What is Management by Objectives (MBO)? Learn Its 5 Steps, Advantages and Disadvantages

Ambiguity is the arch-nemesis of corporate success. In competitive markets, businesses cannot operate based on rough estimates and guesses. It is imperative to have clearly defined objectives in place to help the leadership and departmental teams plan their course of action. This is where the process of MBO comes to the rescue of enterprises struggling to create a coherent approach to achieve business goals.

Under Management by Objectives, employees and management have a say in setting the company goals, developing the action plans, encouraging equal participation, and aligning the objectives across the organization. As a strategic management tool, the MBO process is leveraged by many companies operating in hypercompetitive environments.

What is MBO?

MBO, Management by Objectives, is a strategic tool used to boost the performance of an enterprise. Herein, the business goals are clearly defined by the management and are shared with every team member with the motive of achieving every objective.

MBO is also known as Management by Planning. Under the MBO process, companies establish an MIS (Master Information System) that facilitates the comparison of actual performance with stated objectives. Many experts agree that one of the advantages of management by objectives is that it boosts employee commitment and motivation, and also facilitates better communication between employees and management.

5 step MBO process

The purpose of management by objectives is to help a company enjoy better performance through clearly defined and communicated goals. To complete the MBO process, you must follow the following steps: -

1. Define organizational objectives:

Having clearly defined organizational objectives is essential for the success of an enterprise. Though, this exercise has several other purposes also. To define these objectives, you must include all departmental managers and company leadership. The objectives are defined based on the understanding of what the business can and must attain in a given time frame.

2. Translate objectives to team members

After the organization's objectives have been set, you must brief the employees regarding the broad plans and strategies to achieve these goals. Herein, you must also have a one-on-one discussion with every team member to help define their personal goals. Your team members will also share their feedback about the targets and convey the resources required to achieve those objectives.

3. Monitor performance

To leverage the benefits of management by objectives process, it is vital for you to constantly monitor the performance of every team member in every department. On top of that, you must monitor the efficiency of every manager to identify any changes that may be required.

4. Evaluate progress

It is now time to review the performance of every employee as per the defined MBO framework. Herein you must enlist the departmental managers to be able to conduct in-depth reviews.

5. Reward achievements

Under the process of MBO, it is imperative to share continuous feedback on the objectives and results with the employees. This would enable them to track their performance and take corrective actions. Herein, you must also evaluate and reward employee progress. You also need to share an honest performance review to help the employees understand their performance.

MBO Examples

Marketing MBO Examples

Marketing is a data-driven process that focuses on the results. Some useful MBO examples for the marketing department can be as follows:

• Ensure a 33% growth in social media likes and shares.
• Increase regular website visitors by 25% per week.
• Boost the time spent by visitors on the website by two minutes.
• Generate 500 new leads per month through the website.

Sales MBO Examples

Sales are one of the most important processes for any company. Some important MBO examples for sales teams can be as follows:

• Reduce the sales cycle by 15 days.
• Increase the average ticket size by 33% in a year.
• Onboard 100 new customers in six months.
• Expand overseas sales by 20%.

Human Resources MBO Examples

Setting clearly defined HR MBOs, you can ensure perfect sync between the employees and company MBOs. Some examples of HR MBOs are as follows:

• Ensure compensation levels are at 8% more than the industry standard.
• Develop and implement a leadership training program.
• Meet with the finance team to understand new hiring requirements.
• Improve employee satisfaction levels by 25%.

Finance MBO Examples

Another key operational area is where it is easy to set quantifiable MBOs. Some examples of finance MBOs are as follows:

• Prepare a plan to raise $20 million in the next fiscal year.
• Increase asset-to-debt ratio by 5%.
• Review new compensation agreements.
• Ensure compliance with new statutory regulations.

What are the advantages and disadvantages of MBO?

Here are some of the most important management by objectives pros and cons to help you understand the various aspects of this concept.

Benefits of management by objectives

• Better communication between company leadership and team members brings transparency to the goal-setting process.
• Employees have a higher motivation to give their best efforts to achieve the stated goals as they would match their skills and strengths.
• Employees feel a sense of loyalty towards the enterprise as their goals have been tailored as per their capabilities.
• Specific MBOs for different departments offer clarity to team members regarding the path to success.

Disadvantages of management by objectives

• Sometimes employees can interpret that their only target is to meet the stated goals. This can result in taking shortcuts which compromises the quality of work.
• Employees are under stress to push themselves to the limit to achieve goals within a given timeframe.
• The focus of management can deviate from other non-quantifiable aspects like work ethos, work culture and scope for employee involvement.
• Management can get too focused on working per MBOs. Operations that are not covered under MBO can be left behind.

Final Thoughts

If you are looking to revolutionize the working style in your organization, then you can consider incorporating an MBO program to inspire your team members. You may well be surprised by the readiness with which the employees will accept this new system as it offers many benefits for them as well. By communicating management expectations in clear terms, MBO ensures that employees are in a better position to meet those goals.

FAQs

Q1. What is meant by management by objectives?

A1. It is a management system that evaluates the performance of employees against a series of targets that would help them understand their overall performance during a given period.

Q2. What are some examples of management by objectives?

A2. Examples of management by objectives will vary as per functions. For example, increase sales by 33% (sales), improve employee retention by 12% (HR), and reduce ad expenditure by 20% (marketing).

Q3. What are the 5 steps of MBO?

A3. The five steps of MBO are Define organizational objectives, translate objectives to team members, monitor performance, evaluate progress, and reward achievements.

Q4. What are the advantages and disadvantages of management by objectives?

A4. There are many advantages and disadvantages of management by objectives. The most important benefit is motivating employees to go for defined targets as they have better clarity. The most significant disadvantage is that it can lead to management focusing only on those areas where MBO is applicable.