Management by Objectives (MBO)

What is Management by Objectives (MBO)?

Management by Objectives (MBO) is a strategic approach to enhance the performance of an organization. It is a process where the goals of the organization are defined and conveyed by the management to the members of the organization with the intention to achieve each objective.

An important step in the MBO approach is the monitoring and evaluation of the performance and progress of each employee against the established objectives. Ideally, if the employees themselves are involved in setting goals and deciding their course of action, they are more likely to fulfill their obligations.

Steps in Management by Objectives Process

1. Define organization goals

Setting objectives is not only critical to the success of any company, but it also serves a variety of purposes. It needs to include several different types of managers in setting goals. The objectives set by the supervisors are provisional, based on an interpretation and evaluation of what the company can and should achieve within a specified time.

2. Define employee objectives

Once the employees are briefed about the general objectives, plan, and the strategies to follow, the managers can start working with their subordinates on establishing their personal objectives. This will be a one-on-one discussion where the subordinates will let the managers know about their targets and which goals they can accomplish within a specific time and with what resources. They can then share some tentative thoughts about which goals the organization or department can find feasible.

3. Continuous monitoring performance and progress

Though the management by objectives approach is necessary for increasing the effectiveness of managers, it is equally essential for monitoring the performance and progress of each employee in the organization.

4. Performance evaluation

Within the MBO framework, the performance review is achieved by the participation of the managers concerned.

5. Providing feedback

In the management by objectives approach, the most essential step is the continuous feedback on the results and objectives, as it enables the employees to track and make corrections to their actions. The ongoing feedback is complemented by frequent formal evaluation meetings in which superiors and subordinates may discuss progress towards objectives, leading to more feedback.

6. Performance appraisal

Performance reviews are a routine review of the success of employees within MBO organizations.

Benefits of Management by Objectives

• Management by objectives helps employees appreciate their on-the-job roles and responsibilities.
• The Key Result Areas (KRAs) planned are specific to each employee, depending on their interest, educational qualification, and specialization.
• The MBO approach usually results in better teamwork and communication.
• It provides the employees with a clear understanding of what is expected of them. The supervisors set goals for every member of the team, and every employee is provided with a list of unique tasks.
• Every employee is assigned unique goals. Hence, each employee feels indispensable to the organization and eventually develops a sense of loyalty to the organization.
• Managers help ensure that subordinates’ goals are related to the objectives of the organization.

Limitations of Management by Objectives

• Management by objectives often ignores the organization’s existing ethos and working conditions.
• More emphasis is given on goals and targets. The managers put constant pressure on the employees to accomplish their goals and forget about the use of MBO for involvement, willingness to contribute, and growth of management.
• The managers sometimes over-emphasize the target setting, as compared to operational issues, as a generator of success.
• The MBO approach does not emphasize the significance of the context wherein the goals are set. The context encompasses everything from resource availability and efficiency to relative buy-in from the leadership and stakeholders.
• Finally, there is a tendency for many managers to see management by objectives as a total system that can handle all management issues once installed. The overdependence may impose problems on the MBO system that it is not prepared to tackle, and that frustrates any potentially positive effects on the issues it is supposed to deal with.

Key Takeaways

• Management by Objectives (MBO) is an approach adopted by managers to control their employees by implementing a series of concrete goals that both the employee and the organization aim to accomplish in the immediate future and work accordingly to achieve.
• The MBO approach is implemented to ensure that the employees get a clear understanding of their roles and responsibilities, along with expectations, so that they can understand the relation of their activities to the overall success of the organization.
• If the management by objectives strategy is not adequately set, decided upon, and controlled by organizations, self-centered workers can be likely to misinterpret results, wrongly portraying the achievement of short-term, narrow-minded goals.

Additional Resources

Thank you for reading CFI’s guide to Management By Objectives (MBO). To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below:

• Corporate Performance Management (CPM)
• Key Performance Indicators (KPIs)
• Objectives and Key Resources (OKR)
• Human Resource Management
• See all management & strategy resources