Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.
Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book ‘The Practice of Management’. In the 90s, Peter Drucker himself decreased the significance of this organization management method, when he said: “It’s just another tool. It is not the great cure for management inefficiency.”
The main features of MBO are:
- Management by Objectives is a philosophy or a system, and not merely technique.
- It emphasizes participative goal setting.
- It clearly defines each individual responsibility in terms of results.
- If focuses attention on what must be accomplished goals rather than on how it is to be accomplished.
- It converts objective needs into personal goals at every level in the organization.
- It establishes standards or yardsticks (goals) as operation guides and also as basis of performance evaluation.
- It is a system intentionally directed toward effective and efficient attainment of organizational and personal goals.
Steps in MBO Process
Peter Drucker outlined the five-step process for MBO shown in figure below. Each stage has particular challenges that need to be addressed for the whole system to work effectively.
These steps are explained below:
1. Set or Review Organizational Objectives
MBO starts with clearly defined strategic organizational objectives (see our article on Mission and Vision Statements for more on this.) If the organization isn’t clear where it’s going, no one working there will be either.
2. Cascading Objectives Down to Employees
To support the mission, the organization needs to set clear goals and objectives, which then need to cascade down from one organizational level to the next until they reach the everyone.
To make MBO goal and objective setting more effective, Drucker used the SMART acronym to set goals that were attainable and to which people felt accountable. He said that goals and objectives must be:
- Specific
- Measurable
- Agreed (relating to the participative management principle)
- Realistic
- Time related
For each objective, you need to establish clear targets and performance standards. It’s by using these that you can monitor progress throughout the organization. These are also important for communicating results, and for evaluating the suitability of the goals that have been set.
3. Encourage Participation in Goal Setting
Everyone needs to understand how their personal goals fit with the objectives of the organization. This is best done when goals and objectives at each level are shared and discussed, so that everyone understands “why” things are being done, and then sets their own goals to align with these.
This increases people’s ownership of their objectives. Rather than blindly following orders, managers, supervisors, and employees in an MBO system know what needs to be done and thus don’t need to be ordered around. By pushing decision-making and responsibility down through the organization, you motivate people to solve the problems they face intelligently and give them the information they need to adapt flexibly to changing circumstances.
Through a participative process, every person in the organization will set his or her own goals, which support the overall objectives of the team, which support the objectives of the department, which support the objectives of the business unit, and which support the objectives of the organization.
4. Monitor Progress
Because the goals and objectives are SMART, they are measurable. They don’t measure themselves though, so you have to create a monitoring system that signals when things are off track. This monitoring system has to be timely enough so that issues can be dealt with before they threaten goal achievement. With the cascade effect, no goal is set in isolation, so not meeting targets in one area will affect targets everywhere.
On the other hand, it is essential that you ensure that the goals are not driving adverse behavior because they have not been designed correctly. For instance, a call centre goal of finishing all calls within seven minutes might be useful in encouraging the staff to handle each call briskly, and not spend unnecessary time chatting. However, it might be that customers’ calls were becoming more complex, perhaps because of a faulty new product, and call centre operators were terminating the call after 6 minutes 59 seconds in order to meet their target, leaving customers to call back, frustrated. In this situation, the monitoring process should pick up the shift in the goal environment and change the goal appropriately.
Set up a specific plan for monitoring goal performance (once a year, combined with a performance review is not sufficient!) Badly-implemented MBO tends to stress the goal setting without the goal monitoring. Here is where you take control of performance and demand accountability.
Think about all the goals you have set and didn’t achieve. Having good intentions isn’t enough, you need a clear path marked by accountability checkpoints. Each goal should have mini-goals and a method for keeping on top of each one.
5. Evaluate and Reward Performance
MBO is designed to improve performance at all levels of the organization. To ensure this happens, you need to put a comprehensive evaluation system in place.
As goals have been defined in a specific, measurable and time-based way, the evaluation aspect of MBO is relatively straightforward. Employees are evaluated on their performance with respect to goal achievement (allowing appropriately for changes in the environment.) All that is left to do is to tie goal achievement to reward, and perhaps compensation, and provide the appropriate feedback.
Employees should be given feedback on their own goals as well as the organization’s goals. Make sure you remember the participative principle: When you present organization-wide results you have another opportunity to link individual groups’ performances to corporate performance. Ultimately this is what MBO is all about and why, when done right, it can spur organization-wide performance and productivity.
When you reward goal achievers you send a clear message to everyone that goal attainment is valued and that the MBO process is not just an exercise but an essential aspect of performance appraisal. The importance of fair and accurate assessment of performance highlights why setting measurable goals and clear performance indicators are essential to the MBO system.
Repeat the Cycle
Having gone through this five-stage process, the cycle begins again, with a review of the strategic, corporate goals in the light of performance and environmental monitoring.
When you reward goal achievers you send a clear message to everyone that goal attainment is valued and that the MBO process is not just an exercise but an essential aspect of performance appraisal. The importance of fair and accurate assessment of performance highlights why setting measurable goals and clear performance indicators are essential to the MBO system.