What the heck is Management by Objectives (MBO)

a group of employees discussing organization goals

And how MBO can help your organization improve employee performance.

One of the most desired things on wish lists of modern organizations isn’t a fancy office. For the umpteenth time, it’s great employees delivering great performance. 

According to a research from the Harvard Business Review, 95% of employees don’t understand their company’s goals and strategies. If they can’t understand the goals, the performance is mostly going to be subpar. This is a problem and there need to be solutions to solve it.  

Solutions are plenty. One of the widely used is Management by Objectives, also known as MBO. 

What is Management by Objectives (MBO) 

In short, it’s a strategic model that solves one of the first-world problems for organizations — helping them strategize and improve the performance of their employees. 

Yes, this is a real problem for most organizations. 

MBO’s full form is Management by Objectives and it is also known as Management by Planning (MBP). It was first introduced and popularized by Peter Drucker in 1954 in the book, The Practice of Management. 

It helps managers systematically update and delegate tasks to employees by aligning individual and company goals. Definite tasks are set for each employee and the work is regularly monitored. It is to plan, design, and implement a set of objectives with total transparency in the given time frame. 

Because the model focuses on monitoring performance continuously, it helps in checking the overall employee performance. It’s based on the SMART mnemonic, that’s why it’s better suited towards individual goals and their realization. It is also used for appraisal process evaluations and other bonus activities since every employee is assessed based on their own performance. 

SMART objectives are: 

  • S- Specific   
  • M- Measurable   
  • A- Achievable or Attainable   
  • R- Relevant   
  • T- Time-Bound or Time-limited   

Management by Objectives Process Cycle 

There are 5 steps in the MBO process. 

a chart showing structure of MBO framework

Set organizational objectives: In the first step, MBO focuses on either setting or revising organizational objectives for employees that are measurable and achievable. All of it by keeping the company mission in mind. 

Set individual objectives and goals: The second step is to take the organizational objectives to the employees and align things in one direction. This is where SMART guidelines come into play. 

Measure performance: Step three focuses on the participation of employees by allowing them to plan and set their individual objectives. Offering ownership and autonomy to employees helps them stay motivated and they’re more likely to achieve things for the good of the organization. 

Evaluate performance: In the fourth step, the focus is on monitoring the progress of employees.  

Reward deserving employees: The fifth step is the evaluation step. You evaluate and get a list of top-performing employees and reward them accordingly. If any employee hasn’t achieved their objectives, then constructive feedback is also given to help them out for the future. 

How does the process of Management by Objectives work? 

Management by Objectives can be exercised in several ways. It’s about finding specific goals to aim at during a point in time and companies like HP have successfully used MBO. It’s a functional approach and helps every individual department set its own goals.     

MBO doesn’t interfere in the implementation process, however, it is a highly result-oriented strategy. Focuses on outcomes. MBOs help generates ideas and solves complex problems to help organizations progress.    

A Manager’s role in determining the strategic goals of the organization is significant. These goals are based on an analysis of achievable goals within a specific time. That’s why each manager’s contributions to the organizational goals become vital and are clearly spelled out.   

Advantages and disadvantages of MBO (Comparison Chart) 

MBO advantages and disadvantages chart

A point for thought: Because MBO focuses on achieving targets, the managers are worried about the time when objectives aren’t achieved, and on questioning, everyone has the same reply, “That isn’t in my goals”. A vague goal like “improve customer service,” is kind of impossible to measure and hence deteriorates. Too much focus is given to measurable goals and other goals are left behind.  

This is where OKRs can be a better technique because it takes most of the elements into account. 

Sample MBO (Management by Objectives) 

Here are some examples of Management by Objectives for different departments: 

Organization-wide MBO examples 

  • Become the market leader 
  • Achieve revenue of INR 2 million this quarter 
  • Increase customer retention rate to [number]% 
  • Increase Gross Margin by 15% 
  • Decrease attrition rate by 8% 

Marketing MBO examples 

  • Generate 450 product demos a month 
  • Double social media following in 45 days 
  • Increase regular weekly website visitors by 15% 
  • Increase landing page conversion rates by 10% 
  • Get 10 media placements 

Human resources MBO examples 

  • Maintain employee satisfaction index of 85% 
  • Keep quarterly retention rate at 85% 
  • Get 10% of hires from employee references 
  • Hold two company-wide events 
  • Implement a leadership training program 

Operations MBO examples 

  • Reduce software testing time to one week 
  • Reduce product sourcing and logistics expenses by 10% 
  • Fulfill 95% of SLAs 
  • Fulfill 100% of warranty obligations 
  • Seek one independent operational consulting report 

To End… 

If the Management by Objectives strategy is implemented effectively, it helps employees understand their roles and responsibilities clearly. If not, then self-centered workers can misunderstand outcomes, wrongly over-portraying the achievement of short-term goals which doesn’t help the business in the grand scheme of things.  

The choice is yours in terms of how you want to use MBO. Also, in case you need help with goal setting, try out the OKR goal-setting methodology using Keka and the employee performance will reach the next level and beyond.