Insights

Management by Objectives: What It Is and Why Companies Should Use It

Kilpatrick Executive

Companies aiming to improve their performance should consider the Management By Objectives (MBO) approach. An MBO may not be too popular nowadays, but it remains effective in managing today’s fast-paced working environment.

Learn about the fundamentals of an MBO, its potential benefits and drawbacks for businesses, and the five necessary steps involved in the process.

What Is Management By Objectives?

Management By Objectives (MBO) ensures each team member’s work goals align with the company objective. Peter Drucker introduced this strategy in his book, “The Practice of Management,” which was released in 1954. It wasn’t until the 1960s that the method gained popularity.

Peter Drucker set forth several MBO principles in his book. It includes defining challenging but achievable objectives with the help of employees and giving them daily feedback. The focus should be on rewards instead of punishment. Additionally, managers should concentrate on helping their members improve and grow and not punish them should they fail to reach objectives.

What Is the Goal of Management By Objectives (MBO)?

An MBO’s primary objective is to improve company performance by aligning the objectives of the employees and teams with those of the company. It also aims to promote employee engagement and commitment by getting them involved in establishing goals and action plans.

Advantages of Management by Objectives

There are many benefits to using an MBO. Here are some of them:

Increased team productivity: With an MBO, team members help in creating their work goals. This involvement and the presence of a clear set of tasks can encourage them to give their best efforts at work.
Empowered workforce: An MBO is a powerful tool for driving workforce empowerment as it allows employees to have a say in what goals to accomplish and take ownership of their work.
Better communication: An MBO requires the management to work with employees in setting goals, which can encourage transparency and clarity. Managers also need to provide regular feedback and employee performance reviews.

Disadvantages of Management By Objectives

An MBO isn’t a one-size-fits-all management solution that can or has to be used in all situations. It also has its own set of drawbacks, such as:

Overly goal-oriented: An MBO might make companies so intently focused on goals and targets that they may overlook other essential aspects of a business, like employee behavior, working conditions, and corporate culture.
Unhealthy workarounds: Employees might use any means necessary to reach the objectives because of the goal’s time frame. It may entail taking shortcuts, even if it means sacrificing the quality of work.
Increased workplace competition: Employees may become more competitive as an MBO incorporates an extrinsic-focused reward system. Excessive competition may get in the way of creating a healthy work environment.

5 Steps to Create Good Management By Objectives

Here’s an overview of the five steps to create a good MBO:

Step 1: Defining the Company’s Objectives

The first step in the MBO process is defining organizational objectives. You can derive the organization’s objectives from the company’s mission and vision.

Step 2: Translating Organizational Objectives to Employee Goals

After defining the company’s objectives, the next step will be translating these into individual goals for each employee. Use the SMART (specific, measurable, attainable, relevant, and time-bound) framework to tailor goals for each team member.

You need to involve your team in the process. Have one-on-one meetings with the staff so they know the targets they should meet within a given time frame and the resources they have.

Step 3: Monitoring Employee’s Progress

As employees work toward their personal work goals, managers must monitor their performance. You can use a project management tool to gather success metrics and find out whether the employees are meeting their objectives and key results (OKRs). Regular monitoring will also allow you to assess your team’s productivity.

Step 4: Evaluating Performance

The next step will be a performance review. Managers will provide personal feedback on what each employee is doing well. You can also discuss areas that the employee can make better. Note that an MBO is all about positive reinforcement and helping employees improve and grow.

Step 5: Rewarding Achievements

The final step in an MBO is rewarding the team for its accomplishments. Rewards could include incentives, like bonuses or recognition. This step helps boost team spirit and encourages employees to put in extra effort in their jobs.

Examples of Management By Objectives

Here are some examples of companies in real life that used the MBO approach to improve their business performance.

Using the MBO model as a guide, Hewlett-Packard developed a system in which goals were discussed at every managerial level. It resulted in an integrated goal system.
Intel uses a written model to help make its business objectives and goals clearer. This facilitates the communication of the MBO model’s main points.
Xerox has implemented a system wherein management and subordinates meet regularly to establish goals and find solutions for opportunities and problems.

How Kilpatrick Can Help Your Company in Adopting the MBO Method

An MBO is a powerful management strategy. If you’re trying to adopt this method but have no success, Kilpatrick Executive can help. Our consultants are experienced in qualifying talent with the right skills for you to account on when adopting the MBO method.