What Is MBO? Understanding Management by Objectives

Management by objectives is a business strategy in which managers prioritize company goals and ask team members to direct their individual actions toward meeting those goals. Austrian-American management consultant Peter Drucker (1909–2005) first articulated the MBO process in his 1954 book The Practice of Management, in which he described a way for managers to translate organizational objectives into smaller tasks. Drucker argued that giving workers clear action plans, managers could better tie employee performances to company objectives. And from an employee perspective, they could enjoy more measurable levels of success since they were tying their own performance to key results in a particular initiative.

The MBO concept of management breaks down into a step-by-step process for achieving organizational goals. In order, those steps are:

1. 1. Executives set organizational goals. The management by objective process begins with top management determining the goals of the organization.
2. 2. Executives and managers turn broad goals into specific objectives. Next, the management team settles on individual objectives that will help the company in its broader mission. An individual objective can focus on both short-term results and long-term results, and companies can pursue more than one objective at a time.
3. 3. Management identifies individual goals for team members. The MBO system then calls upon managers to take the larger-picture goals and break them down into individual objectives. Each employee receives an individual plan that helps the company meet its larger goal. Managers can also create checkpoints and success metrics, which will help all parties track individual progress.
4. 4. Employees receive a course of action. Managers meet with their charges and present them with personal objectives and a roadmap. They seek input from the employee to ensure they are setting smart goals bound to specific objectives. Some of these specific objectives require solo work, and some require teamwork. Managers clearly articulate project timeframes, deadlines, checkpoints, and metrics for success—all of which they have brainstormed in the previous step.
5. 5. Employees embark on specific objectives, and managers monitor performance. After setting objectives, managers empower their workers to dive into the project—while always remaining oriented toward the broader organizational goals. As the project unfolds, managers check in with employees to see how they are doing, problem-solving as needed should issues arise.
6. 6. Managers offer performance appraisals. After an employee has reached a checkpoint in the project timeline, managers offer them a performance review to track progress and offer a venue for feedback. The process then continues, with steps repeated as needed, until the completion of the company objective.

Management by objectives has earned a reputation as an effective management style that simultaneously advances organizational goals and individual growth. This reputation stems from five clear benefits of the MBO system.

1. 1. Unified team atmosphere: Organizational morale blossoms when all team members work together toward common goals. The MBO method lets employees trust that their individual efforts are truly helping the organization at large.
2. 2. Clarity for all stakeholders: The MBO management technique lets managers set specific goals with defined performance indicators and clear metrics for success. This lets employees know exactly what they must accomplish to stay on track.
3. 3. Streamlined performance evaluations: When managers and employees are on the same page about specific goals, performance management reviews become more predictable for both the employee and manager. Tensions rarely emerge because the stakeholders share an understanding of company goals.
4. 4. Clear decision-making structure: In MBO organizations, upper management sets the course through a series of objectives, and employee roles stem from those objectives. This top-down model lets employees focus on their specific objectives, and it gives managers the authority to steer employees to meet those objectives.
5. 5. Stable work environment: This form of project management ensures that all team members understand their duties toward a particular objective, and thus to the organization at large. This promotes organizational cohesion and a clear definition of roles within the organizational structure.

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