Learning and Applying Management by Objectives for Organisational Success

Management by Objectives (MBO) is a framework first seen in Peter Drucker’s book The Practice of Management (1954), which was a culmination of previous approaches. The purpose behind using this approach, according to Drucker, is a business performance can become better when each function or job is goal-oriented. Later, it was popularised beyond academic circles by George Odiorne, John Humble, and Dale D McConkey. 

For understanding organisational productivity and success, there should be benchmarks. One of them is management by objectives (MBO). It focuses on employee engagement through defined objectives. Both managers and team members need to have a clear understanding what objectives are to be achieved, how meeting these objectives would help them and the organisation.

If you are getting into the core techniques of modern management, learn this approach to prepare for potential team- or goal-setting-related job situations asked in fresher interview questions. Even if you have never read about this but still are a manager, you can stay assured of acquiring some practical understanding. As after all, ‘management is practice, and a practitioner needs practice’ (Drucker).

What is Management by Objectives?

Management by Objectives is a collaborative, result-driven approach where managers and their teams together identify and set objectives to be met upon mutually agreeable specific timeframes. 

Each individual from the team is responsible for meeting the objectives, which allows the manager to monitor the performance. The performance of the manager is also tracked in how well they are able to achieve the set objectives.  

You can also understand the approach through these ways. 

• MBO in management is about setting clear, achievable goals. This is how managers are able to gather a roadmap for progress of a team, which can help them direct their efforts on the objectives that actually matter for the organisation. 
• The end result of this approach goes beyond fulfilling objectives. It looks into continuous innovation or rethinking of the objectives from the manager’s end. 
• Why this is a modern management approach is because it creates a dialogue with the manager and the team member. Both need to sort out objectives that they can individually fulfil. You can think of the sense of ownership everyone has. 

Here are some additional academic insights into the term management by objective. 

• Drucker defines it as - ‘a process of defining objectives within an organization so that management and employees agree to the objective and understand what they need to do in the organization in order to achieve them’. 
• According to the International Journal of Trend in Scientific Research and Development (IJTSRD), the MBO process allows the employee under a manager to participate in some of the crucial functions of management, more particularly, planning, control, and decision-making. Even, academics, such as J.L. Curtin describe Management by Objectives as participatory management. 
• According to Graham, if the MBO process is participatory, then an organisation, manager, and employees should focus on understanding the psychological principles behind this approach. Employees must be trained to understand concepts such as Maslow’s Hierarchy of Needs and other motivational theories. 
• According to 21st century researchers, Fiera and Ade, managers use the MBO strategy for goal setting. It is about setting, following, monitoring, and evaluating the goals. 

Drucker’s 5-Step MBO Process in Real Practice

Here is a simplified version of Drucker’s MBO process that is recommended to follow. Overall, it is important to consider this process of MBO as a cyclical one. 

1. Determining the Organisational Objectives

Such objectives should root from the vision and mission of the company. If they are not properly defined, they should be revised.

This should be decided among the top level management. 

In fact, determining organisational objectives is not just a one-time exercise. It is an ongoing process of aligning with the changing environment and maintaining focus on the desired future. By doing so, organisations can seize opportunities, overcome challenges, and achieve lasting success in the dynamic world of today.

2. Translate the Objectives from Organisation to Employees

It is important to put the employees in the clear about the bigger goals of the organisation. The supervisory manager must set achievable goals that have a specific timeframe. The concept of SMART (Specific, Measurable, Actionable, Relevant, and Time-bound), invented in the early 80s by George Doran, Arthur Miller, and James Cunningham are applicable here. 

These goals should be quantifiable. That helps in a transparent review of the goals. 

3. Encouraging Participation Among Employees

These goals must be understandable for the employees, and they need to understand why they are going to help them and of course, how. All levels of management, meaning the superior and subordinates must be involved on coming to a common point on the set of goals.  

The biggest takeaway from this is rationality. The employee is motivated to be more productive or engage more when the objectives make sense to them. They are more determined to take ownership. It also leaves some headroom for managers than micromanaging. 

4. Monitoring Progress 

Progress should be monitored so that the employee does not deviate from the goals. This is primarily the duty of the manager. They should also be focused on the management function of directing as a process, at this stage.  

5. Rewarding Achievements

This goes without saying when the success of the MBO system is concerned. Falling within the realm of HR management, rewarding for meeting objectives make for employee retention. 

Management by Objectives Examples

Here are some examples across various departments and industries, mostly in a functional organisational structure, so that you have a broad understanding of the objectives that align with company goals. 

1. Marketing Team in a Tech Startup

• Company Objective: Increase website traffic by 50% in Q2.
• Marketing Manager Objective: Launch a new SEO campaign targeting specific keywords.
• Content Writer Objective: Create 10 high-quality blog posts optimized for target keywords.
• Social Media Manager Objective: Gain 2,000 new followers on Instagram and generate 10% engagement on all posts. (Also, bookmark how to increase Instagram followers - our brief guide).

2. Sales Team in a Retail Chain

• Company Objective: Expand customer base by 20% in the next fiscal year.
• Sales Manager Objective: Implement a customer loyalty program to increase repeat purchases.
• Sales Associate Objective: Achieve a conversion rate of 15% for personalised product recommendations.
• Customer Service Representative Objective: Increase customer satisfaction score by 5% through personalised interactions.

3. Production Team in a Manufacturing Company

• Company Objective: Reduce production costs by 10% by year-end.
• Production Manager Objective: Implement lean manufacturing principles to minimise waste and optimise processes.
• Machine Operator Objective: Improve maintenance procedures to reduce equipment downtime by 5%.
• Quality Inspector Objective: Achieve a 99% defect-free rate for all finished products.

Advantages of Management by Objective Framework

Improved performance 

MBO fosters a focus on clearly defined goals and objectives. It guides employees towards measurable outcomes. This focus enhances clarity, direction, and ultimately, drives better performance. 

Increased employee engagement and motivation 

By involving employees in goal setting and providing them with a sense of ownership over their work, MBO boosts engagement and motivation. Employees feel empowered and connected to the organization's broader mission.

Improved communication and collaboration 

MBO encourages open communication between managers and employees throughout the goal-setting and monitoring process. This promotes cross-functional collaboration and alignment, leading to smoother workflows and more effective resource allocation.

Disadvantages of the Management by Objectives Framework

This framework may not be suitable always. There are disadvantages to be considered as well. 

Limited applicability

MBO may not be well-suited for all types of work, particularly roles involving intangible outputs or unpredictable environments. Creative pursuits, research, and customer service interactions may be difficult to quantify and measure within the MBO framework.

Overemphasis on quantification 

The focus on measurable objectives can lead to neglecting qualitative aspects of performance and disregarding important contributions that may not be easily quantifiable. This can be particularly detrimental in areas like employee morale, team spirit, and customer satisfaction.

Internal Competition and siloing 

Improperly implemented MBO can inadvertently create internal competition and siloing between teams or departments. Individuals may prioritise achieving their own objectives over collaborative goals, hindering cross-functional cooperation and teamwork.

How is Management by Objectives Used Today

While the MBO framework is quite effective when implemented correctly, there are few other considerations to look into, when the shifting business and technology landscapes are concerned. 

While traditional MBO emphasises cascading goals downwards, 21st-century managers are leveraging technology and team dynamics to set goals collaboratively. Frameworks such as OKRs (Objectives and Key Results) foster transparency and cross-functional goal alignment.

The contemporary MBO approach is all about combining Hoshin Kanri and Objectives and Key Results (OKRs). These integrate individual goals with team and organisational objectives, creating a holistic performance ecosystem.