management by objectives
and the Balanced Scorecard:
will Rome fall again?
Management Decision
36/6 [1998] 363–369
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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 manage-
ment technique (if anything)?