What is MBO?

MBO was invented by Peter Drucker in his 1954 book, “The Practice of Management.” He realized results from the modern workforce were measured differently from the agricultural and industrial workers who had dominated the economy until then.

Drucker noted that it’s more challenging to motivate a workforce who can’t instinctively see how their efforts contribute to success and created MBO as the solution. Put simply, it means including employees in a company’s goal-setting process and ensuring their objectives and outcomes are demonstrably aligned with business goals.

The MBO philosophy states that employees should be aware of how their efforts contribute to the company because it fosters an elevated sense of ownership and commitment. To make sure the workforce stays motivated and focused on their goals, MBO necessitates systematic performance reviews. These ensure employees are clear about their progress and successes and know which elements of their work require more attention to reach company objectives.

How to apply MBO

MBO has been such an influential tool, you might already use it without knowing. However, taking an intentional approach to applying it can help ensure you get the best from your team. Discover the steps to applying management by objectives below.

1. Set organizational goals

Start by defining your organizational objectives in the broadest possible sense, starting with mission and vision statements. A mission statement outlines the goal of your operation, your product/service, its primary demographic and the target location. Your vision statement is an idealistic sentence that describes the impact you want your company to have on customers and the world.

2. Break goals down into departments

As you move through the MBO process, you’ll break the goals down further. Start by looking at each department and analyzing its strengths and weaknesses so you can focus on areas that require improvement. Identify any weaknesses that negatively impact overarching organizational goals and develop management goals at the team level to address them.

Because the goals ladder directly up to business objectives, you have a clear picture of how team efforts contribute to improved performance. Importantly, supervisors have a clear picture of how their efforts fit into the bigger picture, pushing them to be more accountable and productive.

3. Collaborate with employees

Once you get down to the individual level, management by objectives necessitates that you conduct regular one-on-one conversations. This increases engagement and, therefore, motivation and autonomy.

Start by learning about each team member’s career goals, values, strengths and weaknesses. Use this information to explain how their values and objectives align with the company’s and emphasize their unique contribution to the business’s success.

Where possible, let employees set their own SMART goals and always make sure they’re involved in the process. Doing this encourages them to proactively work towards organizational goals rather than waiting for a supervisor or manager to steer them in the right direction. Because they know what they need to do and why, workflows are more streamlined and everyone works more effectively—together and individually.

4. Assess progress and provide actionable feedback

One of the best ways to enforce MBO is by conducting regular assessment and feedback sessions with department leaders, team leaders and individual employees. Although it can feel like a stretch to find the time, it’s imperative that performance reviews take place more than once per year.

Crucially, this ensures decision-makers’ understanding of how team performance aligns with company goals is always up-to-date and doesn’t slip. It also ensures that employees are always motivated to go the extra mile because they know their work is constantly under review and lapses in performance will always be noticed.

5. Reward excellent performance and encourage improvement

It’s important that management by objective leaders use positive reinforcement wherever possible, in addition to holding employees accountable for mistakes and underperformance. When individual or team efforts contribute to reaching or exceeding organizational goals, reward those involved and advertise their success and reward to the rest of the company.

Done correctly, MBO spurs increased motivation, performance and productivity across the entire organization because it clearly rewards work that is most beneficial to the company.

6. Review goals

Management by objectives requires continual effort because company objectives will change as you grow and achieve goals. Take the same approach with yourself and your leadership team as you take with employees, regularly conducting performance reviews and assessing how output relates to targets and company-wide results.

Benefits and drawbacks of management by objectives

MBO has been widely adopted—to the extent that many leaders use it without knowing. It’s stood the test of time due to its effectiveness and relative simplicity, but its rigid focus on goal outcomes doesn’t always address the complexities of the modern economy. Also, despite its effectiveness, management by objectives can be time-consuming and may not be appropriate for smaller companies or startups.

Let’s explore the pros and cons of MBO in more detail.

Benefits of MBO

Benefits of management by objectives include:

• MBO helps employees appreciate how their efforts contribute to success.
• Employees feel empowered and understood because leaders conduct regular conversations with them.
• Clear, precise goals help staff understand what’s expected of them and be accountable.
• Individual goals make each employee feel valued and important, inspiring a sense of achievement and loyalty.
• Employees self-direct more when they understand how their job relates to the bigger picture, increasing autonomy and job satisfaction — and freeing up leaders’ time to focus on strategy.
• Individual goals are always tied to company goals, which drives profitability and improves your employer brand.
• More performance reviews mean improved communication between the workforce and the leadership team.

Drawbacks of MBO

Drawbacks of management by objectives include:

• Setting up an MBO strategy takes time and effort, as does implementing it.
• Creating such tight guidelines for each employee‘s role could stifle their growth as they get too comfortable in their current position.
• Because MBO highlights achievements, it could drive an unhealthy level of competition between employees or lead to the same people always being rewarded.
• Over-reliance on business goals and targets for analyzing success can overlook individual successes and improved performance.
• When employees are overly focused on organizational goals and targets, they may get too stressed during challenging times, which could negatively impact performance.

5 Tips for implementing MBO

Here are some tips to help you effectively apply management by objectives:

1. Leave no space for ambiguity when setting SMART goals to make it as easy as possible for employees to understand what you expect from them.
2. Encourage active participation by learning about employees’ motivations and getting them involved in their individual goal-setting process.
3. Be flexible when it comes to creating KPIs. Circumstances can quickly change, and it’s important that you’re poised to pivot whenever necessary.
4. Provide employees with the necessary training and development to reach their goals.
5. Find ways to reward effort and improvement in addition to rewarding goal attainment to ensure the same employees aren’t always winning and everyone remains motivated.

Intentionally implementing MBO creates a goal-oriented company culture that prioritizes accountability, continuous improvement, and collaboration. Done right, it empowers employees to actively contribute to their and the company’s successes, improving performance at the individual, team and organizational levels.

Intentionally implementing MBO creates a goal-oriented company culture that prioritizes accountability, continuous improvement, and collaboration. Done right, it empowers employees to actively contribute to their and the company’s successes, improving performance at the individual, team and organizational levels.