What Is Management by Objectives (MBO)?

Management by objectives (MBO) is a strategic management model that aims to improve the performance of an organization by clearly defining objectives that are agreed to by both management and employees. According to the theory, having a say in goal setting and action plans encourages participation and commitment among employees, as well as aligning objectives across the organization.

The term was first outlined by management guru Peter Drucker in his 1954 book, The Practice of Management.

1:17

Management by Objectives

Key Takeaways

  • Management by objectives (MBO) is a strategic management model that aims to improve organizational performance by clearly defining objectives that are agreed to by both management and employees.
  • According to the theory, having a say in goal setting and action plans encourages participation and commitment among employees, as well as aligning objectives across the organization.
  • The strategy was formulated by Peter Drucker in the 1950s, detailing five steps that organizations should follow.
  • Critics of MBO argue that it leads to employees trying to achieve the set goals by any means necessary, often at the cost of the company.

Understanding Management by Objectives (MBO)

Management by objectives (MBO) is the establishment of a management information system to compare actual performance and achievements to the defined objectives. Practitioners claim that the major benefits of MBO are that it improves employee motivation and commitment and allows for better communication between management and employees.

However, a cited weakness of MBO is that it unduly emphasizes the setting of goals to attain objectives, rather than working on a systematic plan to do so. Critics of MBO, such as W. Edwards Demming, argue that setting particular goals like production targets leads workers to meet those targets by any means necessary, including short-cuts that result in poor quality.

In his book that coined the term, Peter Drucker set forth several principles for management by objectives. Objectives are laid out with the help of employees and are meant to be challenging but achievable. Employees receive daily feedback, and the focus is on rewards rather than punishment. Personal growth and development are emphasized, rather than negativity for failing to reach objectives.

Drucker believed MBO was not a cure-all but a tool to be utilized. It gives organizations a process, with many practitioners claiming that the success of MBO is dependent on the support from top management, clearly outlined objectives, and trained managers who can implement it.

Management by Objectives (MBO) in Practice

Management by objectives outlines five steps that organizations should use to put the management technique into practice.

  1. The first step is to either determine or revise organizational objectives for the entire company. This broad overview should be derived from the firm's mission and vision.
  2. The second step is to translate the organizational objectives to employees. Drucker used the acronym SMART (specific, measurable, acceptable, realistic, time-bound) to express the concept.
  3. Step three is stimulating the participation of employees in setting individual objectives. After the organization's objectives are shared with employees, from the top to the bottom, employees should be encouraged to help set their own objectives to achieve these larger organizational objectives. This gives employees greater motivation since they have greater empowerment.
  4. Step four involves monitoring the progress of employees. In step two, a key component of the objectives was that they are measurable in order for employees and managers to determine how well they are met.
  5. The fifth step is to evaluate and reward employee progress. This step includes honest feedback on what was achieved and not achieved for each employee.

Advantages and Disadvantages of Management by Objectives (MBO)

MBO comes with many advantages and disadvantages to a company's success. The benefits include employees taking pride in their work with goals that they know they can achieve. It also aligns employees with their strengths, skills, and educational experiences. MBO also leads to increased communication between management and employees. Assigning tailored goals brings a sense of importance to employees, bringing loyalty to the firm. And lastly, management can create goals that lead to the success of the company.

Though there are plenty of benefits to MBO, there are some drawbacks and limitations. As MBO is focused on goals and targets, it often ignores other parts of a company, such as the culture of conduct, a healthy work ethos, and areas for involvement and contribution. MBO puts increased strain on employees to meet the goals in a specified time frame. In addition, if management solely relies on MBO for all management responsibilities, it can be problematic for areas that don't fit under MBO.