Management By Objectives - For Optimal Business

By Sean Stevenson – Latest Revision January 12th, 2021

Defining Management By Objectives (MBO)

Do you need to improve the overall performance of your organization?

Most business owners would say yes.

Management by objectives (or “MBO”), is a performance enhancer for business.  It has gained increasing popularity in recent decades, and is known for being a practical methodology.  

MBO allows for:

  • Improved planning
  • Faster completion of goals
  • Higher accountability at all levels
  • Elevated interdepartmental communication 

Management by objectives was first popularized by Peter Drucker in his 1954 book The Practice of ManagementIt has since evolved to serve many companies.  

In our modern and increasingly globalized economy, a healthy business is one that stays ahead of the curb.  That means using a solid business methodology to map out a company’s future. 

MBO has been around for decades.  It represents a practical way for building a highly productive business structure.

There are several ways to execute an efficient MBO strategy.  I will detail the most effective of these.

In this guide I will:

  • Explore the definition of management by objectives (or MBO, its acronym).
  • Offer a general overview of what MBO entails.
  • Lay out the five stages of MBO, and detail each phase as it applies to a business scenario.
  • Detail the important benefits and drawbacks of MBO.
  • Lastly, offer final thoughts on MBO, and how it might positively impact your business.
Management By Objectives

"Management by objectives works. You have to willing to adapt, and you have to consider the impact of what you're doing on others. Be responsive. Accept feedback. It won't happen overnight, either. Nothing ever does."

-Anonymous

Brief Overview - Using Management By Objectives

Using this process, the goals of an organization can be defined and planned in detail by management.   When ready, they then convey these goals to members of their organization, who offer their feedback in turn. 

The conversations that come from this phase are invaluable.  They allow for relevant and attainable goals to be set, which are then acted upon by everyone involved – from top to bottom.

This empowers an organization’s efforts to pursue realistic goals.  A management team can now remain coherent and organized in its mission.  They remain in constant contact with key stakeholders who directly affect the outcome.  Continuous appraisals of projects and how to best move forward in completing them, can now be fully realized and understood.

As an organization steadily completes its goals, both management and their subordinates continually reevaluate.  This ensures flexibility should circumstances or requirements change.   

However, it is not enough to simply remain in close contact during important phases of internal development and growth. 

Hence, measuring employee performance is another key portion of management by objectives.  Since everyone must play a part in the stratagem taking place, personal accountability at all levels of the organization is a requirement. 

The expectation is that each employee satisfies the established objectives where applicable, as laid out by their leaders.  Personal goals are openly distributed and tracked.  This keeps everyone accountable, as they each play their role in the larger business strategy. 

Moreover, as progress evolves, information about important achievements are distributed to all levels of the organization.  This allows everyone to see their organization’s accomplishments over time.

Ideally, it would be the employees themselves who set their own goals.  MBO encourages this, in fact.

Many Fortune-500 companies actively promote self-driven planning from their workers (in line with the tenets of MBO).   This helps to keep them highly motivated and forward-thinking as they progress. 

Overall, MBO helps workers to plan their own personal development.  It gives them the tools required to be effective.  As they engage with the ever-increasing responsibilities and needs of their organization, the systemic approach of MBO reinforces their efforts.

As Noted:  For your reference and use, below are the 5 stages of management by objectives.  These are each laid out in detail:

1. Define The Goals Of Your Enterprise

Setting clear goals should always be the first step in creating a business strategy.  This will help you define your ideas and explore how to best move forward.

Initiating management by objectives requires that managers from all levels participate.  In the setting of goals, feedback from every department of the organization is integral.  This ensures that the objectives being set are both relevant and realistic in nature.

Peter Drucker, who created MBO, often used the SMART goal setting method herein, to ensure each objective made sense. 

This means ensuring each goal was Specific, Measurable, Attainable, Relevant, and Time-bound.

Gaining a contrast of ideas from all levels of your organization is especially important here, due to the following:

  • Any glaring internal weaknesses in your productivity structure can be addressed by the larger group
  • If there are unknown factors involved, they can be explored and researched thoroughly from numerous sources and opinions
  • The best opportunities for growth can be discussed at length, with all stakeholders involved
  • Plans will be more functional and adaptable given the variety of resources involved
  • Any serious concerns can be addressed quickly

Example

A toy manufacturer is seeking to set goals that will assist in its growth.  To this end, they hold an internal meeting, inviting all the key managers from every level of the organization to participate. 

During the meeting, various ideas are explored.  Concepts that will encourage growth or improvement are the primary concern.  However, there is some talk of secondary concerns that may involve proactivity from certain levels of the organization (to rectify outstanding issues).

Key Takeaway

The idea of this initial meeting is important.  It allows for well-defined organizational goals to be fully explored.  Outstanding concerns can also be addressed. 

Once these ideas have been fully interpreted and evaluated, each manager is given specific tasks to pursue in a logical order.  They will then debrief employees about important objectives, plans, and key strategies to follow.

Pro Tip:  Try to involve as many managers and supervisors as possible in the initial meetings.  This will ensure you get a strong foothold in terms of controlling the direction of your objectives.  Your organization will only stand to benefit from a widely concerted effort.

2. Debrief Employee Metrics And Objectives

With management and key stakeholders in agreement, the plan is now put forward.  All employees are carefully debriefed. 

Herein, each manager will work with subordinates to establish their personal goals.  Often, this is accomplished in one-on-one discussions.  It is during these talks that the subordinate will detail what they can accomplish within the given framework.  Resources and timeframes are discussed in detail, to ensure accountability and feasibility.

It is important to share feedback.  This is due to numerous factors:

  • Each goal will require continuous monitoring and feedback on progress to ensure its effectiveness
  • The goals that one department finds feasible may not work for other departments in the same way
  • Some plans may need tweaking or radical changes if they prove too ambitious in the short-term

Example

In a toy manufacturing plant, the plan has been decided upon, and key managers have been debriefed.  They will now take the goals, metrics and recommendations to their subordinates, who will act on their objectives accordingly.

Key Takeaway

With goals in place, debriefing can now take place.  Managers may now give subordinates instructions and metrics to pursue.

Ensuring that managers and employees at every level have all the information and resources they need is critical.  To ensure the success of any plan or goal requires open channels of communication.

In this way, the larger objective is then acted upon at every level of the organization.  Both employee, manager, and company, are now striving to meet this framework for achievement accordingly. 

Any concerns or issues can be proactively dealt with.  Remedying a situation will be based on well-informed action at this point.

3. Stimulate Participation

Stimulating participation among employees and management is integral to the success of any plan.

By setting individual objectives, an organization is invigorating its workers with a heightened level of engagement.  Plans are tailored to suit both the individual’s and the organization’s needs.  This empowers employees to perform, as they are now stakeholders in a larger plan that directly affects them.  They will want the objective to succeed, as they will see the benefits it brings firsthand.

Stimulating employee performance and progress is important for:

  • Creating a dynamic workplace
  • Ensuring the success of of corporate objectives
  • Highlighting organizational workplace culture
  • Providing continuous room for employees to grow
  • Allowing corrective actions to be taken
  • Identifying unknown difficulties as they arise

Example

Alice sits down with Andrew to discuss his goals in greater detail.  As an individual, Andrew is an excellent performer.  Alice knows this and offers him a challenging project to pursue.

Andrew is excited at the prospect of proving himself to his employers, and agrees hastily.  Yet he also mentions some slight concerns, which Alice helps him to address.  As details are discussed, a manageable way forward is discovered. 

They both walk away from their meeting satisfied with this initial outcome.  

Further, having reached an agreement with his employer, Andrew will be motivated to pursue his newfound objective.

Key Takeaways

Stimulating and heightening worker engagement is a recipe for success.  Empowering others to improve themselves and their workplace is the highest form of MBO.

Setting individual goals for each employee will give them a sense of purpose.  Empowered employees are far more effective at making decisions and producing effective results.

4. Monitoring Performance and Progress of Employees

The management by objectives workflow is integral for improving the effectiveness of management at all levels.  Yet it is also of equal importance that progress and performance of employees in the organization be monitored.

This ensures that issues can be identified as they arise.  If certain employees are struggling with their objectives, this too may be addressed.

Monitoring employee performance and progress is important for:

  • Ensuring objectives are being met in a timely matter
  • Highlighting organizational achievements for everyone to see
  • Providing continuous feedback and room for improvement
  • Allowing corrections or alterations to be made if certain goals prove unattainable
  • Identifying both struggling and highly productive employees for future reference

Example

In certain departments, there has been great success.  However, in other departments, there are metrics that simply cannot be met as expected.  As it turns out, this is not the fault of the employees involved. 

The issue it turns out, is that the resources available to each department vary wildly.  Some goals were simply not attainable given varying circumstances. 

To counteract this, a more attainable goal was set for some departments and individuals.  This allowed them to improve in the shorter term. 

The original goals can be slightly downgraded also, to give them a long-term goal to aspire to.

Key Takeaways

Continuous monitoring of performance and progress is important for many reasons.  A key aspect of this monitoring process, is that it allows you to make changes as necessary. 

Some departments and their employees will differ from others in terms of what they can accomplish.  For these, you can set different goals, while maintaining your metrics elsewhere.

Unfortunately, if some employees are drastically underperforming or undermining corporate objectives, you may have to consider disciplinary action. Termination in extreme cases may be your only recourse if there is a significant concern.

Management By Objectives

"A good leader is one who knows the way, goes the way, and shows the way."

-John C. Maxwell

5. Providing Feedback

 The providing feedback aspect of MBO is an analysis of employee results.  This step involves rewarding employee progress.  It includes honest feedback on what was achieved and not achieved by each employee.

Management by objectives relies heavily upon continuous feedback.  The results of efforts and their achievements must be continuously analyzed.  This process enables both management and employees to make corrective actions to their combined efforts.

Ideally, continuous feedback is also frequented with evaluation meetings.  It is during these meetings that both a manager and their subordinate can privately discuss their results in detail.  

This creates a dynamic where efforts and achievements can be actively understood.  Using the best resources and information available:

  • Feedback is promoted and continuous in this state
  • Objectives tend to be motivated by meaningful progress
  • Key results can be obtained more readily, since everyone is driving in the same direction
  • Performance evaluations can often contribute to personal development
  • Professional relationships are founded on shared ideas, ideals, and the setting of objectives
  • Completed goals can be evaluated with objectivity from both manager and worker alike

Example

Meetings are held whereby both subordinates and their managers meet to discuss results.  These are private sessions, so as to ensure confidentiality and comfort.

Rewards are given to those who meet their goals or performed exceptionally well. 

For those who struggled with their objectives, new metrics are set.  Advice and additional learning resources are also offered.  In tandem, a manager may interview the struggling employee to gain important insights about their performance issues.

Key Takeaways 

Completed objectives are a cause for rewarding employees.  Feedback is also used to establish the effectiveness and important outcomes of a positive development.  This helps to reinforce the characteristics that led to the achievement.  

The next assignment of goals and ideas are discussed.  This gives employees some idea of what future expectations or projects may look like.  It also offers a chance for everyone to discuss the details of what has been learned.

These learning and feedback loops promote internal development.  They should be encouraged.

Organizational Performance Evaluation

Evaluating the overall performance of an organization is integral to its continued success.  Evaluating strengths, weaknesses, opportunities, and threats (sometimes referred to as SWOT), is something every organization should explore in detail.  This process falls to the participating managers. 

Often, this will take place in a new series of meetings.

In these new sessions, the management by objectives approach will be reviewed in detail.  The focus will be what progress has been made, and how this might be further expanded upon.

Overall performance evaluation is an important resource for the following reasons:

  • It allows for important discoveries to be discussed
  • An organization’s overall progress can be analyzed
  • It promotes the communication and interpersonal relationships that lead to a thriving business practice
  • A historical record of performance can be established and referred to

Example

The toy manufacturer has now evaluated the overall performance of their organization.  In doing so, they have discovered areas that clearly need improvement.  However, they have also identified clear strengths in their business model. 

They will use this informed knowledge to create a stronger business practice.  Moreover, they will develop more resources in areas where they have found glaring weakness. 

After this process has been effectively repeated several times, a stronger business model will emerge.

Key Takeaways

A performance evaluation is an asset that allows both strengths and weaknesses to be readily identified. 

Areas that fall short can be improved upon.  While already strong portions of a business can set the bar higher for themselves.  As they achieve their objectives, a business can develop new ideas, products, and future goals.  This form of continuous improvement is integral for internal and external growth.

Ensuring Continuous Appraisal And Improvement

By this phase, performance reviews and goal-setting should now become routine for all employees.  It is the role of management to positively reinforce appraisals and improvements.  They should be seen by employees as both a learning opportunity and a chance for advancement. 

These continuous reviews detail the overall success of individual employees.  This is important due to several factors:

  • This appraisal helps employees understand where they are professionally, and where they must improve
  • It helps to keep employees accountable for their own performance
  • It promotes transparency, offering important insights that can help guide an organization to new heights

Example

A state of continuous feedback and improvement now exists within the toy manufacturer.  Stakeholders actively participate at all levels of the organization.  Like a second-nature, goals can now be set and proactive effort exerted in their pursuit.

Performance evaluations and organization-wide improvements are seen as a chance to create “a better workplace.”  Both employees and management are driven by simplifying their own processes, while also working to create new (and better) opportunities. 

Key Takeaways

Performance appraisals keep everyone -including management- accountable.  It promotes open-ended viewpoints, which can help distinguish areas that are in need of improvement.

Important Benefits of Management By Objectives

  • Goals are specific to each individual and department, making them more effective.  If certain goals prove unattainable in the shorter term, they can be altered to suit more current needs.
  • Management by objectives drives improvement at every level of an organization.  This is essential to cultivating an enterprising vision of the future.
  • Helps employees to appreciate their responsibilities and active roles in an organization.  Management by objectives stimulates others to take ownership of their workplace. 
  • Personal goals reinforce the need for personal development.  The idea of continual education is a powerful one.  This empowers everyone.
  • Promotes openness, transparency, and better teamwork.  This system can create a powerful workplace culture, if executed with finesse.
  • Managers can guide subordinates.  In turn, subordinates can offer managers important information from the “front lines.”  This aids in the decision-making process of all parties involved.  This is a unique advantage of the management by objectives system.
  • Enhances communication of corporate objectives, ideals, practices, and vision.  Helps to get everyone “on the same page.”  An excellent means of improving morale throughout any organization.
  • Keeps management accountable, while accentuating their vision for the future.  Using this method, managers find themselves accomplishing and pursuing goals that are far more advanced than what they originally thought possible.
  • Employees are often assigned unique responsibilities.  This helps them to feel uniquely valued, promoting their personal loyalty.

Potential Drawbacks

  • The management by objectives system is often considered taboo by many workplace cultures.  It is not always typical to have employees setting their own objectives.  Nor is it often considered ideal to have subordinates speaking plainly with their superiors about the limitations of their organization’s infrastructure. 
  • Management can easily forget its own role in achieving consistent objectives.  They may fall prey to a “set it and forget it” mentality, whereby they will no longer actively participate in the process.  Managers should not merely give orders; they must remember to work alongside their own people.
  • Operational issues might be ignored if goals are all that matter.  The leadership involved must give careful consideration to the circumstances of an organization.  Before any objective is set, the goal must be deemed highly relevant to improving the existing framework(s).
  • Leadership and stakeholders may not buy-in to this method if there is little will to make necessary changes.  Getting people “on-board” can certainly prove a challenge, as some of the methods of MBO are considered unorthodox.
  • Management by objectives should not be viewed as a “cure-all” for organizations with deep systemic issues that have long gone unresolved.  It is best viewed as a tool for improvement.

Studies Indicates A Lack Of Planning

According to a poll conducted by newswire.ca, “76% (of businesses polled) do not have a governance framework or structure in place.” 

As depicted above in the pie-chart, most organizations today do not have a strategic plan in place concerning their growth models.  Less than 25%, in fact, have an actual framework or strategy in place.

This shocking revelation details the dire need for strategic planning in our business world today.  

Without a coherent strategy in place, a business may suffer catastrophic failures that can lead to insolvency.  Countering many of the potential negatives that can ensnare an enterprise, merely requires effort, forethought and prudent planning.  

For any modern business seeking to secure its own interests, a well-devised system and strategy is imperative.  These more recent trends towards a lack of governance are unfortunate, and will likely prove costly in the future for many would-be stakeholders.

Final Thoughts and Conclusion

Management by objectives is a systemic goal-setting routine that can greatly optimize the larger efforts of an organization.  Used effectively, employees and management alike will feel more valued.  Discussions at all levels of an organization tend to benefit greatly from the feedback loops that are established.  This is important for both the immediate and distant future. 

After its successful implementation, management by objectives tends to ensure that goals are reached far more quickly than they would have been otherwise.  Moreover, employees tend to gain an innate understanding of the importance of their role to the organization.  There are also often noticeable improvements in the professional relationships of the stakeholders involved.  The continuous feedback of all parties tends to create stronger and more dynamic team efforts.

Any concerted effort after all, is rooted in mutual understanding.

The main strength and concern for the management by objectives approach is communication.  If not controlled properly, poor communication can lead to wrongful portrayals of a larger goal.  This can create a negative atmosphere where workers wrongfully believe that they are being persecuted for short-term gains (often cited as “making a certain manager look good to corporate”).

It must always be the primary concern of any organization to extend a sense of gratitude towards its employees.  Showing them that they are valued as part of a larger operation is key to improving general morale.  This will also create further discussion about the future of the company, and how ideal outcomes might be reached in shorter time-frames. 

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