What is Management by Objectives (MBO)?

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Definition:

Management by objectives is a management framework that involves company leaders and employees working together to define goals.

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🤔Understanding management by objectives

Management consultant Peter Drucker coined the term management by objectives (MBO). When companies use the MBO model, management and employees work together to set objectives for growth. Having clear cut organizational goals is intended to increase company productivity. The purpose of including employees in the goal-setting process is to provide encouragement and commitment. The MBO framework also encompasses methods for evaluation and for rewarding employees for making progress on their goals. Overall, the MBO model consists of five steps beginning with organizational objectives and ending with employee rewards. The concept of MBO includes several conditions that employers are encouraged to meet, including employee participation and a focus on growth as opposed to punishment.

Example

Suppose that a small marketing firm decided to adopt Peter Drucker’s management by objectives (MBO) model. The company’s leadership sits down to establish goals for the entire company. Afterward, they meet with individual employees to help them set objectives for their performance. Company objectives might include things like increasing the customer retention rate or growing profit margins. After the company’s leadership narrows down the goals, they also seek input and collaboration from employees.

Takeaway

Management by objects is like going on a road trip and having everyone in the car agree on the route ahead of time…

If you’ve ever gone on a road trip with your friends or family, you know there’s a lot of planning to get you from your starting point to your final destination. Running a business is similar — There’s a lot of planning to get to business success. If you use management by objectives in your organization, it’s like going on a road trip with your friends and discussing each rest stop and off-ramp ahead of time.

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What is management by objectives (MBO)?

Peter Drucker, a renowned business consultant, coined the term management by objectives (MBO) — sometimes referred to as management by results — in 1954, in his book The Practice of Management. MBO is a strategic management tool that seeks to improve business results by setting goals in collaboration with employees.

MBO as outlined by Drucker is a five-step process that includes:

  • Setting goals
  • Translating those goals to employees
  • Encouraging employee participation
  • Monitoring the progress of the goals
  • Evaluating and rewarding employees

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What is the MBO process?

Management by objectives (MBO) is a five-step process:

1. Set organization goals: Before company leaders can collaborate with employees to set specific targets, they first have to sit down and establish overall company objectives. These objectives should be big-picture goals that stem from the company’s mission. If you’ve already been using the MBO process, then this phase is the perfect time to revisit those company objectives and make sure they’re still relevant.

2. Translate the goals to employees: Once leadership has established the big-picture goals, it’s time for management to communicate those goals to the employees. Communication is one of the cornerstones to effectively using MBO. It should also be the case that these big-picture goals serve only as a starting point.

3. Encourage employee participation in the goals: Management should also collaborate with employees to create more individualized objectives. In a small business, this might be a company-wide undertaking. In a larger corporation, it’s more likely to happen at the department level. Not only will you set goals for the company, but individual employees can set goals as well. The employees should have a say in the objectives. Doing so is how you create a sense of motivation and commitment for the employees.

4. Monitor the progress: The purpose of MBO is not to set goals and then put them aside until you have met those goals. Instead, the process involves constant monitoring of progress. It’s essential that you set goals that are easily measurable, which makes it possible to monitor the progress effectively.

5. Evaluate and reward achievement: One of the critical components of MBO is to evaluate whether or not the company met its objectives, and to provide rewards to employees for a job well done. MBO is a reward-based system, not a punishment-based one. Rather than seeking out the areas where employees may have fallen short, seek out the areas where they’ve excelled. This step can take place at an annual performance review.

The MBO process is meant to be repeated indefinitely. Rather than treating MBO as a one-off exercise in your company, treat it as an ongoing process.

Why is MBO important?

Peter Drucker, the father of management by objectives (MBO), argued that companies should integrate the various levels of employees and management. Doing so, Drucker argued, would help to create commitment to the organization.

Drucker felt that the best way to instill this sense of commitment and integration was to establish common objectives for the entire organization. Not only does this ensure that everyone in the company is on the same page, but it also encourages employees to create individual goals for themselves.

For MBO to be successful, it’s important that companies meet several conditions. First, the objectives have to be decided on in collaboration with the employees. This factor is critical for engaging each hierarchy within the company.

Drucker also argued that for MBO to be effective, companies should set goals that are both quantitative and qualitative. They should also challenge employees and motivate them to go after their own goals.

Finally, companies using MBO must provide regular feedback on the status of particular objectives, and that feedback is reward- and growth-based rather than based on punishing employees.

What are the main objectives of management?

The primary goal of management by objectives (MBO) is for employees at every level to collaborate on the creation of goals. Doing so provides encouragement and empowerment for employees and increases commitment to the company. But the goals that come out of MBO are primarily company-wide or focused on the employees, not the managers.

Regardless, managers still play an essential role in moving the company toward its goals. Here are some of the primary objectives of management:

  • Planning: The first steps within the MBO process require the company to plan their objectives and then communicate those objectives to the employees. The planning must start with the company’s leadership and management.
  • Organizing: There are a lot of benefits to using MBO within a company. One of the trade-offs is that it comes with a lot of paperwork. It falls on management to stay on top of organizing the responsibilities and progress of their employees.
  • Staffing: One of the most critical objectives that managers face is the responsibility to fill roles within the company. When a company has implemented MBO, it is up to the managers to staff the company with employees most equipped to reach the objectives.
  • Leading: For companies to effectively meet their goals, they have to have good leaders in place. The better the leader, the better the outcomes for the department will be.
  • Monitoring: The creator of MBO included tracking of progress as one of the steps of MBO for a reason. It’s critical to making sure the company is on the right track toward meeting its goals — a responsibility that falls on management.
  • Motivating: One of the primary benefits of using MBO within a company is that it motivates and empowers employees. For that to be the case, a company needs to have management that can effectively instill that motivation.

What are the benefits of MBO?

Management by objectives (MBO) has been around since 1954, and it’s become a staple in many businesses for good reason. It can often prove beneficial for both the company and the employees.

First, MBO increases communication between the different levels of human capital within the company. By creating shared goals, lower-level employees might feel more of a sense of connection with those above them. After all, when the entry-level employee and the company’s chief executive officer (CEO) share a common goal, it creates a sense of community that might be difficult to create otherwise.

Another benefit of MBO is that it empowers employees. Because they’re more aware of the organization’s objectives, they can take more initiative in helping to reach those goals. It also empowers and encourages them to set individual objectives.

Overall, MBO helps to instill a sense of commitment to the company on all levels. When employees are included in the goal-setting process, they feel more motivated to reach those goals.

What are the limitations of MBO?

While there are clear benefits of using management by objectives (MBO) within a company, there are clear limitations as well. First, MBO can only be as effective as the goals a company sets. If the company sets poor or unrealistic goals, it might have a negative effect.

MBO also requires that employees at every level collaborate to set goals together. If management sets goals and hands them down to employees without getting feedback, the process is far less likely to motivate employees.

MBO is also a time-consuming process. It’s not a set-it-and-forget-it system. Instead, it requires planning, organization, and constant monitoring and feedback. It’s also a process that continues indefinitely. Once the initial objectives have been met, the intention is that the company will set new goals. The time-consuming nature of MBO is something companies have to take into account, as it will require a lot of time on the part of company leaders.

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