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Management by objectives — a classic strategy for modern teams

Management by Objectives (MBO) is a strategic management method that's all about defining goals and hitting them.

It’s also a surprisingly positive outlook on doing business. 

Like many frameworks and philosophies in the business world, it was coined by uber-influential management writer Peter Drucker back in 1954. His book, The Practice of Management, explained how this method can be used to align an organization's goals with its resources, bringing a unified direction to the often chaotic world of business.

It might not sound like the most groundbreaking or exciting way of doing things, but the ultimate aim of MBO is success. And pretty much everyone wants that in some form or another.

Believe it or not, some companies and their owners can shy away from setting definite objectives, even when large sums of money are involved. The 'visionary' attitude that goes hand-in-hand with exciting startups can be hampered by a lack of realistic goal-setting, so Management by Objectives can bring some much-needed clarity to pioneering entrepreneurs.

But does this 1950's doctrine still hold up in today's business landscape? Is it a useful way of doing things for progressive, mission-based enterprises? Or is it an outdated work theory for a world gone by? Let’s take a look. 

What Is Management By Objectives?

Management by Objectives (MBO) is a business strategy that is used to provide direction to business activity. It helps managers and employees work together to improve performance, make better decisions, and focus on their most important objectives.

The theory behind it is that employees will be more committed and productive if they're involved in the process of setting goals.

It's a process of decision-making, delegating responsibility, and then executing on those decisions. It's a more systematic way of doing things than some people might be used to; I've certainly had roles where a good portion of my job involved looking for things to do before I did them. MBO would have prevented that kind of situation by providing a more structured set of goals, over timelines going from days to weeks to months to a year.

So rather than having a general idea of what you need to do at work (with the burden of constantly figuring out the specifics), MBO provides you with clearly defined objectives that you and your management agree on.

These would be, in Drucker's view, objectives that are challenging but achievable, with rewards built in as incentives rather than fear of failure as a motivator. They should be aligned with positive experiences of growth and development, and should work just as well for the individual as they do for the company.

Although the method was formulated many decades ago, it can still fit in nicely to modern corporate cultures, including high-tech startups and entrepreneurial environments that are all about the positive vibes.

Let's have a look at the benefits and drawbacks of MBO, and how it actually works out in practise.

Does Management by Objectives work? The upsides and downsides

So does MBO actually work? Considering it's still talked about 70 years after its inception, you'd have to assume it's had a significant impact on the business world.

Large-scale studies on specific MBO programs aren't so common, so there isn't a ton of quantifiable evidence to justify it with, but some of the concepts MBO is built on are so intrinsic to organizational performance that it's obviously been practised by countless companies without formalizing it as an actual doctrine.

That said, one 2018 study, published in the European Journal of Business and Management, looked at MBO in the context of the Kenyan Department of Tourism. The study assessed the influence of MBO-related performance appraisal techniques on the motivation of civil servants working there.

The values and goals of the organization anchored the program; it was intended to maximize performance and service delivery within the Department, "promote transformative leadership within the Government of Kenya", and "improve public service delivery that meets expectations of the citizens and other clients". The program intended to align those broader goals with the individual efforts of workers.

The result? A significant majority of employees agreed that objective setting in an MBO context led to increased motivation at work for them. A majority also agreed that performance feedback within the program boosted their motivation. Combined overall performance increased, too, throughout the studied cohort. The combination of helping to achieve organizational goals, as well as incentives for their own performance such as salary increases, promotions, praise, recognition, and extra training, made for a positive, determined workforce.

Most companies can make a success out of MBO if it's implemented smartly. But in the interests of balance, let's take a look at the advantages and disadvantages of the MBO methodology.

Pros

  • When employees are handed an objective without any sort of involvement or explanation, it’s tough for them to muster up any sort of motivation. So, involving employees in their own goal-setting increases motivation. It's a more democratic way of doing things, rather than employees acting on decrees that come down from on high - something less familiar to those in low power distance companies.
  • It helps bring personal fulfilment to employees that achieve goals on behalf of the company, because they become more invested in the outcomes of their goals.
  • MBO improves communication between management and employees by necessitating dialogue and feedback. Being able to voice opinions about plans without fear of punishment or ostracism means a more relaxed environment for workers to feel creative and valued.
  • MBO is a pretty flexible methodology; it can be put to use in any size of organization or context bigger than a small team. It can be applied to entire companies, or individual departments, and is quantifiable enough to test on a temporary basis to see how it works.

Cons

  • MBO can encourage organizations to repeatedly tamper with plans, rather than letting them continue as intended. The constant cycle of feedback and testing contributes towards this - and with the high focus on outcomes, attention can be diverted away from root causes of issues
  • It can be laborious and time-consuming to create plans more specific than you're used to; some firms prefer the vague, overarching goals of a company mission statement instead of the rigid ones that MBO requires.
  • It's not as comprehensive as you might think or a panacea for an unproductive company culture; it doesn't matter how specific your objectives are if you have a toxic culture or lack of proper accountability measures.

How does Management by Objectives work?

The most noticeable thing about MBO is that it's a collaborative method. That might not gel with your corporate culture if you're used to high power distance - having a large gap between the power of subordinates vs. their superiors.

But it's absolutely worth trying if you want more enthusiasm and buy-in from your workers, even if you don't think full creative autonomy is something that'll work for them.

We'll go through the steps to actually implementing MBO below, but these are the fundamental aspects of the method that Drucker recommends to make it work.

  • The process begins by defining specific, achievable objectives through shared discussion. This means participation from everyone involved; from all levels of management as well as those on the front lines. 
  • You'll also be deciding on specific methodology; i.e. how you're going to achieve those objectives. 
  • Then, during the execution of your chosen methods, you'll be observing performance and acting on feedback, with the intention of analyzing and improving performance as you go. This ties in with participating in support and coaching to align personal development alongside the company goals - as we saw before, these need to work in tandem for MBO to be a successful endeavor.

This setup allows managers to pace work accordingly and create a more productive environment. As a result of the ongoing feedback efforts, employees see their own accomplishments as they complete each objective, reinforcing their sense of achievement.

That's the bones of it. Interested in implementing Management by Objectives into your organization, company, project or team? Here's what you need to know about making it happen.

Five steps to implementing Management by Objectives in your organization

Step 1: Determine your organizational goals

Start at the start: the first step is to decide what you want to achieve as an institution.

Organizational objectives are going to be based on the mission and the vision of the company, so you'll have to start high up in the abstract. Your vision might be something like "inspire humanity", "accelerate regional transition to sustainable energy" or a similar lofty intention. This is a great starting point, but we need to drill down from here.

After your vision is identified, get more specific by drawing up objectives that help make that vision a reality. If you want to inspire humanity, how do you define 'inspire', which demographic can you realistically reach, what action do you want people to take, and in what time period?

At this point it's time to bring out an old favorite: SMART criteria. This is all about making sure your goals aren't pie-in-the-sky intentions, but realistically doable targets. Make sure they are:

  • Specific - quantifiable and precise, rather than vague or ill-defined.
  • Measurable - they have to produce indicators of progress you can track.
  • Achievable - you must have the ability and resources within your organization to be successful in these goals.
  • Relevant - make sure the goals act in service to your overall vision, not just temporary whims.
  • Time-bound - they have to have an actual timeframe to be completed by and for you to define success.

Step 2: Define your employees' objectives

Now, it's time to translate these organization-wide objectives to employee goals that serve the same purpose.

The organizational objectives have to be understood by employees. If they're given tasks without really understanding why they're being asked to do them, motivation won't come easily.

The overall philosophy behind MBO hinges on this critical part: essentially, it's about defining and opening communication channels between managers and employees to set up the democratic nature of the project.

So, in step two, you must translate the organization objectives into operations-level employee objectives collaboratively - discussing with employees to determine what's acceptable, how responsibility will be shared, and what benefits they'll get out of it. Goals can't be set by one side - they have to be agreed upon by both. Understanding and setting expectations properly is key here.

Once everyone is aware of their objectives and willing to participate, it's time to start executing on them and see how things work.

Step 3: Execute plans and deepen engagement

The focus of this part is on doing the work needed to achieve the desired outcome, and deepening the joint involvement between the parties in achieving the goals that have been defined.

By now, plans should now have been discussed properly with the employees, and expectations of responsibility set, so it's time to get them moving.

During execution of the plans, it's really important for management to provide the resources and support necessary to help workers achieve what's being asked of them. Without this, failure and resentment can appear and blame can be thrown around.

Step 4: Monitor progress

Another crucial part of MBO is the monitoring of progress - if it's not measured, it's not managed.

Compare the goals that were set with timelines for completion. Are you behind or ahead of schedule? Did you use the expected amount of resources? Were there any unexpected obstacles that you can better prepare for?

Observe projects as they happen to make sure tasks are being delegated properly and are aligning with personal objectives. Remember, this is all about engagement and worker buy-in, so if you find that employees aren't enjoying or learning from these experiences, it's time to change things up - otherwise you risk losing them.

The system can fall apart if it's left alone unchecked, so be diligent with recording and monitoring - just don't feel tempted to micromanage, which often ends up with resentment and inefficiency.

Step 5: Reward achievements

Finally, it's time to recognize the achievements that have been made and reward them accordingly. Remember, MBO is about positive reinforcement, rather than negative punishment, so if things haven’t gone to plan, constructive criticism is the way to go. 

After a successful performance evaluation, employees need to be rewarded right - and you need to deliver on your promises. Whether it's small gestures of appreciation or significant financial bonuses, keeping to your word ensures everyone will trust you and be more likely to enthusiastically participate next time you're making plans.

The warm glow of a job well done will emanate through the workplace, and when this happens, it's just a much nicer place to be. Properly rewarded success can really lift a company, and after an appropriate rest, your employees should be raring to go again for another taste of glory.

A classic framework for modern business

So are you going to implement Management by Objectives in your business? It's not the most fashionable methodology in business. In fact, Peter Drucker himself downplayed the importance of adhering to its structure:

"MBO is just another tool. It is not the great cure for management inefficiency … Management by objectives works if you know the objectives: 90% of the time you don't."

But even if you don't follow it exactly by the book, you can still take inspiration from its practical, results-based outlook. Knowing your objectives is surprisingly easy to dismiss when you're awash with creative ideas and enthusiastic colleagues. But getting smart about things and defining what you want to get before you get it - that's a pretty good way to make great things happen.

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