Management by Objectives (MBO): Learn Its 5 Steps, Pros and Cons

Management by Objectives (MBO)

Katie Kerpel / Investopedia

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.

Key Takeaways

  • Management by objectives (MBO) is a process in which a manager and an employee agree on specific performance goals and then develop a plan to reach them.
  • It is designed to align objectives throughout an organization and boost employee participation and commitment.
  • There are five steps: Define objectives, share them with employees, encourage employees to participate, monitor progress, and finally, evaluate performance and reward achievements.
  • 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.
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Management by Objectives

Understanding Management by Objectives (MBO)

Management by objectives (also known as management by planning) is the establishment of a management information system (MIS) to compare actual performance and achievements with 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 Deming, argue that setting particular goals like production targets leads workers to meet those targets by any means necessary, including shortcuts that result in poor quality.

In his book that coined the term, Peter Drucker set forth several principles for MBO. 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.

MBO is 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 5 Steps

MBO outlines five steps that organizations should use to put the management technique into practice.

  1. Either determine or revise organizational objectives for the entire company. This broad overview should be derived from the firm’s mission and vision.
  2. Translate the organizational objectives to employees. In 1981, George T. Doran used the acronym SMART (specific, measurable, acceptable, realistic, time-bound) to express the concept.
  3. Stimulate 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. Monitor the progress of employees. In step two, a key component of the objectives was that they are measurable for employees and managers to determine how well they are met.
  5. Evaluate and reward employee progress. This step includes honest feedback on what was achieved and not achieved for each employee.

The term “management by objectives (MBO)” was first used by Peter F. Drucker in his 1954 book titled The Practice of Management.

Advantages and Disadvantages of Management by Objectives (MBO)

MBO comes with many advantages and disadvantages.

Advantages

  • Employees take pride in their work and are assigned goals they know they can achieve that match their strengths, skills, and educational experiences.
  • Assigning tailored goals brings a sense of importance to employees, boosting their output and loyalty to the company.
  • Communication between management and employees is increased.
  • Management can create goals that lead to the success of the company.

Disadvantages

  • 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.
  • Strain is increased on employees to meet the goals in a specified time frame.
  • Employees are encouraged to meet targets by any means necessary, meaning that shortcuts could be taken and the quality of work compromised.
  • If management solely relies on MBO for all management responsibilities, it can be problematic for areas that don’t fit under MBO.

What is the goal of management by objectives (MBO)?

Management by objectives (MBO) uses a set of quantifiable or objective standards against which to measure the performance of a company and its employees. By comparing actual productivity to a given set of standards, managers can identify problem areas and improve efficiency. Both management and workers know and agree to these standards and their objectives.

What is an example of MBO?

A company can set various goals with its employees. In the case of a call center, an MBO could be to increase customer satisfaction, say, by 10%, while reducing call times by one minute. The onus is now on finding ways to achieve this goal. Once that’s decided on, it’s important to get employees on board and then monitor their progress, provide feedback, and reward those who do a good job.

What are some drawbacks of using MBO?

As MBO is entirely focused on goals and targets, it often ignores other parts of a company, such as the corporate culture, worker conduct, a healthy work ethos, environmental issues, and areas for involvement and contribution to the community and social good.

What is the difference between MBO and management by exception (MBE)?

In management by exception (MBE), management only addresses instances where objectives or standards are transgressed. Thus, workers are left alone until and unless proficiency is not met.

The Bottom Line

As a theory, MBO makes a lot of sense: Help employees to get involved in setting company goals and they are more likely to share management’s objectives, work harder, and deliver.

However, there’s also a good reason why MBO is widely criticized. Like most things that look good on paper, it doesn’t always work in practice. The key is to be aware of its drawbacks, customize the plan according to your organization, and make sure that everyone is fully on board and that the objectives are clear and reasonable before commencing.

Article Sources
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  1. Printing Color and Process Control Blog (Bruce Leigh Myers). “A Critical Look at Management by Objectives (MBO).”

  2. Ronald G. Greenwood, via JSTOR. “Management by Objectives: As Developed by Peter Drucker, Assisted by Harold Smiddy.” The Academy of Management Review, Volume 6, No. 2, 1981, Pages 225–230.

  3. Temple University, Fox School of Business, Management Information Systems. “There’s a S.M.A.R.T. Way to Write Management’s Goals and Objectives.”

  4. Harvard Business Review. “Management by Whose Objectives?