When it comes to managing organizations, there are plenty of theories available for companies to use. Among the most popular is the model of Management by Objectives. In this guide, we’ll explore the concept and the basic principles guiding the objective-focused approach to management.

We’ll explore the key features and outline the strengths and weaknesses of the approach. The guide will also explain the steps an organization needs to take in order to implement the approach as well as examine a few examples of companies using the approach.

WHAT IS MANAGEMENT BY OBJECTIVES ALL ABOUT?

Management by Objectives (MBO) as a concept first appeared in a 1954 book The Practice of Management. The author, Peter Drucker, has since become known as one of the world’s most influential business experts. Aside from developing the ideas around MBO, Drucker has revolutionized the corporate world with his views and theories on essential things such as leadership. His other famous books include The Effective Executive and Management Challenges for 21st Century.

In The Practice of Management, Drucker examined the different schools of management, from the classical to the human relations theories. He felt the problem of these theories was how effectiveness was assumed a natural and expected outcome of management. He saw effectiveness to be more important than efficiency, creating the foundation for organizations to operate and therefore an integral part of focus for organizations. Due to the findings, Drucker set forth certain principles and processes that would create effectiveness in the relations between the management and the employees.

Therefore, Management by Objectives is

a management model that aims to improve performance of an organisation by clearly defining objectives that are agreed to by both management and employees”.

The aim is to create a more harmonious relationship between the management and the employees and enhance the operational efficiency of the organization. According to Drucker, this is best achieved if the goal setting and action planning is determined by both the management and the employees.

Furthermore, Drucker’s MBO is based on a few core principles, which are:

  • Challenging yet achievable goals
  • Daily feedback on achieving objectives
  • Focus on rewarding good behavior rather than punishing failure
  • Emphasis on personal growth and development

Drucker wanted MBO to align organizational goals with employees’ personal objectives. The focus on a common challenge, set by different players within the organization, would help each person understand their responsibilities better and move everyone towards the target with speed. The model hopes to increase participation and commitment among employees, but also the different layers of management. Furthermore, it supports operational and employee maturity and responsibility.

The key part of success is MBO’s ability to clarify and align the roles and responsibilities of different people within the organization, which will lead to enhanced effectiveness and quicker achievement of goals. But in addition, Drucker was interested in the ability of the model to improve employee satisfaction and personal fulfillment of the different people within an organization. Peter Drucker saw Management by Objectives as a tool to help organizations identify and achieve goals, even though it might not be the solutions to end all ailments.

The participative and democratic model of MBO has become a popular philosophy of management in today’s corporate world. The ideas of Drucker have been refined and used to establish and implement the model in a variety of industries. For each organization or a manager, the detailed, in-depth definition of MBO might slightly differ, but Drucker’s core tenets still hold. If you want to hear more about how the MBO model can be viewed, watch the video below. In it, Dr Fredmund Malik shares his insights on the concept.

THE FEATURES OF MBO

Let’s delve deeper into the features that make the MBO model operate. The section will first examine the basic principles of the model, before taking a closer look at one of the key features of setting the objectives: the SMART model.

The key features

Five features or elements are central to the Management by Objectives model. Drucker saw these as the basic principles of the model and each element helps with the long-term implementation of the model.

Superior-subordinate participation

As mentioned above, the MBO model emphasizes the democratic and participative leadership and decision-making. It asks for involvement of the different stakeholders, from low- to high-level management and the employees. Therefore, the model can’t obtain it’s full potential unless the participation between the superior and the subordinate is equal. Both superiors and subordinates have to buy-in in the program and to fully understand the model and its benefits.

The key is to create an environment where objective-setting is considered a joint activity by both the subordinates and the superiors. The input to identify objectives and the follow up with responsibilities must be commonly shared. It doesn’t require the setting of same objectives or responsibilities, as hierarchies can still play a role and job descriptions are naturally different. Nonetheless, both parties need to be aware that both participants should have a say in the determining of the objectives and roles.

The management and the subordinates need to work hand in hand to define and to fulfill the goals for the organization. This means discussions on the viability and the difficulties that either party might face. The idea is that once each stakeholder participates in the goal-setting, there’s also more clarity in terms of how to obtain these goals. Therefore, it isn’t merely the objectives superiors and subordinates must agree on; they must also agree on the processes to achieve the goals.

Joint goal-setting

Both parties need to fully subscribe to the joint process, but MBO further emphasizes the need for the goals to be realistic and tangible. It’s not only about getting superiors and subordinates to agree on a goal, but they also must find the objectives attainable. Therefore, by setting the goals together, the aim is to ensure the objectives are set based on actual capabilities and abilities of the team.

In essence, the superiors can bring knowledge of resources and the requirements, while the subordinates can help determine the speed and ability in which goals can be achieved. The equal input and information is thought to ensure the goals are not set with unrealistic aims in mind.

Furthermore, during the joint goal-setting, the objective is to guarantee the goals will be tangible, verifiable and measurable. This is closely associated with the SMART method, which is an acronym for Specific, Measurable, Acceptable, Realistic and Time-bound, and we’ll return to it later.

Joint decisions on methodology

The main difference of MBO to other management styles is its lack of focus in terms of the processes that are used to achieve the objectives. The most important part of organizational efficiency in the MBO model is the objectives. The focus is on ensuring these are set through a participative framework and enough attention is paid on ensuring the goals are realistic and attainable. But this means there’s less focus on the process of achieving them. Nonetheless, when it comes to deciding the methodology, the superiors and subordinates must work together.

Deciding the methodology is not focused on the small detail and attention is not on the process at any point. However, the idea is to set up certain standards and performance evaluation points to guarantee the objectives are appropriately obtained. Although the focus must be on setting the objectives, the key is to ensure the broad framework of methodology (how to achieve the objectives) is jointly decided and agree upon. This further strengthens the participation levels and it can help in ensuring the objectives are realistic.

Easy to attain maximum goals

The process emphasizes rational thinking. As mentioned, the goals must be realistic and achievable, which further helps to guarantee the model helps achieve maximum results. The participative framework and attainability of the goals ensures organizational efficiency and it makes achieving success more straightforward. The systematic approach can help organizations to create a rational approach to approaching objectives.

Since the focus is on setting the objectives and only a broad framework of methodology, the model could provide a bit more breathing room for the superiors and subordinates in terms of execution. The system has in-built freedom, which allows creative decision-making, since the only important part is to set realistic objectives and achieve them. The freedom can motivate and help subordinates, especially, to perform to the maximum ability.

Support and coaching

Finally, a key element of MBO focuses on the support system. The model facilitates effective communication as it forces the superiors to talk with the subordinates. Requiring co-operation in terms of goal-setting, the two stakeholders are forced to discuss things more authentically and openly. Since the goals must be realistic, both parties need to be aware of the positive and negative forces influencing the structures at play.

For the model to work, the superiors must be able to offer appropriate support and coaching structures. The improved relationships should help create an environment where sharing problems become easier. In order to ensure the objectives are met, superiors want to support and help develop subordinates.

The SMART approach

As mentioned above, Drucker’s model focuses on using the SMART approach in order to set the objectives. The Specific, Measurable, Acceptable, Realistic and Time-bound model ensures the objectives are efficient and effective. It acts as a checklist for setting the objectives and it provides an opportunity for transparency within the organization as well. It’s a feature providing clarity and efficiency to goal-setting.

Below chart outlines how to make a goal SMART:

SpecificDetermine what it is you want to achieve. You need to have a clearly defined reason and avoid broad idea of what the focus on. A specific goal is one that answers questions such as:

What? Where? How? When? With whom? Why?

MeasurableThe objective also needs to be quantified. You want to break it down to elements, which can be individually measured.
AcceptableAcceptable goals emphasize the attainability of them. This is about deciding whether the goal has meaning in the current situation.
RealisticYou also need to ensure the goals are realistic. The team must be able to set objectives that can be achieved, either with the resource limitations or labor limitations in mind, for example.
TimelyObjectives must also have a specific timeline to guarantee success. You need to have different deadlines in mind to boost measurability of the objectives and ensure it is a realistic goal.

ADVANTAGES AND DISADVANTAGES OF MBO

The above has detailed the concept and the basic features of the model. But what do these features mean in practice? To understand the model, you also need to consider the strengths and weaknesses of the approach.

Advantages of MBO

MBO has plenty of advantages relating to the operational effectiveness and the enhanced relationships between the different stakeholders. Drucker thought of effectiveness as something the management has to focus on and through the communicative and participative style, organizations can improve the rate at which they achieve the objectives.

In essence, the fact that objectives are organization-wide and they are appropriately discussed prior to setting them, the organization can enjoy from heightened effectiveness. Creating a system in which objectives are not done in secret, employees and managers feel more engaged with the system.

Management by Objectives increases participation. As people feel more engaged with decision-making and planning, they will also feel more motivated. The work effort and input have a direct impact, with the employee or manager’s understanding of the situation resulting in a beneficial situation for all.

Since the organization is interested in the input and good behavior is rewarded, the person will feel more inclined to work hard, develop his or her skills, and achieve the objectives, as they don’t just benefit the organization but also the employee. Both increased participation and motivation can further lead to higher job satisfaction. The employee will feel engaged and valued. The work has an actual meaning, which can ensure they remain interested and satisfied.

The model guarantees the different layers within the organization are paid attention to. Management hierarchies are understood, which helps devise strategies for deeper inclusion. Management at all levels has a say in operational objectives, together with the inclusion of employees. Studies have shown how better inclusion of different opinions and backgrounds can not just result in better results, but also improve the relationship.

When management and employees are not divided and kept secret, communication between the two groups improves. The strong feedback systems of MBO provide people the opportunity to improve the work input, but also to self-development. The ability to voice opinions without the fear of punishment creates an environment of trust and respect. Both managers and employees feel appreciated and respected, which builds mutual trust and understanding. As communication becomes better, the organization will benefit. Job satisfaction is higher and effectiveness to reach operational goals improves.

While the above are major benefits for organizations, the theory also has the major advantage of being easily applicable in different situations. The model doesn’t require a specific sized organization and the model can work in a number of different industries. In essence, the model is easily scaled to suit the needs of the organization and it could be used organization wide or applied in a specific department. Setting up is rather straightforward and the cost of implementing the model is modest.

Disadvantages of MBO

Although the model can increase organizational effectiveness and have a positive impact on the relationships, there are certain disadvantages to using the model. While the MBO model is a straightforward one with clear steps of implementation, it does require a systematic approach to implementation.

For the model to work efficiently, the approach has to be followed rigorously, which can be time-consuming and difficult to maintain. In essence, the model requires careful monitoring and enforcing even after the initial stage, which adds pressure on the organization in terms of resources.

The model is rather rigid, resulting in a situation where the rules and processes must be followed. This requires knowledge, time and resources. The MBO model brings about plenty of paperwork in the form of training manuals, feedback forms, and performance data collection. The rigid system can add extra burden on staff and reduce motivation.

Furthermore, as the name suggests, Management by Objectives emphasizes organizational objectives above the outcome or even the action. The focus is on setting the objectives and discovering the right objectives, with resources, time and effort flowing to this part of the process. But this reduces attention on the actual outcomes.

If the objectives are met as laid out, the lack of the desired outcome is not necessarily an issue for the organization, even though it perhaps should be. In addition to lack of attention on the outcomes, there isn’t enough emphasis on the processes. Lack of focus on the process that led to the outcome can hinder the operational efficiency or result in practices, which are not beneficial for the organization.

Although clearly defined objectives can make achieving desirable outcome easier, experts argue it isn’t always the most important thing. Heightened focus on objectives can lead to the exclusion of certain elements that could influence the planning in the first place. The model doesn’t consider the environment, available resources, stakeholder needs, and other such key elements, as the focus is just on aligning operational and individual objectives.

Furthermore, since the focus is on the objectives and achieving them, people can become disengaged from the wider organization. The employee and the manager will become transfixed in their own set of objectives, which can lead to the polarization of effort. People simply focus on their own set of objectives instead of looking at the wider picture.

The model can also result in a lack of innovation, as it could discourage risk-taking. Since the emphasis is on rewarding behavior that meets the objectives, people can start setting objectives, which are easy to obtain. Effectiveness becomes the key goal for employees and managers, which can in short mean people are relying on strategies that have worked in the past. Innovation and creativity can suffer as a result of this complacency.

Finally, while the model can lead to improved motivation and employee satisfaction, the reward-focused system can have its drawbacks as well. While punishment structures might not be set in place, the system of getting rewards based on performance can add pressure on the employee and the manager. This could result in unrealistic expectations and goals, which can diminish motivation or lead to loss in job satisfaction.

FIVE STEPS TO IMPLEMENTING MANAGEMENT BY OBJECTIVES

How can Management by Objectives be implemented? As mentioned in the previous section, the application of the model has to be systematic in order for it to work. To implement it in an organization, the following five steps are crucial for success. Drucker laid out the steps in his book and they are key to putting the model into practice.

Step 1: Determining the organizational objectives

First part of the model calls for the identification of the organizational objectives. These can be either the objectives currently in place or the objectives that needs to be set. Without setting the organizational objectives, the next steps of the model are not able to work and don’t even make much sense.

The organizational objectives are based on the mission and the vision of the organization. Therefore, if the organization doesn’t have a clearly defined vision and mission, the first step is to outline it. Once a vision is established, the organization is able to draw the objectives from the mission statement. Furthermore, the process refers to the identification of Key-Result Areas (KRAs). An example vision of KRA is outlined below:

Example Indicators of Performance
Key Results AreasIndicators of Performance
Return/Profit
  • Return on Revenue,
  • Donations to Sales Ratio
  • Net profit
Productivity
  • $ sales per employee
  • Units produced per months
People development
  • Percent ethnic hire
  • Days of training per employee
Market penetration
  • Percent of market share
  • Percent growth by product

In terms of the organizational objectives, the decision-making is in the hands of the top executives. The organizational objectives should be decided after consultation with the entire management team, but the organizational objectives are distinct from the other objectives outlined by the model. This is down to the nature of these broader operational requirements. In essence, the objectives are not necessarily set by anyone, but stem from the vision.

Step 2: Explaining the objectives to employees

Once the organizational objectives have been identified, it’s time to translate them to employee level. This means turning the organization-wide objectives into detailed operational level objectives that are defined in terms of the different parts of the organization. The aim is to guarantee each employee is aware of the objectives, but also participate in the process.

For the second step to work, the SMART method must be applied. The Acceptable aspect of the SMART method is especially key at this stage, as it refers to an agreement between the superiors and the subordinates. The part of the method is about ensuring the goals fit the current situation and are attainable by all. Therefore, it requires both the employees and the organization to agree on the terms of the objectives. The goals cannot be determined by one side, but require the involvement of both, even it it’s technically just about the buy-in.

According to the principle of the MBO model, the management can’t determine objectives without the input from the employees. This doesn’t just relate to the defining of the objectives, but also explaining them to the employees. The organizational objectives have to be recognizable by the employees, with the specific responsibilities of each employee identifiable in relation to these goals.

Therefore, the step is about establishing clear communication routes between the superior and the subordinates. It is about understanding and identifying the expectations of both parties and creating the feedback structures to enhance the communication, making the following steps easier.

Get superior communication skills by thinking fast and talking smartly.

Step 3: Stimulating further participation of employees

During stage three, the focus is on deepening the joint involvement in defining objectives and achieving goals. As the model is about aligning personal objectives of the employee with the organizational objectives, the third step focuses on establishing this part. The organizational objectives should now have been discussed properly and the different aspects of the goals should have been clearly explained to the employees. Each person within the organization should be aware of what is required of them and why the specific requirements are important. In short, the organization’s vision and goals have to be clear.

With the clarified understanding of the organization’s needs and aims, the employees can become more involved in determining their own specific contribution. The idea is to move beyond expectations and to achieve participation instead. MBO guarantees the employees are aware of the expectations, but also have the opportunity to actively engage with the expectations.

The decision-making process, in terms of the detailed objectives, is shared and the management should include the employee input at this stage. The process requires the alignment of the organizational objectives, the business unit objectives, the departmental objectives, the team’s objectives, with the personal objectives of the employee.

The employee’s responsibility at this point is to ensure the actions they take enhance the achievement of all of the above points. For the management, the key is to provide the resources and the support the employees need in order to perform their tasks.

Step 4: Monitoring progress

A big part of the SMART method emphasizes the aspect of measurability. Under the MBO model, the objectives will need to be measured or the system doesn’t function properly. Each objective must entail smaller objectives, with the superiors focused on supporting the subordinates and monitoring the progress. The larger idea behind Drucker’s model was about development and growth.

Therefore, the focus of the superiors shouldn’t be on performance and reviewing this aspect of the tasks. The more important focus is on noticing how the employee is developing. The evaluation has to focus on growth, as well as the obtaining of the objectives.

Therefore, the two main aspects of the monitoring process are creating objectives which are measurable and outlining personal development goals which align with the objectives. You can see the connection between the main objectives of the organization and the personal objectives individual employees set. When it comes to monitoring progress, the alignment becomes obvious and part of the success of the model. If the monitoring shows the organizational objectives are being met, the employees are most likely to experience personal growth.

Step 5: Evaluating and rewarding achievements

The final stage is about evaluating the progress and rewarding the right behavior on the basis of the findings. The monitoring stage must lead to evaluation of the performance, which means all the five stages work in harmony. As mentioned above, you can take any stage as a one-off event, but each stage leads to the other. At the final stage, the information from the previous step will lead to the evaluation, which in turn will set the company to check the organizational objectives.

The idea of the MBO model is to improve performance and therefore evaluation is crucial. A comprehensive system for analyzing employee behavior must be in place. Again, if the SMART method has been used to set the objectives, evaluation becomes easy. The objectives are measurable, timely and applicable, creating the framework in which the analysis can take place.

Each objective and its mini goals can be looked in the SMART context and immediately evaluated to see whether the performance has been good or bad. In terms of the individual, the evaluation is based on understanding how well the person has been able to set those individual goals and objectives. The idea is to focus on the why, when and how the objectives can be obtained.

Furthermore, after the evaluation has been conducted, the employee should receive a reward for good behavior. The model uses positive reinforcement and not negative punishments. The emphasis must be on providing feedback and rewards, not punishing for poor performance. The final stage tests the feedback structure within the organization and its important to ensure to communication flows from one department to another, not only from the immediate superior to subordinate.

EXAMPLES OF COMPANIES THAT HAVE USED MBO

Due to the benefits Management by Objectives model can provide for companies, the model has been widely used in the business world. Since Drucker outlined his model, a number of organizations have applied the above steps to seek out improved productiveness and enhances sales. Few of the most notable examples include companies such as Hewlett-Packard, Xerox and Intel.

The computer company Hewlett-Packard used the model to create a system where objectives were discussed at each managerial level, creating a system of integrated objectives, following the MBO model. The organization used written plans as part of its method, ensuring the objectives and the steps to achieve them were appropriately understood by each employee.

Bill Packard later claimed, “No operating policy has contributed more to Hewlett-Packard’s success…MBO…is the antithesis of management by control.” He believed the model creates an environment where employees are not just working for the benefit of the organization, but the personal growth aspect ensures employees gain while enhancing the organization’s success rate. The organization-wide plan has enough focus on the details, but also the bigger picture.

The model is also widely used at Intel, with the company’s Manager’s Guide providing directions on using the approach. Each manager at Intel must:

  • Begin by choosing a few overriding objectives for the team.
  • Establish objectives with subordinates that are aligned with the manager’s overriding objectives.
  • Provide the subordinates the chance to set the processes, which help them achieve the goals.

Like Hewlett-Packard, Intel also uses a written model to help clarify the specific aims and targets. The document makes it easier to convey the key messages of the MBO model: what the organization is hoping to achieve, what the employee has to do in order to help receive these objectives and what the responsibility of each individual is. According to Andy Grove, who helped establish the model at Intel, the model is used at Intel and in other organizations as a system, which provides a focus for the organization.

The final example of an organization, which believes its operational strengths have been boosted by the MBO model, is Xerox. The organization has established a system where management and subordinates meet regularly to set objectives and to discover solutions to problems and opportunities.

Xerox uses MBO to set benchmarks for performance and to use these to improve the quality of service it provides across the different departments. According to one study of the management system at Xerox, the MBO model has provided the company better strategic control. The review believes the management system is “flexible enough to adopt to environmental changes both from within and outside the company”.

The above examples provide an insight into the companies utilizing the system. A number of organizations continue to vouch for the model, as they feel the systematic approach to management has helped the organization to boost productivity and employee engagement. For further information on the practical application of the Management by Objectives model watch the below video where Ben Griffin, the founder of CEOIQ, explains how MBO works in practice.

FINAL THOUGHTS

Management by objectives has become a popular management theory. The focus on creating an environment where decisions are not top-down, but each member of the organization has the ability to influence has proven to be a popular method. The democratic and participative theory can provide organizations plenty of benefits in terms of improving employee engagement and satisfaction. When the organizations can guarantee people are more involved with the objectives and processes, it can expect to enjoy benefits such as improved productivity and profitability.

The model is carefully thought trough and the systematic approach can be rather straightforward to implement. The main objective of the model is to ensure objectives are at the core of everything the organization does and to ensure there’s enough attention paid to ensuring the objectives are well established and understood across the company.

On the other hand, the rigid approach can be problematic and purely focusing on the objectives can hinder the performance. MBO, as any other management theory, requires careful implementation in order to work efficiently and effectively.

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