Management by Objectives (MBO) Tutorial | Overview, Steps, Benefits

What is Management by Objectives – MBO

Management by Objectives (MBO) is a personnel management technique or can say approach where managers and employees work together to set, record, and monitor goals for a particular period of time. Organizational goals and planning flow top to lower management through the organization and translated into personal goals for organizational members. Management by objectives is a systematic and an organized approach. MBO aims to improve organizational performance by aligning goals and subordinate objectives throughout the organization.

Meaning of MBO – Management by Objectives

MBO, or management by objectives, is often referred to as management by results (MBR). MBO is a famous term among academicians and practitioners because of 2 reasons. First, it focuses on objectives or results that are too crucial for managers to achieve them in a particular time period. Second, it is based on participative management, an approach that offers more motivation to individuals in an organization.

MBO

It is needed for MBO that the employees set measurable personal goals based upon organizational goals. One more concept of Management by objectives (MBO) is that all managers should participate in the strategic planning process for good implementation of plans. It includes ongoing tracing and feedback in the progress to reach objectives.

Principles of MBO-

1. 1. Focus on growth and development instead of failure and punishment.
2. 2. Open a channel for regular feedback instead of static weekly or monthly reports.
3. 3. Made objectives highly challenging but motivating as well for better results.
4. 4. Employees must be involved while setting objectives for a specific entity.
5. 5. Made performance-oriented reviews rather than speed-oriented.
6. 6. Focuses on goals rather than the methods.

Feature of MBO – Management by Objectives

• MBO is an approach & philosophy for management and not merely a technique.
• The main focus of MBO is on objectives.
• MBO is bound to have some relation with each other’s management techniques.
• Periodic review/feedback of performances is a more important feature of MBO.
• MBO offers more freedom to subordinates.
• MBO is results-oriented.
• MBO facilitates a Participative management.

Element of Management by Objectives (MBO):

• Goal specificity (Purpose of MBO)
• Training for MBO
• Top Management Support
• Participation (Decision Making)
• Performance feedback.

How does MBO work?

Management by objectives (MBO) aligns team member goals with the company objectives so team members feel much motivated and included at work. First introduced by Peter Drucker in his 1954 book “The Practice of Management,” the MBO model also focuses on screening team member performance using reporting tools and performance reviews. MBO uses objective standards to calculate team member and company performance.

Objective standards outline what is fair, reasonable, or acceptable in the agreement. Use these standards to assess team member productivity and identify opportunity areas within a team. MBO works because part of the MBO process involves management and team members aligning and agreeing on those objective standards.

MBO Process

Management by objectives or MBO is a system for achieving organizational objectives, improving employee participation. As a result, its methodology and procedure ought to make it easier to turn fundamental ideas into management techniques. Rigorous analysis, clarity, and objective balance are stressed heavily during the MBO process. The participation of the manager with the accountability of the results. The process of Management by objectives is not as easy as it appears to be. All managers require training and experience for developing the required skills.

The MBO process has many steps that are;

Step 1 ➔ Setting Organizational Purpose and Objectives

Step 2 ➔ Setting Subordinates Objectives

Step 3 ➔ Key Result Areas (Monitoring)

Step 4 ➔ Matching Resources with Objectives (Evaluating)

Step 5 ➔ Appraisal (Reward)

Step 6 ➔ Recycling (Setting MBO for next operating period)

1. Setting Organizational Purpose and Objectives:

The first basic step in MBO is to explain organizational purpose and objectives. Objectives can be found by answering a few basic questions like why the organization exists? What business domain do we belong to? What will be the product and services? These kinds of questions provide guidelines for the statement of purpose (SOP). These objectives in interaction with external factors find the long-range strategic objectives like ;

• whether to achieve growth through expansion in the individual business or diversify.
• What should be the blending of manufacturing the activities; and
• what should be a degree of vertical integration .

The objective setting starts from the top and moves downward to the lowest managerial level. This will go in sequence like

• explaining the purpose of the organizational firm.
• Long-range and a strategic objectives.
• Short term of organizational objectives.
• Departmental/Divisional objectives.
• Individual manager’s objectives.

2. Setting Subordinates Objectives:

The organizational objectives are achieved through the individuals. Therefore, every individual manager must know clearly what is expected to achieve. Each manager in the managerial hierarchy is both superior and subordinate except for the person at the top level and the lowest level. Therefore there are superior and subordinate relationships at each level. The process of objective setting starts with the superior’s proposed recommendations for subordinates’ objectives.

3. Key Result Areas : (Monitoring)

Organizational objectives and planning premises together offer the basis for the identification of key result areas ((KRA). It may be emphasized that Key Results Areas are derived from the expectations of different stakeholders and indicate the priorities for organizational performance. KRAs also represent the present state of an organization’s health and top management perspective for the future of an organization.

Example of KRAs applicable to most business organizations are;

• Profitability
• Market Standing
• Innovation
• Productivity
• Worker Performance
• Financial and Physical resources
• Manager Performance and
• Public Responsibility

4. Matching Resources with Objectives: (Evaluating)

When objectives are set carefully then they also denote the resource planning requirement. In fact, resource availability becomes a more important aspect of objective setting because it is the proper application of resources that ensures objective achievement.

5. Performance Appraisal : (Feedback and Reward)

The performance appraisal aspect of MBO tries to measure whether the subordinate is achieving his objective or not. If not, then what are the issues, and how these problems can be overcome.The purpose of Performance appraisal is to ensure that everything is going as planned and an organization is able to achieve its objectives.

6. Recycling : (Set MBO for New Objectives)

Performance Appraisal is the last aspect of the MBO process but Recycling is used as an input for recycling objectives and the other actions. New objectives are neither start at the top and communicated to the bottom nor are set at the bottom and go up. Setting Objectives is a joint process through interaction between superiors and the subordinates. Therefore, activities of every level may affect other levels also.

The 3 aspects involved in the recycling process are;

• Setting Corporate Objectives at various level
• Action planning
• Performance Review.

Advantages of MBO (Benefits)

Personalized Objectives: MBO allows employees to set their personal objectives according to their competencies, skillset, and strengths. This allows self-growth and skill development.

Responsibility: As every working staff sets his/her objectives, it makes them responsible to achieve their goals as they have set their own goals. This sense of responsibility also brings royalty to an organization.

Communication: MBO opens a communication channel between the top management and employees. By using this channel of communication, all ambiguities can be cleared up and the goals may be clearly understood.

Efficiency: As the MBO objectives are clear and time-bound, it helps increase productivity and the efficiency of the operational units.

Continuous Support: Unlike other management techniques, MBO offers a mechanism of continuous support throughout the MBO cycle.Managers continuously offer feedback, reviews, guidance, and monitoring to remove any problem that arises in the working environment.

Sense of Importance: Through proper appraisal and reward processes, MBO gives the employees a sense of importance and realizes that an organization values their work and they are a more important asset to the firm.

Unity of Goals: MBO introduces a general goal throughout an organization which means unity of goals. Measurement of Performance: MBO offers a mechanism for the measurement of performance for every individual in the organization.

Resource Optimization: The MBO process helps with resource optimization because only those who are competent use only required resources. It means resources are allocated according to the goals.

Clear Expectations: The objectives are measurable, attainable, and time-bound, it means end goals and expectations are clear-cut from day one ,when goals are set.

Disadvantages of MBO (Limitations)

Goal Settings and Organizational Culture:MBO seems limited when it comes to the goals settings. For example, what should be the nature of goals? Long-term or short-term? Quality-oriented or quality-oriented? MBO focused only on goals and objectives rather than the culture of the organization.

Time Consuming: The whole process of goal settings, appraisal, reviews, screening, and evaluation takes a lot of time and paperwork.

Goals-Oriented: MBO focused more on goals and objectives rather than the actual action plan and a course of an action.

Faulty Evaluation Process: Sometimes managers try to calculate employees from their perspective and competencies rather than the employees’ skillset. It means there are chances that an incompetent manager may involved in the evaluation process.

Too Much Expectation: Sometimes managers expect much from the employees and treat employees like ideal employees without leaving any room for the mistakes.This may lead to several problems and clashes between the management and the working unit.

Limited Growth: As the employees play a part to set goals as per the skill set. It leaves little room for self-growth because the employees are not willing to try out new and creative ideas rather they stick to the old methodologies.

Negative Competition: Although superiors reward employees for the efforts and goals achieved, it may generate negative competition among the other employees where everyone tries their best by hook or by crook.