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What is 'Management By Objectives - MBO'

Management by objectives (MBO) is a 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."

BREAKING DOWN '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 is that MBO unduly emphasizes the setting of goals to attain objectives, rather than working on a systematic plan to do so.

Basic Principles

Peter Drucker set forth several principles. Objectives are laid out with the help of employees and are meant to be challenging, but achievable. There is daily feedback, and the focus is on rewards rather than punishment. Personal growth and development are emphasized, rather than negativity for failing to reach the objectives.

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

Putting Management by Objectives Into Practice

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

Step three is stimulating the participation of employees in setting 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 goals. This gives employees greater motivation since they have greater empowerment.

Step four involves monitoring the progress. Back in step two, a key component of the objectives was that they are measurable in order for employees and managers to determine how well these were met. The fifth step is to evaluate and reward progress. This step includes honest feedback on what went well and what did not.

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