MBO is a management system in which each member of the organisation effectively participates and involves himself. This system gives full scope to the individual strength and responsibility. MBO harmonises the goal of an individual with the organisation's goal.

Management by Exception.

(i)  KRA means Key result areas. Key Result area are fixed on the basis of organisational objectives premises.
(ii) Key Result Areas are arranged on a priority basis. KRA indicates the strength of an organisation.
(iii) The examples of KRA are profitability, market standing, innovation etc.

The objectives of MBO are ;
(i) to measure and judge performance.
(ii) to relate individual performance to organisational goals

Professor Reddin defines MBO as "the establishment of effective standards for managerial positions and the periodic conversion of those into measurable time bound objectives linked vertically and horizontally and with future planning".

Three process of MB0 are
(i) Defining Organisational Objectives.
(ii) Goals of Each Section.
(iii) Fixing Key Result Areas.

(i) Primarily, it is necessary to set objectives or norms with predictable or estimated results.
(ii) These performances are assessed and get equated to the actual performance. Next, the deviation gets analysed.
(iii) With an insignificant or no deviation; no action is a required and senior managers can concentrate on other matters.
(iv) If actual performances deviates significantly, the issue needs to be passed to the senior managers, as an exception has occurred.
(v) Finally the union is to solve this "exception" immediately.

The MBO process is characterised by the balance of objectives of the organisation and individual. The process of MBO is explained below
(i) Defining Organisational Objectives
(ii) Goals of Each Section.
(iii) Fixing Key Result Areas
(iv) Setting subordinate objectives or targets.
(v) Matching resources with objective.
(vi) Periodical review meetings.
(vii) Appraisal of activities.
(viii) Re-appraisal of objectives.
 

(i) An attempt ismade by the management to integrate the goals of an organisation and individuals. This will lead to effective managerment.
(ii) MBO tries to combine the long run goals of organisation with short run goals.
(iii) Management tries to relate the organisation goals with society goals.
(iv) MBO's emphasis is not only on goals but also on effective performance.
(v) It increases the organisational capability of achieving  goals at all levels.
(vi) Aims at replacingthe exercise of authority with consultations.

The process of MBO is explained below:
(i) Defining Organisational Objectives: Initially, organisational objectives are framed by the top level employees of an organisation. The definition of organisational objectives states why the business is started and exists.
(ii) Goals of Each Section : Objectives for each section, department or division are framed on the basis of overall objectives of the organisation. Goals or objectives are expressed in a meaningful manner.
(iii) Fixing Key Result Areas: Key result areas are fixed on the basis of organisational objectives premises. Key Result Areas (KRA) are arranged on a priority basis. KRA indicates the strength of an organisation.
(iv) Setting Subordinate Objectives or Targets : The objectives of each subordinate or individual are fixed. It is preferable to fix the objectives at lower level in quantitative units. There should be a free and frank discussion between the superior and his subordinates.
(v) Matching Resources with Objective : The objectives are framed on the basis of availability of resources. If certain resources (technical personnel or scarce raw material) are not adequately available, the objectives of an organisation are changes accordingly.
(vi) Periodical Review Meetings: The superior and, subordinates should hold meetings periodically in which they discuss the progress in the accomplishment of objectives.
(vii) Appraisal of Activities: At the end of the fixed period for achieving the objectives, there should be a discussion between the superior and subordinates.

Management by objectives is intended primarily
(i) To measure and judge performance
(ii) To relate individual performance to organisational goals.
(ii) To clarify both the job to be done and the expectations of accomplishment.
(iii) To foster the increasing competence and growth of the subordinate.
(v) To serve as a basis for judgements about salary and promotion.
(vi) To stimulate the subordinates motivation
(vii) To serve as a device for organisational control and integration.

(i) The main disadvantage of MBE is, only managers have the power over really important decisions, which can be demotivating for employees at a lower level
(ii) Furthermore, it takes time to pass the issues to managers.
(iii) Managing employees who deviate from the normal procedures.
(iv) Because of compliance failures are considered difficult to manage and typically find themselves with limited job duties and ultimately dismissed / terminated.

Management by exception provides the following
advantages.
(i) It saves the time of managers because they deal only with exceptional matters. Routine problems are left to subordinates.
(ii) It focuses managerial attention on major problems. As a result, there is better utilisation of managerial talents and energy.
(iii) It facilitates delegation of authority. Top management concentrates on strategic decisions and operational decisions are left to the lower levels.
(iv) It is a technique of separating important information from unimportant one. It forces managers to review past history and study related business data for identifying deviations.
(v) MBE keeps management alert to opportunities and threats by identifying critical problems. It can avoid uninformed and impulsive action.
(vi) Management by exception provides better yardsticks for judging results. It is helpful in objective performance appraisal.

The advantages of MBO are explained below:
(i) Managers are involved in objectives setting at various levels of management under MBO and this commitment ensures hard work to achieve them.
(ii) MBO process helps the managers to understand their role in the total organisation.
(iii) Manager recognises the need for planning and appreciates the planning.
(iv) MBO provides a foundation for participative management. Subordinates are also involved in goal setting.
(v) A department does not work at cross purpose with another department.