Systems Approach and Management by Objectives, Explained

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Systems Approach and Management by Objectives

Healthcare Organization and Management · Chapter 5: Core Management Functions in Healthcare OrganizationsSection 5.3 · lesson 27 of 1059 min · free with a free account

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In this lesson

See the hospital as a system and set objectives without harming it.

  • Trace inputs, processes, outputs, outcomes, and feedback in a healthcare system
  • Explain local optimization and pair subsystem measures with boundary measures
  • Describe the components and required conditions of management by objectives
  • Judge when management by objectives fits the work using contingency thinking

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Transcript

Everything said in the video, section by section (1,105 words). Read along, or search it.

Opening Case

A Lab Hits Its Cost Target

Owen Price runs Larkfield's laboratory, and this year's objective was simple: cut the cost per test. He did it. Routine blood tests now run in two big batches a day, the analyzers stay full, and cost per test fell by about a fifth. His report shows a clear success, and every figure in it is true.

The Other Side

Discharges Slip Half a Day

Up on 4 North, charge nurse Ellen Murphy sees something else. Morning labs now come back in the afternoon, so patients ready to leave wait for results. Discharges slip by about half a day, and the beds stay full. Owen met his objective. So why is Larkfield worse off?

Systems View

Inputs, Processes, Outputs, Outcomes, Feedback

Helen Wu, the CEO, says the answer starts with seeing Larkfield as a system: interdependent parts that together produce what no part produces alone. The lab is a subsystem. A systems view traces five elements. Inputs are what comes in: staff, supplies, funding, referrals, information. Processes transform them: assessment, treatment, support services. Outputs are what gets counted: tests run, discharges, reports. Outcomes are what actually changed: health, patient experience, cost per case. And feedback returns information to adjust the inputs and processes.

Outputs Versus Outcomes

An Open System in Context

The gap between outputs and outcomes carries most of the weight. Outputs are easy to count, so they fill most reports. Outcomes are why Larkfield exists. A department can raise its outputs while outcomes get worse, and a system that watches only outputs calls that a success. Larkfield is also an open system, a term from Daniel Katz and Robert Kahn in 1966. It trades with an environment it doesn't control. Payers set much of the revenue, regulators much of the process, the labor market who can be hired, and the community the demand. So read internal numbers in context. A jump in emergency visits might mean a clinic across town just closed, not a problem in triage.

Local Optimization

One Department's Gain, Everyone's Cost

Now the lab. Interdependence means one part's performance depends on another's behavior, so you can't improve a system one part at a time. Owen's batching is local optimization: improving one subsystem in a way that makes the whole worse. Results arrive in two waves, so 4 North holds patients longer. That ties up beds, which delays admissions, which keeps patients waiting in the emergency department. Larkfield's total cost rises and its flow slows, while the only department measured looks better. Nobody behaved badly. The measures asked for exactly this.

Boundary Measures

Where Handoff Failures Hide

The lesson isn't that subsystem measures are wrong. It's that a subsystem measure needs a partner at the boundary. If Owen's cost per test had been reported beside the time from order to result on the unit, the trade-off would have shown up in the same report. Boundaries are where failures hide. A handoff, the transfer of work or information across a boundary, belongs to neither side. Each department investigates itself, finds itself compliant, and the failure in the link survives. That's also why safety is an emergent property: a quality of the whole, made by staffing, communication, equipment, and culture together, that no part has alone.

Quick Check

Twice-Daily Pharmacy Deliveries

Quick check. Larkfield's pharmacy lowers its cost per dose by delivering to the units twice a day, instead of every hour. Now nurses on 4 South wait for first doses. What is this? Pause, and decide. Local optimization. Pharmacy's own measure improves, while the units it supplies pay for it in delays and workarounds. An open-system effect is tempting, since the units feel it from outside. But nothing changed in the environment. One internal part optimized for itself.

Management by Objectives

Drucker's Four Components

Tom Brennan, the chief financial officer, traces Owen's objective to Larkfield's version of management by objectives, popularized by Peter Drucker in his 1954 book, The Practice of Management. Organizational goals are translated into specific objectives at each level, agreed between manager and employee, reviewed at set intervals, and used for appraisal. That gives four components. Cascading goals: each level's objectives come from the level above. Participative goal setting: objectives are negotiated, not issued. Defined review periods: progress is checked during the year, not only at the end. And appraisal linked to objectives: people are judged on what was agreed.

Conditions for Success

Four Requirements of MBO

MBO works only under four conditions. Objectives must be measurable, with a target, a baseline, and a date. Otherwise review becomes an argument about impressions. Participation must be real: the person can actually change the target. Otherwise ambitious targets are accepted silently and quietly ignored. Reviews must happen on schedule, with authority to revise. Otherwise nobody learns until December that an objective died in March. And review must be honest: a miss can be recorded as a miss without punishment. Otherwise targets get set low enough to guarantee success.

Failure Modes

Goal Displacement and Cascade Distortion

Even with all four, MBO fails in recognizable ways. Goal displacement: hitting the target replaces the result it stood for. Unmeasured work gets crowded out: teaching a new colleague, noticing a family is struggling, keeping a tense relationship with another department workable. And cascade distortion: by the third level of translation, an individual objective may barely connect to the original goal. Test it by reading the bottom level first. So MBO fits work that's honestly measurable, that the person controls, in conditions stable enough for a target to stay sensible. It fits badly where the output is judgment, where results depend on other departments, or where conditions change faster than the review cycle. That's contingency thinking: no single best way to manage. Before adopting any approach, ask what conditions it assumes.

Quick Check

Zero Family Complaints as a Goal

Quick check. The ICU proposes an objective for each nurse: zero family complaints this year, scored at the annual appraisal. How well does management by objectives fit here? Pause, and decide. Poor fit. Complaints depend on prognosis, physicians, visiting rules, and moments no single nurse controls, so the appraisal built on it isn't defensible. It's measurable, which makes it tempting. But measurable isn't enough: the person must also control the result.

Case Resolution

Pairing Cost With Turnaround Time

Back to Owen's lab. Helen doesn't reverse his objective. She pairs it. Cost per test stays. Beside it goes a boundary measure: hours from order to result on the unit, reported to Owen and the unit managers together. Owen can't hit the second measure alone, and that's the point. He adds a mid-morning run for patients due to go home. Ellen's patients leave before lunch again, and the lab keeps most of its savings.

Key Takeaways

Systems Thinking and Fitting MBO

To recap. A systems view traces inputs, processes, outputs, outcomes, and feedback. Outputs aren't outcomes, and an open system's numbers need their environment. Pair every subsystem measure with one at the boundary, where handoffs fail. Management by objectives works when objectives are measurable, participation is real, and review is regular and honest. And before adopting any approach, ask what conditions it assumes.

About Healthcare Organization and Management at UPI Study

Healthcare Organization and Management (Health 302) is a self-paced online course of 105 video lessons in 18 chapters, from health systems and the law to ethics, leadership, teams, strategy, informatics, finance, quality, human resources, marketing and evidence-based practice. It carries a NCCRS credit recommendation for 3 semester credits.

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Universities that work with NCCRS

Healthcare Organization and Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

Thomas Edison State UniversityThomas Edison State UniversitySigned partnerUniversity of the PeopleUniversity of the PeopleSigned partnerCharter Oak State CollegeCharter Oak State CollegeSigned partnerStrayer UniversityStrayer UniversitySigned partnerColumbia Southern UniversityColumbia Southern UniversitySigned partnerIndiana TechIndiana TechSigned partnerPenn StatePenn StateWorks with NCCRSSouthern New Hampshire UniversitySouthern New Hampshire UniversityWorks with NCCRSSUNYSUNYWorks with NCCRS +many more cooperating universitiesFind my college →

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FAQ

Questions students ask us

About Systems Approach and Management by Objectives

What is the difference between outputs and outcomes in healthcare?
Outputs are what gets counted, such as tests run, discharges, or reports, while outcomes are what actually changed, such as health, patient experience, or cost per case. Outputs are easier to measure, so they dominate reports. A department can raise its outputs while outcomes worsen, and a system that watches only outputs will mistake that for success.
What is local optimization in a hospital?
Local optimization is improving one department in a way that makes the whole organization worse. For example, a lab that batches routine tests to cut cost per test can delay results, which holds patients longer, blocks beds, and backs up admissions. Pairing each subsystem measure with a boundary measure, such as order-to-result time on the unit, exposes the trade-off.
What are the key components of management by objectives?
Management by objectives, popularized by Peter Drucker in his 1954 book The Practice of Management, has four components. Organizational goals cascade into objectives at each level, objectives are negotiated between manager and employee, progress is reviewed at set points during the year, and appraisal is tied to the agreed objectives. It also needs measurable targets and honest review.
When does management by objectives work poorly?
MBO works poorly when the result depends on judgment, on other departments, or on conditions that change faster than the review cycle. A target must be measurable and also within the person's control. Holding each ICU nurse to zero family complaints, for example, fails because prognosis, physicians, and visiting rules shape complaints. Goal displacement and cascade distortion are other common failures.

About the Healthcare Organization and Management course

How many college credits is Healthcare Organization and Management?
Healthcare Organization and Management (Health 302) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
How much does Healthcare Organization and Management cost and what is included?
$250, paid once, with lifetime access: all 105 video lessons, a practice quiz after each, the graded work and final exam, and an official transcript when you finish. Students who want several courses choose UPI Study PRO instead.
Which universities accept UPI Study credits?
UPI Study has signed partner agreements with universities such as Thomas Edison State University, University of the People and Charter Oak State College, and works with universities such as Penn State, SNHU and SUNY. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities. Use "Find my college" on this page to check yours.
How long does Healthcare Organization and Management take?
It is self-paced with no deadlines. The 105 lessons total about 17 hours of video; most students add reading and practice time and finish in a few weeks to a few months, on their own schedule.
How are the exams done?
Quizzes and assignments are online in the course. The final exam is taken online with proctoring; a person on the UPI Study team checks assignments, usually within two days.
How do my credits reach my college?
When the course shows 100% complete, request the official transcript from your dashboard. It is sent to the college you name, and you can send it to more than one. Check your college first with "Find my college" on this page, or ask Athena.

Ready for the full course? Earn 3 credits in Healthcare Organization and Management.

105 video lessons, a quiz after each one, and the graded work that earns the credit. Recommended for credit by NCCRS.

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