Management by Objectives (MBO): Definition and Examples

Updated March 10, 2023

Strategic management models can help companies better define their primary objectives and achieve them. One such model called management by objectives (MBO) is common in a variety of industries. Understanding the concept of MBO can help you better understand how to use strategic models such as this one to foster success and progress in a company.

In this article, we define MBO, explore its benefits, show you how to create MBO and provide examples for reference.

What is management by objectives?

Management by objectives is a strategic management model that uses prioritized company goals to determine individual employee objectives. MBO allows everyone in the company to see what they've accomplished and how each individual accomplishment relates to the top goals and priorities of the company. This shows how individual employee activities can influence company objectives and highlights the importance of individual employee contributions to the greater goals of the business.

Benefits of MBO

Using an MBO can have the following benefits:

Performance improvement: MBO can greatly improve employee performance in the workplace. Detailed planning and highlighting individual contributions can help increase employee morale and increase performance and profits.
Sense of identity: MBO can give employees a greater sense of identity with the company by highlighting their contributions. Employees may feel proud that they're involved in the goals of the organization and become more productive employees.
Career growth: Employees have the opportunity to further their careers under an MBO management style. Effective management takes an enormous interest in improving and enriching the skills of employees and provides many opportunities for this type of training to happen, as they benefit the entire company.
Career focus: MBO can also help create a focus on specific career paths, highlighting their importance in the company. This may help employees better understand the role they play and how to contribute more to the business over time.

How to create your own MBO

You can follow these steps to create an effective MBO:

1. Define organizational goals

It's important to first define the primary objectives or goals for the organization, so the company has a metric by which to measure individual contributions. Primary objectives also help ensure the company has a unified path to follow for improvement, innovation and basic business advancement. Define the company's goals by creating a list of potential primary objectives and determining which objectives best fit the company's abilities and are most relevant.

2. Create employee objectives

Once the company has firm primary goals, you can develop objectives or steps to achieve them for individual positions. Try separating your goals into smaller objectives to create a timeline that you can follow. Communicate the role of each team member in reaching those objectives and clearly define their own goals. You can provide a written summary to each employee to avoid confusion and create a written record of their goals.

3. Continuously monitor performance and progress

An MBO can create more effective management, but it can also be important for monitoring the progress and performance of employees. Monitor employee progress and performance while they complete their individual objectives in the designated timeline. Look for alignment with company goals and success in each individual objective. You can also monitor for quality and performance to ensure employees meet goals within company parameters. Consider creating tracking sheets for progress and performance and host regular meetings for the team to discuss obstacles and celebrate achievements.

4. Provide feedback

An important part of a successful MBO strategy is mutual feedback between managers and employees. Feedback can help each person in the company understand how their contributions affect others and whether they're meeting their own responsibilities and provides a unique opportunity for professional development. When employees reach a goal, provide feedback on their work, their progress and the quality of their contribution. Then, ask for feedback on your management style and progress.

5. Conduct a performance appraisal

The last stage of the MBO process is performance appraisals. Once you complete your goals, appraise each team member's overall work. Review their performance throughout the project to determine where they excelled and where they can improve. Appraisals not only allow the company's leaders to better understand the individual contributions of each team member but also provide a written record of company progress that managers can use as a metric to measure future progression.

Examples of MBO

Here are examples of MBO that you might experience in the workplace:

Human resources example

The HR department typically uses MBO to set specific goals. Here's an example:

Teller and Co.'s human resources department set a goal of maintaining an employee satisfaction index of 85%. Once HR has created a plan to reach that goal, the leaders explain that goal to their employees. Through feedback, they learn new ideas to help make the process more efficient and to better understand how employees currently feel about their positions. The department determines that to reach this objective, they must create monthly evaluation processes and feedback opportunities to continuously monitor satisfaction and determine where to improve.

Marketing example

Marketing departments typically align their goals with company objectives using MBO. Here's an example:

Aran and Sons, Inc. sets a marketing goal to triple its social media following in just one year. Employees first gather performance data to determine their performance cap or how well the team can perform with current resources. They then define everyone's role in the marketing team and create a list of objectives for each team member that contributes to the primary goal. The leaders then research what steps to take to triple their following, applying any new information to each team member's individual goals and determining whether to hire more personnel to spread the workload.