Academy of Management Review 1981, Vol. 6. No.

2, 225-230

Management by Objectives:
As Developed by Peter Drucker,
Assisted by Harold Smiddy
RONALD G. GREENWOOD
University of Wisconsin — La Crosse

In this article, I discuss the early development of the philosophy and con-
cept of management by objectives (MBO) as it has been traditionally de-
fined in the literature. Peter Drucker worked out the philosophic founda-
tions of MBO with the assistance of Harold Smiddy of the General Electric
Company, who was already putting the "manager's letter" concept into
practice in the late 1940s.

Peter Drucker is often credited with "inventing" ment by objectives is simply defined as measuring
management by objectives. He himself has never work against stated objectives. I will use as a defini-
claimed the distinction, but a perusal of the tion for MBO the often cited one of George Odióme
literature would lead one to a proper conclusion that that it is "a process whereby the superior and subor-
Drucker was first to publish the concept and first to dinate managers of an organization jointly identify
use the term. The history of MBO is clouded because its common goals, define each individual's major
it is a concept, and no concept or philosophy ever areas of responsibility in terms of the results ex-
springs up full grown wihtout a long period of ger- pected of him, and use these measures as guides for
mination. The seeds that later sprouted MBO were operating the unit and assessing the contribution of
evident many times and in many places. Drucker's each of tis members" [1965, pp. 55-56]. The key to
precursors who wrote about the need for objectives this definition is that subordinates play a major role
as a foundation for management, but did not use the in setting their own objectives and not in merely
term MBO, include James O. McKinsey [1922], receiving objectives from above. This would dismiss ^
Chester I. Barnard [1938, p. 233; Wolf, 1974, p. many of the claims made for previous use of MBO
114], Henri Fayol [1916], Mary Parker Follett by such people as McKinsey, Barnard, and Fayol, or
[1941], Ralph C. Davis [1937, pp. 90-126; 1940, pp. by such corporations as DuPont, General Motors,
27-28; 1951, pp. 15-16], and Harry Hopf [1973]. and Standard of New Jersey — firms that Odiorne
Each hinted, some more strongly than others, about claims used an early objective-based management
the importance of a philosophy such as MBO. Hun- style of organization [1978].
dreds of unidentified managers probably even prac-
ticed systems with varying degrees of similarity to
MBO, but the story of how Peter Drucker came to Drucker and Smiddy, Pre-GE Days
put it all together is worth telling.
MBO as it is understood today was conceptual-
ized by Peter Drucker and first put into practice by
MBO Defined Harold Smiddy, a long-time vice president of the
General Electric Company and a close personal
The writings of early management theorists could friend of Drucker. Drucker even claimed that Smid-
be interpreted as often hinting at MBO, if manage- dy was the godfather of his classic The Practice of
© 1981 by the Academy of Matigement 0363-7425 Management [1954, p. ix].
225
 Smiddy was Vice President of General Electric's didn't invent the term 'management by objectives';
Management Consultation Services and chief archi- actually, Alfred Sloan used it in the 1950s" [1976, p.
tect of that corporation's famous decentralized 77]. Tarrant now says that he misconstrued what
structure, which was so often copied in the 1950s Drucker said about Sloan using objectives as a key
and 1960s. Harold Smiddy had a lifetime commit- to his management style to mean he used the term; in
ment to both the theory and practice of manage- fact Sloan used neither the term nor the MBO
ment. He was Academy of Management president in philosophy [1979]. Drucker reports that neither
1963 and one of its original Fellows. Among his Sloan nor Donaldson Brown at GM "had [anything]
numerous awards are included The Taylor Key, to do with the term. . . [and] nothing to do with the
Gantt Medal, and Wallace Clark Medal [Green- concept as such" [1979b]. But Drucker also claims
wood & Zimet, 1979]. It was Smiddy who designed that Sloan "practiced managing by objectives
the structure, and thought through and wrote a without considering it central to his management
management philosophy that was the foundation philosophy or to his style [1979c].
for the decentralization reorganization General Elec- Peter Drucker and Harold Smiddy first met after
tric put into operation in a five-year period begin- World War II, probably as early as 1946. As
ning in 1951. Drucker recalls it, Smiddy approached him after
Smiddy's chief outside consultant was Peter reading The Concept of the Corporation [Drucker,
Drucker. Drucker's association with Smiddy and his 1946]. Drucker was still teaching at Bennington Col-
management consultation group was so close that lege in Vermont and Smiddy was a partner of Booz,
during this reorganization time one might have Allen, and Hamilton, heading the New York office.
mistakenly considered him to be on General Between 1946 and 1948, the two met four or five
Electric's payroll. Both men had similar experiences times to discuss management. Drucker, in 1948, had
that led to Drucker's developing the MBO phil- taken on a consulting assignment with the Chesa-
osophy and to Smiddy's initial decision to try it in peake and Ohio Railroad in Cleveland to study basic
practice. Harold Smiddy, before coming to GE, had objectives and long-range planning. Drucker asked
been a partner at Booz, Allen, and Hamilton. There Smiddy to join him on this project, as both men had
he had learned the concept of the "manager's letter" discussed the subject. Smiddy declined, having just
from one of his associates. Simply put, the decided to join General Electric, then he asked
"manager's letter" required a job holder (manager or Drucker if he would be available to work with him
individual contributor) to write a letter to his or her once he moved over.
superior indicating what the goals for the next It was duririg this period that Drucker truly began
period of time were, how the goals would be met, to crystallize in his mind the concept of managing by
and what standards were to be expected. When the objectives and self-control. Fundamentally, the
superior accepted this letter — usually after editing basic difference between the philosophical develop-
and discussion — it became the work "contract." ment of Drucker and his predecessors Smiddy,
When Harold Smiddy first came to the General Elec- Sloan, Fayol, Barnard, and the widely respected
tric Company in 1948, he introduced the monthly management consultant Harry Hopf, was that the
letter concept to two operating divisions; but it was others took for granted that the objectives were
not until 1952, when he first began to have the cor- known, obvious, and given. What Drucker saw so
porate philosophy of management written, that clearly in his own mind, largely as a result of his con-
Drucker was able to convince him of the ease with sulting work, was that objectives are risk-taking
which the monthly letter concept could act as a decisions and are anything but known or given. In
foundation for an MBO philosophy of management. other words, to the earlier management theorists,
Drucker had been invited to look at the political, objectives are something that somehow you use as a
social, and structural relationships at General foundation for your planning or, at least, are in-
Motors under Alfred P. Sloan, Jr., in the early 1940s herent in your planning. To Drucker, objectives are
[Drucker, 1946,1979a. ]. John Tarrant reports that it something you look at first. Unless you do, you can
was here that Drucker picked up the phrase or con- do no planning, let along any organizing, inte-
cept "management by objectives." In his book on grating, or measuring (to use the Smiddy functions
Peter Drucker, Tarrant quotes Drucker as saying "I of management [General Electric, 1954, p. 63]). The
226
earlier theorists (and most of the current crop) define reset, with explanation. If the objectives spelled out
the work of managing as planning, organizing, inte- in the monthly letter required another work rela-
grating, and measuring the work of the organiza- tionship, then a copy of that letter was sent to the
tion. To Drucker, these activities are the implemen- respective manager(s) to complete the full cycle and
tation of what he calls the real work of managing: to allow others involved to incorporate the neces-
setting objectives and deciding what the business is, sary agreed-on responsibility as part of their own
what it should be, what it could be. For the last thir- monthly objectives. Once an objective was defined
ty years, Drucker has hammered on this point in and scheduled in a monthly letter, it was never
almost every one of his management books; perhaps removed from future monthly letters until it was ac-
his point has not yet been understood. In summary, complished [Drucker, 1954, pp. 129-130; 1974, pp.
objectives to Sloan and Smiddy were obvious; to 438-489; W.J. Greenwood, 1980; Smiddy, 1977).
Drucker they were anything but obvious, yet are at Harold Smiddy always said that the monthly let-
the heart of real managing. ter was actually written by the managers or "in-
dividual contributors" for their own personal
guidance —- not for the boss, but for self-measuring.
The Manager's Letter Without it, the managers or individual contributors
might not take the time to frequently measure their
Drucker did assist Smiddy at GE; indeed, he own performance and might therefore fail because
became an almost permanent fixture at GE's New of not having pursued timely accomplishment of
York City corporate headquarters on Lexington their previously agreed-on objectives. Nevertheless,
Avenue. Drucker joined the faculty of New York the scrutiny Smiddy gave to the monthly letters and
University in 1950 and was able to act as a consul- his voluminous written comments led many of those
tant to Harold Smiddy's Management Consultation who reported to him to say that "Smiddy manages
Services Division on almost a daily basis during the by marginal notation" [W.J. Greenwood, 1979).
period 1950-1954. Drucker and Smiddy shared
many long hours of discussion on such GE problems
and ventures as decentralization, operations Early MBO Literature
research, manager development, and designing the
famous GE Crotonville Training Center. Harold Koontz directs attention to the early use of
Because Drucker aided Smiddy in so many areas, MBO in his outstanding book. Appraising Mana-
specific topics would be pre-arranged for discussion gers as Managers, claiming that "if not indeed earlier
when they met. One of the early subjects was the than Drucker, the General Electric Company faid
'manager's letter," which in 1952 was debated, out the elements of managing by objectives in its ex-
discussed, and thought through over a period of tensive planning for decentralization in 1952-1954"
many weeks. Smiddy frequently invited his asso- [1971, pp. 45-46). (Koontz was, at the time of his
ciates to sit in on discussions of the principles behind writing, unaware of the influence Drucker had in the
this letter as he and Drucker thought it out. Once he GE philosophy and system [Koontz, 19801.) Koontz
asked one of his internal management consultants, documents his contention by quoting from a GE
William J. Greenwood, to sit in on an all-day discus- publication of 1954 (released to the public a decade
sion and to reduce their observations to a written later), titled Professional Management in General
document for further analysis. The write-up was Electric, Book III: The Work of the Professional
carefully edited by Smiddy and Drucker [W.J. Manager. (I will be selecting my own excerpts from
Greenwood, 1979; Smiddy, 1977]. that same publication.) But an earlier General Elec-
From their rigorous analyses, the manager's letter tric publication has some most interesting
developed into a monthly letter wherein one set statements. At Smiddy's request and under his
goals, activities, and standards for each month and supervision, a book — Dynamic Management
reported the results against the previous month's ob- Organization — was drafted by L. Byron Cherry in
jectives. In this way, nothing was ever swept early 1952 [General Electric, 1952]. Hardcover
under the carpet. Targets were set, progress reported, mock ups were produced, but the book was not
and objectives with a specific time table were often published. The material was superseded by drafts
227
written by Hubert "Speed" Race and finally resulted The Smiddy group, including Hubert Race and L.
in Professional Management in General Electric, Byron Cherry, had read Drucker well before the
Book III two years later. Race manuscript was written. Almost every week
Two quotations from this unpublished 1952 draft Smiddy received drafts from first Cherry and later
are of interest because they portray MBO and the Race and he asked Drucker to rewrite them over the
self-control side of that concept — the most weekend. The two quotations from the 1952 Cherry
overlooked aspect of the Drucker philosophy. draft not only are Drucker's concepts, but Drucker's
Dynamic Management Organization explains: words — they have his writing style. Cherry, Race,
and Smiddy did not write with this flavor [W.J.
Greenwood, 1979].
Effective control in every Operating Component
depends on the establishment of definite goals in Shortly after the 1952 mock up was produced, the
terms of specific dates and figures for the measure- project was greatly altered and Smiddy decided that
ment of performances, as a stimulus toward com- one book would not cover the material that needed
plete achievement of stated objectives. The impor- to be disseminated as the General Electric Company
tant factor is that every member of management
should have specific goals which he agrees to attain moved from a highly centralized structure to a
by specific dates, and which will obligate him to ex- decentralized one. One of the reasons that Smiddy
amine and explain the reasons for variance or devia- shelved the original project may have been that he
tion. This produces the most effective form of con- had read Drucker's book in its first draft and con-
trol — self-control, [p. 78] cluded that what was developed in Dynamic
Management Organization was simply not ade-
Later the book describes methods of control. quate. Smiddy clearly realized that more was need-
Among the simplest, yet most effective, is: ed than the traditional functional approach with
which he had started the project. Drucker was
The requirement that the management of each com- pushing the GE drafts toward a conceptual structure
ponent formulate, for a period sufficiently long in that subordinated functions. It appears this was a
advance, a comprehensive operating program and direction to which Smiddy had a difficult time ad-
budget (including personnel and capital require-
ments) — what they propose to accomplish by justing, because of his intense loyalty to the pioneers
when; hov.i they propose to accomplish it; what it of management and their functional approach. The
will cost; what it will earn; what capital and other subordination of Fayol's approach and that of Smid-
resources are required, and their amortization, [p. dy's mentor Harry Hopf led to an approach with a
83] far more rigorous conceptual framework, one that
did not focus on process but on purpose. Therefore,
This is a simple requirement for a manager to set
the evolving philosophy was far removed from the
objectives, time periods, costs, and standards engineering approach with which Smiddy had
against which to be measured. started out.
It was during this period that Drucker wrote The
Smiddy planned a series of "texts" to explain the
Practice of Management, including the now classic
corporation's new philosophy. Ultimately four
chapter "Management by Objectives and Self-
books were published and a fifth was written hut
Control." Drucker comments:
had not reached its final stages when Smiddy retired
in 1961 and the project was suspended. The series of
I wrote the draft of Practice of Management, and books was entitled Professional Management in
especially of the parts that deal with objectives and
General Electric. The third book, mentioned earlier
with the manager's work, in 1951/52. In fact, I
remember distinctly that "Speed" Race visited me in and subtitled The Work of a Professional Manager,
our summer place in Colorado in the summer of was published in 1954. As in all the books, Smiddy
1952, when I finished the first draft of that book. wrote much of the material, led its direction, and ap-
And it was then circulated among a few friends, proved every word. Hubert "Speed" Race acted as
especially Smiddy, [Fred] Borch, Cherry, and Race coordinator for the project and major contributions
. . . at GE, before I started on the final revision,
which was finished at Cape Cod in the summer of came from Smiddy's Management Consultation Ser-
1953.[1979b] vices staff, then consisting of Fred Borch (later to

228
become Chairman of the Board and Chief Executive authored the phrase "management by objectives."
Officer), Paul Mills, Melvin Hurni, Tim Linville, Harold Koontz believes he recalls Drucker saying
Charles Clark, Hugh Estes, Byron Case, and Harold Smiddy may have first coined the expres-
William J. Greenwood. Also, contributions came sion. The uncertainty stems from a discussion of
from outside consultants Miles Mace of Harvard MBO and the manager's letter concept that Koontz
and Peter Drucker [W.J. Greenwood, 1979]. and Drucker had, in which Drucker readily credited
It is this third book of the series that speaks direct- the manager's letter concept and term to Smiddy but
ly to the subject of MBO, but without using the ac- not the MBO term [Koontz, 1980]. The term
tual term. A few quotations will lend support to this "management by objectives" was in fact coined by
claim: Drucker. Sometime between 1948 and 1951 the
phrase evolved and Drucker often used it in his lec-
The manager of each division, of each department, tures.
and of each successively smaller component is
responsible for seeing that objectives are established Beyond coining the phrase, Drucker must be
for his component which are consistent with credited with numerous contributions to the MBO
previously stated . . . goals of the larger components philosophy. He was intellectually first, and for a
of which his component is part [p. 26]. long time alone, in claiming that objectives are not
given, are not obvious, are not something that
Whatever is worth planning is also worth measur-
ing. Performance is the ultimate test. Even the most everybody knows. He broke from the earlier writers
perfect planning is of little use unless it results in per- who emphasized the process of management and
formance, [p. 38] who placed the setting of objectives within the ele-
ment of planning. The basic assumptions of the
As a result of the work of planning and organiza- traditional functional approach lacked intellectual
tion, the manager of a particular business compo-
nent has established plans, forecasts, estimated and operational underpinning: the earlier writers
schedules and budgets for the work of his compo- assumed objectives. Drucker, on the other hand,
nent. These have been in quantitative terms with found setting objectives to be the difficult, highly
corresponding expected standards of performance risk-taking aspect of the manager's job [Bonaparte,
specifically indicated, [p. 113] 1970, pp. 30-32; W.J. Greenwood, 1979; Ritchie,
Decentralization of managerial decision making re- 1970, pp. 86-89].
quires that objective goals and objective measure- It also appears that most earlier thinkers about
ment of progress toward these goals be substituted objectives tried to find the single objective — this
for subjective appraisals and personal supervision. was Sloan's approach and for a long time Smiddy's.
Through a program of objective measurements,
managers will be equipped to focus attention on the Drucker built management as a discipline and
relevant, on trends, and on the future. To the ex- managing as a practice around the decision on objec-
tent, therefore, that we are able to develop sound, tives — something few others understood. Whereas
objective measurements of business performance, the earlier systematic writers on management had
our philosophy of decentralizing authority and
responsibility will be rendered more effective, [p. talked of a process, Drucker talked of an intellectual
133] and conceptual decision based on analysis, from
which the process of managing would then flow
One does not need to be "controlled" or "command- [W.J. Greenwood, 1979].
ed" if he knows what is to be done and why; if he
knows, from continual measurement of results,
whether the work is getting done as planned and on Conclusion
schedule, or if not, why not [p. 73].
William Greenwood, who worked on the project, In answer to the question "Did you know
claims that these are all Drucker rewrites [1979]. anybody who practiced MBO before you wrote
about it?" Drucker replied:
Drucker's Distinct Contribution A good many people in earlier times managed by
To Management by Objectives objectives. Sloan was the first one I met, for the sim-
ple reason that he was the first significant figure in
There seems to be some confusion as to who management I met personally. But I would imagine
229
 that Pierre Du Pont, before him, started out with view, was the area in which Sloan had not really
objectives — perhaps even more clearly than Sloan done his thinking and was woefully woolly. In other
did. In those years, of course, I had not read Pierre words, to manage by objectives is nothing new.
Du Pont's papers and letters, which Chandler [1979c]
[1971] has made available only fairly recently. And
there is no doubt in my mind that a difficult, but Peter Drucker put objectives into center stage and
brilliant man — Donaldson Brown — had a very made them the core of the structure of a discipline of
clear concept of management by objectives in mind, managing. Many other managers probably "in-
although he never wrote about it, to the best of my vented" and used an MBO concept before 1954, but
knowledge, never spoke about it, and certainly did
not discuss it in his talks with me, which were fo-
it took Drucker to put it all together, think through
cused almost entirely upon organization structure its underlying philosophy, and then explain and ad-
and especially on the role of staffs which, in Brown's vocate it in a form others could use.
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Ronald G. Greenwood is Professor of Management and