What is Management By Objectives (MBO)?

Management by Objective, also called Management by Results (MBR), is a theory of management developed by Peter F. Drucker in his book Practice of Management (1954). 

In summary, MBO is a management system in which the manager and employees work together to develop areas of responsibility for employees. 

It is a control system in which jointly developed business objectives are made to align with company goals. Managers and employees develop plans for achieving these objectives. 

The standards set forth are used as metrics to determine an employees performance.

 MBO was developed based upon the belief that employees perform better when they understand what is expected of them. It allows the employee to associate their individual efforts to the objectives of the organization. 

Further, allowing employees to have a say in the goal-setting process and planning function encourages participation, dedication, and loyalty among employees while aligning objectives across the organization.

What is the Process of Management by Objective?

• Establishing Goals - Managers work to establish goals that are based upon the company's mission, vision, and strategic intent. This is primarily carried out by Managers.
• Establishing Objectives - Objectives are the specific things to be achieved in furtherance of the company's goals within a given time frame. These are developed by managers and employees working together.
• Develop Action Plans - Action plans allow subordinates to achieve the specifically identified objectives through coordinated efforts. These action plans are also developed by managers and employees.
• Appraise Results - Managers measure and appraise the specific performance of individuals. The appraisal is based upon effort and progress toward the completion of objectives. Basically, it compares what is accomplished against what is expected. There is daily feedback, and the focus is on rewards rather than punishment. Managers emphasize personal growth and development rather than punishment for failing to meet objectives. Importantly, the managers must provide continued support and commitment to the employee.
• Corrective Action - Managers will use the appraisal result to take corrective actions. This may include additional efforts to motivate employees, modifying objectives, plans, or goals accordingly.

Developing Objectives or Goals

The criteria for the defined objectives include:

• Ordered according to the level of importance
• Quantitatively defined
• Realistic or capable of being achieved
• In accordance with organizational policies
• Compatible with other objectives

Notably, these criteria have given way to the use of Specific, Measurable, Achievable, Realistic, and Timely (SMART) goals. 

Why is Management by Objective beneficial?

There are numerous advantages associated with MBO. This include:

• Employee Understanding of tasks and duties.
• Each employee has Key Result Areas based upon their individual competencies, knowledge, and experience.
• It reducing duplication and confusion in task responsibility and completion.
• The goals of the organization are interrelated across the completion of individual employee objectives.
• It lends itself to the open flow of communication within the organization.
• Alignment of effort with organizational strategies
• Increased employee focus
• Increased employee motivation, empowerment, and job satisfaction

The difficulty with administering this type of system is that rewards systems used to incentivize completion of individual objectives are out of sync with overall organizational strategy.