Laura Iñiguez, Content Manager at Hirebook
Laura is a content strategist focused on Human Resources, People Management and Culture. She has previously worked as a Talent and Corporate Culture Specialist and as a Social Media Manager for renowned companies such as Sheraton Hotels.
Pub: August 26 2021
. Upd: September 22 2021
Management by objectives, AKA "MBO" is a management practice coined by Peter Drucker in the late ‘60s as he began to describe better ways to manage knowledge workers compared to the agricultural and industrial workers which preceded us.
Table of Contents:
- What is Management by Objectives (MBO)?
- The Key Steps and Components of MBO
- Pros and Cons of MBO
- MBO Examples
What is Management by Objectives (MBO)?
In the industrial and agricultural areas there are tangible outputs that each process delivers which can be easily measured. With knowledge workers the outcomes are not as easily measured, and therefore required the development of new management techniques. MBO was the embodiment of a comprehensive series of ideas that Mr. Drucker proposed.
The idea of MBO have gone through several evolutionary stages since the '60s, including the work from doctors Kaplan and Norton in the late '80s called "The Balanced Scorecard" and, more recently, through the work publicized by John Doerr in his book "Measure What Matters" in which he describes "OKR" or Objectives and Key Results, based on some ideas that began in Intel in the late ‘70s.
The Key Steps and Components of MBO
The primary idea of MBO is to identify the few key objectives that individuals should be working to achieve. These objectives should typically be phrased in an outcome manner, with just two elements: a verb and a noun. For example "Increase Sales” or "Grow our customer base".
In the MBO body of knowledge, any employee would have three to five objectives which would be reviewed on an annual basis.
OKRs, the more modern version of MBO, takes into account the faster pace of business, the abundance of information, the need for organization agility and refines this model to say that for each objective one should have one to three key results, or measurable deliverables, that we can monitor to ensure the employee is making progress on their goals.
The Five Steps in MBO:
- Identify Company’s Objectives: Leaders must identify clear, realistic, measurable and achievable objectives that are aligned with the company’s mission and values, to guarantee best results.
- Translate Objectives to Employees: Once the objectives are decided, translate and assign them to employees. Make sure each employee is aware of the objectives and have no doubts about their participation in the process so they can cooperate with the organization’s larger goals.
- Monitor Progress: Making progress measurable is key. Management must provide the resources their employees need and monitor progress to see how well they perform and if they are delivering on the agreed objectives. If objectives are being met and management shows so to their teams, they will likely experience professional growth and feel motivated to continue.
- Evaluation and Feedback: Management must evaluate progress and provide feedback to their employees. MBO usually focuses on positive recognition.
- Reward Performance: Do a Performance Review and reward those who are staying on track and performing high.
Components of MBO
Though the MBO process is defined by just five steps; there are also a few components to consider that affect each step, so although five steps sounds simple enough, not paying attention to these components will result in not getting the desired outcomes since they contribute to the success of MBO and the organizational understanding of what your company wants to achieve. These components are:
Types of MBO Objectives:
1. Strategic: These are the broad, general objectives determined by company management in step one. These should always be set first and then used to determine later objectives.
2. Tactical or Team: More specific objectives set to teams or departments. This type of objective may require the collaboration of other teams or groups to achieve a shared goal.
3.Operational or Individual: Specific objectives belonging to an individual. These can be very different from employee to employee.
Quantification of Objectives:
Quantification is providing clear outlining and definition of the requirements of each objective. Using the SMART framework will help you to provide this information.
The final component in MBO is to perform a performance appraisal, or performance review. Including an initial evaluation, providing feedback and rewarding good behaviors.
Pros and Cons of MBO
There are a variety of benefits of MBO, including employee engagement and employee experience. But to name a few others:
- Increased Participation: creating a positive work environment since employees feel the impact of their performance.
- Motivation: As employees see the impact of their performance, they feel motivated to keep getting high results.
- Collaboration: When motivated, employees try to help each other to have better chances of succeeding as a team.
- Self Direction: With the MBO system, employees must be aware of their own individual objectives, so they tend to self-direct themselves on daily activities.
- Satisfaction: Satisfaction comes after a job well done, it lets employees know they’re on the right track and gives them the confidence to grow.
- Increased Communication: Improving communication equals better relationships and fewer mistakes.
- Increased Accountability: The structure of MBO helps strengthen the commitment of employees when clarifying their tasks and responsibilities. This results in higher levels of accountability because objectives are personalized to each individual.
However, there are two sides to every story. A few cons we can find in the Management by Objectives process are:
- Weak Infrastructure: Focusing on broad objectives can lead to negligence towards company infrastructure and other daily operations. This can cause mistakes made by employees that aren’t sure of how to resolve issues within the very same infrastructure.
- Unhealthy Competition: Since MBO has a positive reinforcement approach and rewards good performance, some employees might feel jealousy, causing tension between colleagues and provoking a negative competition trying to overshadow those who are doing good.
- Slow Set-Up: While MBO’s purpose is to efficiently achieve objectives, it takes a while to do the whole process of establishing and assigning them. Becoming not as efficient as intended.
- Lack of Process: The steps of MBO focus on setting and achieving objectives, but there’s not much intel about the planning and execution of a strategy to reach those objectives.
- No Room for Growth: Though employees might feel motivated to grow, they can also get stalled in their current positions because they have a clear set of activities and understanding of their role, thus not wanting to leave their comfort zone.
To help you get a handle of what MBOs actually look like, here are some real examples of MBO goals:
- Human Resources: Keep quarterly retention rate at 95% / Get 10% of hires from employee references / Hold a minimum of three interviews for new hires.
- Sales: Hit the win rate of 20% / Achieve new customer target of 50 per month / Get 25% more leads.
- Finance: Finish reviewing compensation agreements / Develop annual operating budget / Help increase quarterly shareholder value by 2.5%.
- Performance Management: Promote new departamental supervisor / Increase CSAT by 80% / Become market leader.
Whether you use MBO, Balanced Scorecard, OKRs, or other related methodologies such as EOS (Entrepreneurial Operating System), OGSM (Objective Goals Strategy and Methods) 4DX (The Four Disciplines of Execution), these are all similar practices by which objectives and target performance levels are assigned to departments, teams and individuals to allow for more effective management.
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