Management by objectives: MBO defined & explained [2024]

Management by objectives can be a powerful framework for business success, but it does come with downsides that not everyone is aware of.

Forma.ai loves data and we embraced the MBO model from our early days. We've learned a lot about the pros and cons of the system, which we will share with you today.

What Is Management by Objectives?

Management by Objectives (MBO) is a management model that emphasizes collaborative goal-setting between managers and employees to align individual performance with organizational targets. It is also known as Management by Results, Goal Management, and Management by Planning.

With an emphasis on clear communication and a unified commitment to organizational objectives, the MBO technique measures employee performance against mutually determined goals, standards and expectations.

Management by Objectives: Peter Drucker

Peter Drucker (1909–2005) was a groundbreaking management consultant, educator, and writer, often hailed as the father of modern management. His innovative ideas on management practices, organizational dynamics, and strategic planning have profoundly influenced contemporary business leadership and management techniques.

Management by Objectives is based on ideas from management guru Drucker’s 1954 book, The Practice of Management. It is a full-scale organizational operational model that involves all employees in the goal-setting process. The belief is that when individuals can pinpoint their contributions toward corporate goals they helped define, they are often more inclined to perform related tasks and duties. 

Additional key components of the Management by Objective model include the call for open communication and collaboration between junior, mid and senior-level employees. The theory is that alignment between all levels of staff ensures synchronicity and productivity. That ranges from the specificity during planning stages when measurable group goals are defined to the ongoing refinement of individual responsibilities and expectations.

When implemented successfully, this strategic management model should enhance the performance of an organization by way of greater efficiency and transparency.

Related article: What is Incentive Compensation Management?

7 Steps to Using Management by Objectives

1. Establish Organizational Goals: Begin by setting clear and overarching goals that align with the organization’s strategic vision. These goals should act as a guiding framework for developing both departmental and individual objectives.
2. Engage Stakeholders: Involve both managers and employees in the goal-setting process to secure their commitment and sense of ownership. This inclusive approach ensures that personal objectives are well-aligned with the overall organizational goals.
3. Set Clear and Measurable Objectives: Define specific, measurable objectives for each team and individual that align with the organization’s broader goals. This clarity allows for effective tracking of progress and accurate performance evaluations.
4. Create Action Plans: Develop detailed action plans that outline the steps, timelines, and resources needed to achieve the set objectives. These plans should clearly assign responsibilities to ensure efficient progress toward the goals.
5. Monitor Progress Regularly: Implement a system for frequent reviews and feedback to track progress toward the objectives. Regular monitoring helps in identifying potential challenges early and making necessary adjustments to stay on course.
6. Offer Continuous Support and Training: Provide ongoing support and development opportunities to employees to help them reach their objectives. This support can include training, resources, and mentorship to enhance their ability to meet their goals.
7. Review and Revise Objectives: At the end of the evaluation period, review the outcomes against the objectives and make adjustments as needed. Use the findings to refine future goals and improve processes for better performance.

Why Use Manage by Objectives?

MBO has allowed countless organizations to achieve — and in many cases exceed — their goals since the mid-1950s. The common outcome of managing by objectives is increased productivity, teamwork and communication.

By its very nature, the MBO framework makes the roles and responsibilities of every employee explicit, which ensures every contributor is aware of their input and impact. 

MBO differs significantly from alternative management processes that operate from a predominantly siloed approach. There's usually a lower chance of success in instances like that, where the larger picture isn't visible to employees. 

A well-implemented Management by Objective model empowers employees to take ownership of their piece of the organizational puzzle, increasing engagement and productivity. MBO also encompasses the regular monitoring and evaluation of employees against agreed goals, and any associated variable compensation or non-financial incentives.

Management by Objectives is an exhaustively comprehensive management approach that affects the entire organizational structure. While many organizations sing its praises, others sing from another hymn sheet. 

Related article: 3 Key Objectives of a Sales Compensation Plan

Let’s take a look at the advantages and disadvantages of MBO together.   

Examples of Management by Objectives

Examples of Management by Objectives (MBOs) show how this approach can effectively align individual performance with company-wide goals:

1. Sales Goals: A company might set a target for its sales team to boost revenue by 15% over the coming year. Individual sales reps are given specific quotas to achieve within their regions, and their performance is assessed based on these targets.
2. Customer Service Improvement: A service organization could aim to enhance customer satisfaction ratings by 10% in six months. Customer service staff would have clear objectives related to improving response times and issue resolution, with evaluations based on their success in these areas.
3. New Product Launch: A tech company might set a goal to release a new product within nine months. The product development team would be assigned specific deadlines and milestones for design, testing, and marketing, with regular progress reviews to ensure timely delivery.
4. Employee Training Programs: A business could mandate that all employees complete a certification course within a year. The training department monitors participation and completion rates to ensure that training objectives are met and employees gain necessary skills.
5. Cost Efficiency Improvement: An organization might set a target to lower operational costs by 5% within the upcoming year. Each department is tasked with developing strategies to trim expenses, such as optimizing resource use or reducing waste, and their performance is evaluated based on their success in meeting these savings goals.
6. Market Expansion Initiatives: A company could aim to enter two new regional markets within the next year. Marketing and sales teams are tasked with objectives related to conducting market research, forming local partnerships, and running promotional campaigns, with performance tracked based on achieving these goals.
7. Production Efficiency: A manufacturing plant might set an objective to enhance production efficiency by 8% in the next quarter. Teams are given specific targets for reducing downtime and increasing output, with progress reviewed through performance evaluations.

These examples illustrate how MBOs can be customized to meet various organizational goals, focusing on clear, measurable outcomes to drive overall organizational success.

Advantages of MBO

• Detailed planning: Managers and employees work together to define measurable goals, leaving less room for uncertainty and more room to focus on what will drive success. 
• Clearly assigned roles and responsibilities: When employees help set organizational goals and metrics, they better understand what success looks like, how to obtain it, and how you will evaluate them. 
• Enhanced communication and transparency: Clear and effective communication between management and employees is part and parcel of MBO. Transparent communication minimizes ambiguity and cultivates confidence across the business. 
• Increased productivity and morale: MBO highlights the relevance of each employee in achieving the goals that have been mutually set. When the employee knows that their unique contribution plays a fundamental role in the business's overall success, it can boost motivation, productivity and accountability. 
• Regular feedback and opportunities for career development: MBO is a process of constant refinement which prompts managers to take a guiding role in areas for employee development. Since employees also understand where their current skills are being utilized, they are aware of areas that could be improved and can seek them out.
• Quantifiable objectives: Specific goals and objectives are an agreed-upon benchmark to measure the performance of employees and the organization. With high significance placed on measurable objectives, the performance appraisal and evaluation process is more precise.
• Overall improvement to the organization: With its performance and result-oriented focus, MBO brings about clarity, communication and collaboration among managers and team members. This winning combination promotes business growth in a proactive and responsive framework.

Disadvantages of MBO

• Unanimous support from all levels of the organization is required: The success of Management by Objectives hinges on senior management's complete support and acceptance. Many underlying issues may stall the process of unifying the goals of the ‘unequal’s,’ i.e. management and junior to mid-level employees. Cross-functional support is essential to overcome them.
• Time-consuming: Integrating MBO is an investment that requires a concerted commitment to be beneficial. Additional time to define goals and evaluation processes is necessary, requiring meetings and paperwork that can infringe on daily work.
• Some aspects are difficult to quantify: The emphasis on measuring everything that can be measured ignores non-measurable factors like teamwork, company culture and other interpersonal activities. That could lead to those factors being devalued and less practiced. The extreme focus on numbers and metrics could have an anxiety-inducing impact on employees who feel they have to be ‘always on’ and performing optimally.
• Emphasis on short-term goals: Goals are usually set based on six to 12-month intervals, which often means long-term objectives aren’t treated with the same level of importance. With this being the case, it’s possible to lose sight and direction of overarching long-term goals.
• Inflexibility: Fixation on particular goals could cause stakeholders to miss signs that the revision of a goal may be necessary or beneficial.
• Potential gaps in management’s skillset: MBO, though deep-rooted in collaboration, rests heavily on the shoulders of leadership to create a sense of direction. If a manager lacks the skills, the potential benefits of the Management by Objectives model will not be realized.
• Integration issues - Limited application: Seamless integration into an existing management system is unlikely, and businesses should be aware of this before attempting to do so.

Management by Objectives Vs. Other Goal-Setting Frameworks

MBO vs. SMART Goals

Management by Objectives (MBO) involve an approach where managers and employees work together to set and review goals regularly. SMART Goals ensure objectives are Specific, Measurable, Achievable, Relevant, and Time-bound. While SMART Goals can be helpful to create structured frameworks for creating targets, MBO provides ongoing feedback and alignment that might be more dynamic and supportive compared to the fixed criteria of SMART Goals.

MBO vs. OKRs (Objectives and Key Results)

OKRs share similarities with MBO in that they both involve setting clear objectives and measuring progress with specific results. However, MBO emphasizes a collaborative goal-setting process with regular performance reviews to ensure alignment with organizational aims, whereas OKRs are known for their focus on setting ambitious targets and frequent progress check-ins. While OKRs can drive high performance, MBO’s structured support and iterative approach may offer a more gradual and manageable path to achieving goals.

MBO vs. KPIs (Key Performance Indicators)

KPIs track performance through specific metrics related to business goals, similar to MBO’s emphasis on measurable outcomes. However, MBO incorporates a collaborative goal-setting process with continuous feedback, while KPIs often focus more narrowly on quantitative performance indicators. MBO’s approach includes regular evaluations and employee involvement, offering a broader perspective than the primarily data-driven focus of KPIs.

MBO vs. Balanced Scorecard

The Balanced Scorecard, like MBO, aims to align performance with strategic objectives but does so through a comprehensive evaluation across multiple perspectives, including financial, customer, internal processes, and learning and growth. Unlike MBO’s focus on setting specific, measurable goals and conducting regular reviews, the Balanced Scorecard provides a more holistic view of organizational performance. This broader perspective can be more complex to implement compared to the more focused and goal-oriented approach of MBO.

MBO vs. Stretch Goals

Stretch Goals aim to set highly ambitious targets to push performance, similar to the challenging goals often set in MBO. However, while MBO involves setting achievable goals through a collaborative process and provides ongoing support, Stretch Goals emphasize exceeding conventional limits and may create pressure if the targets are too extreme. MBO’s structured feedback and alignment can help maintain motivation and realism, contrasting with the potentially overwhelming nature of Stretch Goals.

MBO vs. GROW Model (Goal, Reality, Options, Will)

The GROW Model helps individuals set and achieve goals by clarifying objectives and exploring action plans, akin to MBO’s goal-setting and progress monitoring. However, MBO is designed to align individual goals with broader organizational targets and includes regular reviews, whereas the GROW Model focuses on personal development and problem-solving. MBO’s organizational alignment and continuous feedback are more comprehensive compared to the individual-focused GROW Model.

Each goal-setting framework has distinct features and drawbacks, and selecting the right approach depends on the specific needs and context of the organization or individual.

Is MBO right for your business?

When integrated correctly, Management by Objectives can contribute to organizational efficiency, transparency and success.

MBO is a result-oriented management model that neglects many unquantifiable aspects of a business. A thorough evaluation of this style is a great starting point in determining whether your business could benefit from it.

If you're considering implementing a MBO model in your business, the best (and most fitting) place to start is by asking employees for the thoughts on it, as well as if and how they would like to be involved in the process.

The strength of the Management by Objectives framework is its collaborative nature, so if you want to build the strongest foundation, start there.