Management by Objectives (MBO)

Aligning Objectives With Organizational Goals

Management by Objectives (MBO) - Aligning Objectives With Organizational Goals

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Management by objectives opens a window onto organizational strategy.

In many organizations, it's hard to remember a time when non-managerial employees were kept in the dark about strategy.

We're often reminded about the corporate mission statement, we have strategy meetings where the "big picture" is revealed to us, and we're even invited to participate in some business decisions. We're also kept aware of how our day-to-day activities contribute to corporate goals.

But this type of managing hasn't been around forever. It's an approach called Management by Objectives (MBO), a system that seeks to align employees' objectives with the organization's goals. In this article, we'll look at how you can use MBO to motivate and engage your team.

About the Tool

Peter Drucker developed MBO, and published it in his 1954 book, "The Practice of Management." It received a great deal of attention, and it was widely adopted until the 1990s, when it seemed to fade into obscurity.

The idea may have become a victim of its own success; it became such an integral part of modern business practice that it may no longer have seemed worthy of comment. Today, it has evolved into the Balanced Scorecard, which provides a more sophisticated framework for essentially the same process.

Advantages and Disadvantages

Using Management by Objectives with your team offers several benefits.

First, MBO ensures that team members are clear about their work and how it benefits the whole organization. It's easy to see why this type of managing makes sense: when the individual parts of an organization work well together, the whole operates smoothly and efficiently. By focusing on what you're trying to achieve, you can quickly distinguish between tasks that you must complete, and those that may not be worth your time.

Implemented on a team level, MBO can be seen in many of the key techniques needed for effective team management, including team briefing, goal setting, performance appraisal, delegation, and feedback.

On an individual level, we all want to see our work as purposeful and meaningful, and MBO makes a clear link between individual effort and the organization's mission – this is great for our sense of purpose!

One disadvantage of MBO is that it can be challenging and lengthy to implement. When applied on an organizational level, MBO needs the organization's full commitment, and it also needs an underlying system for tracking goals and performance.

Because you must transmit goals from level to level with agreement, goal transmission can be slow. This means that full implementation of MBO can be time-consuming, particularly if non-accounting-based goals are included.

This is perhaps why MBO has evolved into the idea of the Balanced Scorecard: MBO on its own may too easily slip into being nothing more than a financial management mechanism.

How to Use the Tool

Drucker outlined the six-step process for MBO shown in Figure 1. Each stage has challenges that you must address for the whole system to work effectively.

Figure 1: The Six-Step MBO Process

Diagram: The MBO Process


To use MBO with your team, follow the steps below.

Step 1: Set or Review Organizational Objectives

MBO starts with clearly defined strategic organizational objectives, expressed in concise, easily-understood Mission and Vision Statements.

These statements should contain specific goals. Vague goals such as "improving customer satisfaction" may mean little to team members; and they're also difficult to measure. A better objective is to "reduce customer complaints by 90 percent." This objective is exciting because it's challenging, and it's much easier to measure.

Remember, if your organization isn't clear about where it's going, no one working there will be either.

Step 2: Cascade Objectives Down to Employees

To support the mission, the organization needs to set clear goals and objectives for every business unit, department, team, and employee. (These goals are cascaded down from level to level.)

To make MBO goal- and objective-setting more effective, use the SMART acronym to set attainable, clear goals. SMART goals are:

  • Specific.
  • Measurable.
  • Agreed.
  • Realistic.
  • Time related.

(Notice the "A" in SMART stands for "Agreed" in a team context. When used on a personal basis, "Achievable" is sometimes better, but, with MBO, agreement about goals is fundamentally important.)

It's not enough to set the goals and objectives at the top...

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