What do you mean by management by objectives?

Management By Objectives (MBO) is a management model that focuses on organizational goals by setting a benchmark. The management and employees work together to fulfil the same mission by having clear intentions, open communication, and shared goals.

Índice Show

• How Does Management by Objective Work?
• Management by Objectives Process
• Examples of Management by Objectives
• Advantages and Disadvantages
• Frequently Asked Questions (FAQs)
• What is management by objectives (MBO)?
• The 5 step process for MBO
• 2. Translate objectives into goals
• 3. Monitor performance
• 4. Evaluate progress
• 5. Reward accomplishments
• The pros and cons of MBO
• Cons of MBO
• Management by objectives example
• Set goals and achieve company objectives with MBO

The model is based on Peter Drucker’s book, The Practice of Management which was published in 1954. Emphasis is laid on transparency and ease of communication. Superiors and subordinates, together, take part in goal setting.

• Management by objectives is a model that emphasizes communication and clarity when defining the goals of an organization.
• It uses realistic goals and metrics to create objectives that will be achieved by the employee. This way, human resources are used in an efficient manner.
• MBO is excellent in giving employees a fair understanding of their responsibilities. This way, it encourages expected behaviour.
• It’s a method to improve transparency and efficiency over time.

How Does Management by Objective Work?

MBO is a full-scale organization strategy. It involves people from top to bottom of the productive chain. At first, the managers identify the main goals of the company. Next, they set up strategies to communicate company goals to the staff.

The sole concept behind this management model is clarity. When employees have clarity about the goals, they are more efficient at meeting them. The goals are hard but also realistic.

All objectives are quantified and monitored to ensure that the strategies are working. In the end, the employees receive feedback based on their performance. Over time, the organizations fine-tune these goals and increase overall productivity.

Management by Objectives Process

Peter Drucker introduced this strategy in his book, The Practice of Management. It was published in 1954. The execution of this process comprises the following steps.

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Step #1 – Defining Goals

The company heads determine or revise the current goals of the organization. These goals are derived from the mission of the company. This is already defined in most cases except startups.

Step #2 – Defining Specific Objectives

This is the most important step of the management by objectives method. As soon as goals are set, the company should determine how to reach them. This analysis will list out the objectives. The employees will have specific objectives depending on their position.

It is recommended to design only one to three objectives per person. Anything beyond that would lead to confusion and a lack of focus.

In his book, Drucker mentions the following SMART goals for a company. The goals should be:

• Specific, it cannot be vague.
• Measurable, so that the organization can assess if they are succeeding.
• Acceptable, so that they won’t seem unfair to the employees.
• Realistic; otherwise, goals would never be met.  
• Time-bound, to measure results and determine success.

This prevents failure due to unrealistic expectations, which may diminish morale.

Employees should set their own goals. It will make them feel like a part of the organization and help them stay motivated.

Step #3 – Monitoring the Process

The process should be monitored at all times, as results will determine the future plans. It also prevents the management from losing track of progress. By doing so, organizations can avoid failures by spotting flaws in the process early on.

Step #4 – Evaluating the Performance

It’s essential to use solid metrics to evaluate the performance. Firms should focus on the key performance metrics used from the beginning.

Firms should define boundaries for what is acceptable, what is successful, and what could be an utter failure. Successes should be rewarded, and failures need to be addressed.

Step #5 – Feedback

All employees must get a clear response on their performance. If they do well, they should be rewarded. This motivates them to keep up the good work.

Employees who did not achieve the goals, however, need to figure out the flaws in their process. They need to come up with a strategy to overcome the flaws and improve.

Examples of Management by Objectives

Consider the following example emulating the steps of management by objectives.

• The financial department wants to raise $1 million in funding, increase financial automation by 10% and the shareholder’sA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more profits by 5%. After debating these goals with the heads of the department, they decide to talk with the employees to set their objectives.
• All employees would be focused on one of these three points. For instance, those focused on technology would handle automation, while the business team would work with the investors to ensure the funding.
• If the marketing department wants to create 1,000 new leads per month, increase return on investment (ROI) by 6%, and landing page conversions by 25%, they will need to follow another strategy.
• Subsequently, they need to devise objectives and communicate with the people. They need to interact with those in charge of creating leads and landing pages. This way, they can improve conversions and get a higher ROI.
• For both examples, the heads of the department need to collaborate and assess the results. By evaluating successes and failures, they can promote changes and define goals for the future.

Many noteworthy companies have used MBO. The management at the computer company Hewlett-Packard (HP) considers the policy a huge component of its success. Many other corporations praise the effectiveness of MBO, including Xerox, DuPont, and Intel.

Advantages and Disadvantages

Like any other organizational model, MBO has both advantages and drawbacks.

Advantages

• Overall, management by objectives increases the productivity of an organization over time because it continuously evolves the process.
• It increases the quality of teamwork and communication between the management team, as they need to constantly cooperate to ensure clarity in the strategies and provide feedback.
• Employees may achieve their goals more easily because they will be coherent and achievable.
• It enhances the transparency of the organization and the efficiency of the management. Thus, it improves productivity by minimizing ambiguity.

Disadvantages

• It emphasizes the goals too much.
• Some relevant parts of a company are often ignored by MBO, such as company culture, work ethos, and interpersonal activities.
• MBO can cause burnout as it puts a heavy strain on employees to meet the goals set by management.

Frequently Asked Questions (FAQs)

What is meant by management by objectives?

Management by Objectives (MBO) is a management model that focuses on organizational goals by setting a benchmark. The management and employees work together to fulfil the same mission by having clear intentions, open communication, and shared goals.

Which is an example of MBO?

Consider the following example emulating the steps of MBO. The financial department wants to raise $1 million in funding and increase financial automation by 10%. After debating these goals with the heads of the department, they decide to talk with the employees to set their objectives. All employees would be focused on one of the points.

Finally, heads of the department collaborate and assess the results. By evaluating successes and failures, they promote changes and define goals for the future.

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Management by objectives (MBO) is a strategic approach to increase company performance by aligning company and team objectives. In this article, we’ll explain how the MBO process works and some pros and cons of using the MBO model.

The idiom “It takes a village” refers to the idea that success stems from collaboration. As a project manager, you experience this first-hand. You rely on your village—or your team—to complete projects. Companies also rely on the collective whole to meet their objectives. But how do team members stay motivated to work toward the objectives of others? 

Management by objectives (MBO) is a strategic approach to increase company performance by aligning company and team objectives. In this article, we’ll explain how the MBO process works. We’ll also discuss the pros and cons of using the MBO model.

What is management by objectives (MBO)?

Management by objectives (MBO) aligns team member goals with company objectives so team members feel more motivated and included at work. First introduced by Peter Drucker in his 1954 book “The Practice of Management,” the MBO model also places focus on monitoring team member performance using reporting tools and performance reviews. 

MBO uses objective standards to measure team member and company performance. Objective standards outline what is fair, reasonable, or acceptable in an agreement. You can use these standards to assess team member productivity and identify opportunity areas within the team. MBO works because part of the MBO process involves management and team members aligning and agreeing on these objective standards.

The 5 step process for MBO

There are five steps to the MBO technique. Implementing this process involves creating organizational goals and turning those goals into a set of individual objectives that team members can follow. 

The first course of action is to define your organizational objectives. As a project manager, your job may be to co-create company objectives or translate company objectives to your team in an understandable way. You can use a business goals template to structure your specific goals in this stage.    

2. Translate objectives into goals

After you’ve defined the company’s objectives, use a top-down approach to translate the company objectives into individual goals for each team member. Make sure you’re using the SMART goals framework to ensure your team members’ goals are measurable and achievable.

When team members have personal goals that ladder up to larger company goals, they understand how they fit into the bigger picture. According to our research, only 26% of employees have a clear understanding of how their individual work relates to company goals and just 16% say their company is effective at setting and communicating goals.

3. Monitor performance

As your team members work toward their specific objectives, you’ll need to monitor their performance. You can monitor the performance of each team member by gathering success metrics from your project management tool and assessing whether objectives and key results (OKRs) are being met. Monitoring team member performance will also help you assess team member productivity.

4. Evaluate progress

You can evaluate team member progress by setting up performance appraisals. Performance appraisals will allow you to give personal feedback on what each team member is doing well and where they can improve on their individual goals so they can better serve the company as a whole. This step in performance management is crucial because it emphasizes effective communication between management and the team. Team members may look forward to performance evaluations because feedback can provide a boost in team productivity.

5. Reward accomplishments

The last step in the MBO system is rewarding the team for their achievements. This increases team morale and keeps teammates motivated to work hard during the next MBO process. 

You can reward your team in both intrinsic and extrinsic ways. You can promote intrinsic motivation by challenging team members, recognizing their hard work, ensuring they feel a sense of belonging, and offering team-building activities. With these actions, you’ll help team members develop self-confidence and self-motivation.  

Extrinsic rewards may include praise, a paid bonus, a salary increase, promotions, extra responsibility in their current role, or with paid time off. These rewards may be tangible or intangible, but they’ll likely incentivize team members to continue working toward their individual objectives and the company’s. 

The pros and cons of MBO

MBO became a popular management strategy in the 1960s and 1970s after it was first introduced by Drucker. However, widespread usage of the model has since decreased as companies tested out new styles of management. Some companies today still use MBO, but there are arguments for and against it.  

Supporters of MBO believe that using this form of management within a larger system creates a simpler management structure. Other benefits include:

• Increased team productivity: When team members have personal objectives, they have more clarity about why their work matters. As a result, their motivation and productivity increases. 

• Improved team communication: The MBO model can improve team communication and create a more open work environment because team members understand the objectives of the company and know that their personal goals align with those objectives. 

• Personalized team member objectives: Because the MBO system personalizes team member objectives and makes it a priority for team members to reach their highest potential, everyone in the company understands how their work makes an impact.

Cons of MBO

Opponents of MBO believe that the model risks overlooking company ethics and values by placing so much focus on individual goals. Other drawbacks include:

• Prioritization of goal-setting over strategic planning: Prioritizing personal objectives for team members may come at the expense of long-term strategic planning. Companies that spend so much time setting goals may have less time to focus on company culture, operational issues, and other areas of involvement. 

• Increased strain on team members to meet goals: Because MBO focuses on the individual, team members may feel too much pressure to reach their goals. This can be a drawback of MBO because team members may become overworked in this type of work environment, which can lead to low retention and low morale. 

• Competition between team members: The extrinsic-focused reward system incorporated in MBO may promote competition between team members, which may get in the way of creating a healthy work environment. Healthy team dynamics in the workplace should include teamwork and supporting one another to reach personal and company goals. 

Management by objectives example

An example of MBO in action would be a company that has a quarterly objective to earn 30% of overall revenue from their marketing efforts. To achieve this objective, they break it down into personal objectives for each team member. 

• For the digital marketers on the team, their personal objectives are to secure three new marketing clients for the quarter. 

• Managers monitor team member performance over the quarter to identify how each team member plans to achieve their personal goal and whether they’re making progress toward the goal. 

• If a team member reaches their goal at the end of the quarter, they are rewarded with a paid bonus.

Set goals and achieve company objectives with MBO

MBO is most effective when used as one part of a more comprehensive management plan. When team members have goals that connect to the company mission, they’ll feel more motivated to collaborate. With goal-tracking software, you can help your team members stay on track with their goals and help them meet those goals in real time.