What Is Management by Objectives (MBO)?

What Is Management by Objectives (MBO)?

Let me explain management by objectives, or MBO, directly to you. It's a strategic management approach where you align the performance goals of your organization with the objectives of your employees and management. The main aim here is to boost the organization's performance by clearly defining these objectives.

According to the theory behind it, when employees have a say in setting goals and action plans, it encourages their participation and commitment, and it helps align objectives across the entire organization.

Key Takeaways

Here's what you need to know about MBO. It's a process where a manager and an employee agree on specific performance goals and then create a plan to reach them. This is designed to align objectives throughout the organization and increase employee participation and commitment.

There are five steps involved: define the objectives, share them with employees, encourage participation, monitor progress, and finally evaluate performance while rewarding achievements. Critics point out that MBO can incentivize employees to hit these goals by any means, which might come at the company's expense.

Understanding Management by Objectives (MBO)

You should understand MBO, also known as management by planning, as the establishment of a management information system to compare actual performance and achievements against defined objectives. Practitioners claim its major benefits include improving employee motivation and commitment, along with better communication between management and employees.

However, a noted weakness is that it overly emphasizes setting goals to attain objectives, rather than focusing on a systematic plan to achieve them. Critics like W. Edwards Deming argue that setting specific goals, such as production targets, leads workers to meet them by any means, including shortcuts that result in poor quality.

In his book that introduced the term, Peter Drucker outlined several principles for MBO. Objectives are set with employee input and are meant to be challenging yet achievable. Employees get daily feedback, with the focus on rewards rather than punishment. The emphasis is on personal growth and development, not on negativity for failing to meet objectives.

Keep in mind that MBO isn't a cure-all; it's a tool. It provides a process, and many say its success depends on top management support, clearly outlined objectives, and trained managers who can implement it.

Advantages and Disadvantages of MBO

MBO has its advantages. Employees take pride in their work when assigned goals they can achieve that match their strengths, skills, and experiences. This brings a sense of importance, boosting output and loyalty to the company. It also increases communication between management and employees, and allows management to create goals that drive company success.

On the disadvantages side, MBO focuses heavily on goals and targets, often ignoring other company aspects like culture, work ethos, and areas for involvement. It increases strain on employees to meet goals in a set time frame. Employees might take shortcuts to hit targets, compromising work quality. If management relies solely on MBO, it can be problematic for areas that don't fit this framework.

What Is the Goal of Management by Objectives (MBO)?

The goal of MBO is to use quantifiable standards to measure company and employee performance. By comparing actual productivity to these standards, you can identify problem areas and improve efficiency. Both management and workers agree on these standards and objectives.

What Is an Example of MBO?

Consider a call center example. You could set goals to increase customer satisfaction by 10% while reducing call times by one minute. The focus then shifts to finding ways to achieve this, getting employees on board, monitoring progress, providing feedback, and rewarding success.

What Are Some Drawbacks of Using MBO?

As I mentioned, MBO's focus on goals often ignores corporate culture, worker conduct, work ethos, environmental issues, and community contributions.

What Is the Difference Between MBO and Management by Exception (MBE)?

In management by exception (MBE), management only intervenes when objectives or standards are not met, leaving workers alone otherwise unless productivity falls short.

The Bottom Line

In theory, MBO makes sense: involving employees in goal setting leads them to share management's objectives, work harder, and deliver better results. But it's widely criticized for a reason—it doesn't always work in practice. Be aware of its drawbacks, customize it to your organization, ensure full buy-in, and set clear, reasonable objectives before implementation.