Management by objectives: what it is and how to make it work

25 of March, 2021

Management by objectives can be an efficient way to enhance your workforce’s performance and increase your business’s profitability. In this article, we explain what management by objectives mean and what its main advantages and drawbacks are. We also lay out the 5 steps to an effective MBO process.

What is management by objectives?

Management by objectives (MBO) consists in a strategic management model that seeks  to improve performance and efficiency by setting clear objectives for every employee. Managers and employees discuss those objectives that must fit the organisation’s general goals as well as the employee’s abilities. The concepts of management by objectives come from Peter Drucker’s 1954 book The Practice of Management.

What are the benefits and drawbacks of MBO?

Advantages of management by objectives

The main effect of management by objectives is an increase of transparency in the general operating of the company. Indeed, the objectives are stated clearly and employees know exactly what their tasks are and what results are expected of them. This in turn leads to several positive outcomes. For a start, more transparency means a better communication between managers and employees. There is less confusion about job roles, and it is easier to hold everyone accountable for their part.

Management by objectives also increases employee productivity and motivation. By setting clear goals and tasks to each employee, MBO ensures that they focus on the most relevant tasks. Moreover, because employees work towards a goal that has been outlined as important for the organisation, they can see how their work positively impacts the company. This causes employees to see their job as meaningful and to feel valued by the company, which leads to an increase of employee engagement.

Limitations of management by objectives

Management by objectives also has some limitations that you should be aware of. First of all, under such a system, employees might tend to try and meet the objectives at any cost. If the goals are only quantitative, they can be tempted to take shortcuts, which will cause a drop in the production quality. It can also push employees to engage in aggressive competition with each other.

Another limitation of MBO is that because it focuses on setting and meeting objectives, it can cause a lack of innovation and creativity, qualities that are key to a thriving business. For the same reason, it also tends to ignore certain aspects that are essential for the good functioning of a company. These aspects include for instance the development of a corporate culture, the respect of environmental regulations, and the creation and upholding of a healthy work environment.

What are the steps in the MBO process?

1. Determine organisation goals

The first step in management by objectives is to establish or revise the company’s organisational objectives. These should be based on the organisation’s vision and mission.

2. Determine employee objectives

Once the general goals have been set, managers establish the individual objectives of each subordinate. They do it in consultation with the employees. Indeed, they must have a say in which targets to set and within which time frame.

3. Monitor employee performance and progress

Regularly monitoring your employees’ progress is crucial to understand if your MBO plan is working and if need to apply some changes. Sesame’s task planning tool makes it easy to assign tasks to employees, track their progress and measure their performance thanks to the automatically generated reports.

4. Provide feedback

Monitoring is not enough to improve your staff’s performance. You must also provide your employees with regular feedback where you discuss the progress towards the objectives.

5. Appraise and reward performance

Finally, your MBO plan should include performance appraisals. You might also want to introduce a reward system or an employee recognition program to maintain high motivation levels.