The Concept Of Management By Objectives (MBO)
The concept of MBO is closely connected with the concept of planning. The process of planning implies the existence of objectives and is used as a tool/technique for achieving the objectives. Modern managements are rightly described as 'Management by Objectives' (MBO). This MBO concept was popularized by Peter Drucker. It suggests that objectives should not be imposed on subordinates but should be decided collectively by a concerned with the management. This gives popular support to them and the achievement of such objectives becomes easy and quick.
Management by Objectives (MBO) is the most widely accepted philosophy of management today. It is a demanding and rewarding style of management. It concentrates attention on the accomplishment of objectives through participation of all concerned persons, i.e., through team spirit. MBO is based on the assumption that people perform better when they know what is expected of them and can relate their personal goals to organizational objectives. Superior subordinate participation, joint goal setting and support and encouragement from superior to subordinates are the basic features of MBO. It is a result-oriented philosophy and offers many advantages such as employee motivation, high morale, effective and purposeful leadership and clear objectives before all concerned per-sons.
MBO is a participative and democratic style of management. Here, ample a scope is given to subordinates and is given higher status and positive/participative role. In short, MBO is both a philosophy and approach to management. MBO concept is different from MBC (Management by Control) and is also superior in many respects. According to the classical theory of management, top management is concerned with objectives setting, directing and coordinating the efforts of middle level managers and lower level staff. However, achievement of organizational objectives is possible not by giving orders and instructions but by securing cooperation and participation of all persons. For this, they should be associated with the management process. This is possible in the case of MBO and hence MBO is different from MBC and also superior to MBC.
MBO is an approach (to planning) that helps to overcome these barriers. MBO involves the establishment of goals by managers and their subordinates acting together, specifying responsibilities and assigning authority for achieving the goals and finally constant monitoring of performance. The genesis of MBO is attributed to Peter Drucker who has explained it in his book 'The Practice of Management'.
Definitions Of Management By Objectives MBO :-
- According to George Odiome, MBO is "a process whereby superior and subordinate managers of an Organisation jointly define its common goals, define each individual's major areas of responsibility in terms Of results expected of him and use these measures as guides for operating the unit and assessing the contribution of each of its members."
- According to John Humble, MBO is "a dynamic system which seeks to integrate the company's needs to clarify and achieve its profits and growth goals with the manager's need to contribute and develop himself. It is a demanding and rewarding style of managing a business."
Features Of Management By Objectives MBO :-
- Superior-subordinate participation: MBO requires the superior and the subordinate to recognize that the development of objectives is a joint project/activity. They must be jointly agree and write out their duties and areas of responsibility in their respective jobs.
- Joint goal-setting: MBO emphasizes joint goal-setting that are tangible, verifiable and measurable. The subordinate in consultation with his superior sets his own short-term goals. However, it is examined both by the superior and the subordinate that goals are realistic and attainable. In brief, the goals are to be decided jointly through the participation of all.
- Joint decision on methodology: MBO focuses special attention on what must be accomplished (goals) rather than how it is to be accomplished (methods). The superior and the subordinate mutually devise methodology to be followed in the attainment of objectives. They also mutually set standards and establish norms for evaluating performance.
- Makes way to attain maximum result: MBO is a systematic and rational technique that allows management to attain maximum results from available resources by focussing on attainable goals. It permits lot of freedom to subordinate to make creative decisions on his own. This motivates subordinates and ensures good performance from them.
- Support from superior: When the subordinate makes efforts to achieve his goals, superior's helping hand is always available. The superior acts as a coach and provides his valuable advice and guidance to the subordinate. This is how MBO facilitates effective communication between superior and subordinates for achieving the objectives/targets set.
Steps In Management By Objectives Planning :-
- Goal setting: The first phase in the MBO process is to define the organizational objectives. These are determined by the top management and usually in consultation with other managers. Once these goals are established, they should be made known to all the members. In setting objectives, it is necessary to identify "Key-Result Areas' (KRA).
- Manager-Subordinate involvement: After the organizational goals are defined, the subordinates work with the managers to determine their individual goals. In this way, everyone gets involved in the goal setting.
- Matching goals and resources: Management must ensure that the subordinates are provided with necessary tools and materials to achieve these goals. Allocation of resources should also be done in consultation with the subordinates.
- Implementation of plan: After objectives are established and resources are allocated, the subordinates can implement the plan. If any guidance or clarification is required, they can contact their superiors.
- Review and appraisal of performance: This step involves periodic review of progress between manager and the subordinates. Such reviews would determine if the progress is satisfactory or the subordinate is facing some problems. Performance appraisal at these reviews should be conducted, based on fair and measurable standards.
Advantages of Management By Objectives MBO :-
- Develops result-oriented philosophy: MBO is a result-oriented philosophy. It does not favor management by crisis. Managers are expected to develop specific individual and group goals, develop appropriate action plans, properly allocate resources and establish control standards. It provides opportunities and motivation to staff to develop and make positive contribution in achieving the goals of an Organisation.
- Formulation of dearer goals: Goal-setting is typically an annual feature. MBO produces goals that identify desired/expected results. Goals are made verifiable and measurable which encourage high level of performance. They highlight problem areas and are limited in number. The meeting is of minds between the superior and the subordinates. Participation encourages commitment. This facilitates rapid progress of an Organisation. In brief, formulation of realistic objectives is me benefit of M[BO.
- Facilitates objective appraisal: NIBO provides a basis for evaluating a person's performance since goals are jointly set by superior and subordinates. The individual is given adequate freedom to appraise his own activities. Individuals are trained to exercise discipline and self control. Management by self-control replaces management by domination in the MBO process. Appraisal becomes more objective and impartial.
- Raises employee morale: Participative decision-making and two-way communication encourage the subordinate to communicate freely and honestly. Participation, clearer goals and improved communication will go a long way in improving morale of employees.
- Facilitates effective planning: MBO programmes sharpen the planning process in an Organisation. It compels managers to think of planning by results. Developing action plans, providing resources for goal attainment and discussing and removing obstacles demand careful planning. In brief, MBO provides better management and better results.
- Acts as motivational force: MBO gives an individual or group, opportunity to use imagination and creativity to accomplish the mission. Managers devote time for planning results. Both appraiser and appraise are committed to the same objective. Since MBO aims at providing clear targets and their order of priority, employees are motivated.
- Facilitates effective control: Continuous monitoring is an essential feature of MBO. This is useful for achieving better results. Actual performance can be measured against the standards laid down for measurement of performance and deviations are corrected in time. A clear set of verifiable goals provides an outstanding guarantee for exercising better control.
- Facilitates personal leadership: MBO helps individual manager to develop personal leadership and skills useful for efficient management of activities of a business unit. Such a manager enjoys better chances to climb promotional ladder than a non-MBO type.
Limitations of Management By Objectives MBO :-
- Time-consuming: MBO is time-consuming process. Objectives, at all levels of the Organisation, are set carefully after considering pros and cons which consumes lot of time. The superiors are required to hold frequent meetings in order to acquaint subordinates with the new system. The formal, periodic progress and final review sessions also consume time.
- Reward-punishment approach: MBO is pressure-oriented programme. It is based on reward-punishment psychology. It tries to indiscriminately force improvement on all employees. At times, it may penalize the people whose performance remains below the goal. This puts mental pressure on staff. Reward is provided only for superior performance.
- Increases paper-work: MBO programmes introduce ocean of paper-work such as training manuals, newsletters, instruction booklets, questionnaires, performance data and report into the Organisation. Managers need information feedback, in order to know what is exactly going on in the Organisation. The employees are expected to fill in a number of forms thus increasing paper-work. In the words of Howell, "MBO effectiveness is inversely related to the number of MBO forms.
- Creates organizational problems: MBO is far from a panacea for all organizational problems. Often MBO creates more problems than it can solve. An incident of tug-of-war is not uncommon. The subordinates try to set the lowest possible targets and superior the highest. When objectives cannot be restricted in number, it leads to obscure priorities and creates a sense of fear among subordinates. Added to this, the programme is used as a 'whip' to control employee performance.
- Develops conflicting objectives: Sometimes, an individual's goal may come in conflict with those of another e.g., marketing manager's goal for high sales turnover may find no support from the production manager's goal for production with least cost. Under such circumstances, individuals follow paths that are best in their own interest but which are detrimental to the company.
- Problem of co-ordination: Considerable difficulties may be encountered while coordinating objectives of the Organisation with those of the individual and the department. Managers may face problems of measuring objectives when the objectives are not clear and realistic.
- Lacks durability: The first few go-around of MBO are motivating. Later it tends to become old hat. The marginal benefits often decrease with each cycle. Moreover, the programme is deceptively simple. New opportunities are lost because individuals adhere too rigidly to established goals.
- Problems related to goal-setting: MBO can function successfully provided measurable objectives are jointly set and it is agreed upon by all. Problems arise when: (a) verifiable goals are difficult to set (b) goals are inflexible and rigid (c) goals tend to take precedence over the people who use it (d) greater emphasis on quantifiable and easily measurable results instead of important results and (e) over-emphasis on short-term goals at the cost of long-term goals.
- Lack of appreciation: Lack of appreciation of MBO is observed at different levels of the Organisation. This may be due to the failure of the top management to communicate the philosophy of MBO to entire staff and all departments. Similarly, managers may not delegate adequately to their subordinates or managers may not motivate their subordinates properly. This creates new difficulties in the execution of MBO programme.
Essential Conditions for Successful Execution / Implementation of MBO Or...
Q.How To Make MBO Effective?
- Support from all: In order that MBO succeeds, it should get support and co-operation from the management. MBO must be tailored to the executive's style of managing. No MBO programme can succeed unless it is fully accepted by the managers. The subordinates should also clearly understand that MBO is the policy of the Organisation and they have to offer cooperation to make it successful. It should be a programme of all and not a programme imposed on them.
- Acceptance of MBO programme by managers: In order to make MBO programme successful, it is fundamentally important that the managers themselves must mentally accept it as a good or promising programme. Such acceptances will bring about deep involvement of managers. If manages are forced to accept NIBO programme, their involvement will remain superfluous at every stage. The employees will be at the receiving-end. They would mostly accept the lines of action initiated by the managers.
- Training of managers: Before the introduction of MBO programme, the managers should be given adequate training in MBO philosophy. They must be in a position to integrate the technique with the basic philosophy of the company. It is but important to arrange practice sessions where performance objectives are evaluated and deviations are checked. The managers and subordinates are taught to set realistic goals, because they are going to be held responsible for the results.
- Organizational commitment: MBO should not be used as a decorative piece. It should be based on active support, involvement and commitment of managers. MBO presents a challenging task to managers. They must shift their capabilities from planning for work to planning for accomplishment of specific goals. Koontz rightly observes, "An effective programme of managing by objective must be woven into an entire pattern and style of managing. It cannot work as a separate technique standing alone."
- Allocation of adequate time and resources: A well-conceived MBO programme requires three to five years of operation before it provides fruitful results. Managers and subordinates should be so oriented that they do not look forward to MBO for instant solutions. Proper time and resources should be allocated and persons are properly trained in the philosophy of MBO.
- Provision of uninterrupted information feedback: Superiors and subordinates should have regular information available to them as to how well subordinate's goal performance is progressing. Over and above, regular performance appraisal sessions, counseling and encouragement to subordinates should be given. Superiors who compliment and encourage subordinates with pay rise and promotions provide enough motivation for peak performance.
What is MBO (Management by Objectives)?
Management by Objectives (MBOs) is the management concept and framework coined and popularized by Peter Drucker, the management consultant, educator, and author who has been described as ‘the founder of modern management’ for his 1954 book The Practice of Management.
MBO is the process of defining top company goals and using them to define employees’ objectives. This helps all company contributors see their accomplishments in connection to the company’s top priorities as they carry out their individual tasks, reinforcing alignment between activity and outcome, which dramatically increases productivity. MBO processes are intended to identify an employee’s main objectives, later graded with group input.
The performance review process helps identify mistakes and errors. It also allows for a brainstorming session about what the company might need to change in order to meet its main objectives in the future.
Goals are set for sole contributors, team leaders, department executives and for the CEO, so everyone has a sense of what they are supposed to be contributing to the team as well as how it fits into the big picture.
Objectives are essential to ensuring that all contributors spend their time at work productively and are working towards a concerted outcome. They also teach those at a company about how much they are truly capable of accomplishing in a set amount of time. If quarterly goals end up being too easy, they can be adjusted to be more ambitious or vice versa during the review process. It is important to set goals that are aspirational, so employees are met with real challenge.
We recommend three objectives maximum, or sometimes only one objective. This forces employees to discover what their truly essential priorities ought to be. As Peter Drucker noted, “Do first things first, and second things not at all.” Overall, the MBO process consists of five steps:
- Set company objectives
- Cascade objectives to employees
- Evaluate performance
- Reward performance
Another rule is to quantify your objectives. This is to set about defining a very clear idea of success, which will be important later in the review process, though not every objective is quantifiable. Rules like this are helpful guidelines, but do not necessarily need to be applied all the time. Top company goals are sometimes non-quantifiable. Company culture, for instance, is a considerably valuable asset and one that deserves to be a high priority, though it is too intangible to quantify.
Though Management by Objectives (MBO) is intended to help define and manage a set of goals, the goals themselves will be at least a little bit different for every company. It allows companies to express their individuality as well as their top priorities and, most important, to execute on them. In order to help you get a handle on what MBOs look like, we’ve provided some examples for different industries below. Here, we give you an idea of what the actual MBOs might be for a CEO, team leader and a sole contributor.
If you’re interested in MBOs, you may also be interested in OKRs, a similar goal setting and tracking management process. To learn more, check out a basic description of OKRs and some examples as well.
Company Performance MBO Examples
Top Company MBO
- Become market leader
- Achieve cash flow of $500,000 per month
- Become a member of the fortune 500
- Increase CSAT to 90%
- Increase customer retention rate to 92.5%
- Decrease OPEX by 5%
- Expand sales abroad by 10%
- Increase Gross Margin by 10%
- Increase assets to debt ratio by 15%
- Reduce carbon footprint by 5%
- Raise brand profile by 25%
- Promote or hire one new departmental executive
- Achieve payback period of 1.5 year for new products
- Increase win ratio by 10%
Marketing MBO Examples
- Generate 1,000 new Marketing Qualified Leads (MQL) per month
- Earn 40% of overall company revenue from marketing efforts
- Increase annual product subscribers by 35%
- Increase marketing ROI by 7.5%
- Triple social media following
- Double newsletter subscriptions
- Double unique web traffic
- Increase regular weekly website visitors by 45%
- Increase landing page conversion rates by 30%
- Increase surveyed brand awareness by 25%
- Get 10 media placements
- Hire 5 new account executives
- Implement continuous A/B testing of landing pages
- Collaborate with sales department to devise quality lead definition
Sales MBO Examples
- Achieve the new bookings target of 50 per month
- Hit the win rate of 20%
- Achieve average deal size of $150 000
- Decrease sales cycle to 3 months
Human Resources MBO Examples
- Maintain employee satisfaction index of 85%
- Keep quarterly retention rate at 97%
- Increase employee engagement to 85%
- Maintain compensation at 10% above industry average
- Meet with sales department to define sales hiring requirements
- Hold a minimum of three interviews for new hires
- Increase rate of meeting new hire deadline to 80%
- Get 15% of hires from employee references
- Hire a training agency for the sales department
- Implement 1-on-1 automation system in Q2
- Increase departmental ROI by 5%
- Hold two company-wide events
- Implement a leadership training program
- Give at least 1/3 of all managerial positions to internal applicants
Software Engineering MBO Examples
- Complete 350 story points per team
- Complete at least 400 points of review
- Migrate completed story points less than a week after completion
- Launch 3 new product features
- Develop 20 new front-end software tests
- Launch alpha testing phase
- Meet with customer service and product departments for development coordination
- Increase system architecture speed by 25%
- Maintain system architecture up-time of 99.9%
- Maintain rate of no more than 3 P-0 and P-1 bugs at once
- Participate in one hackathon
- Prioritize blocker bugs
- Optimize UI for 15% faster onboarding process
- Conduct review of programming team optimization
Product Management MBO Examples
- Successful product launch ($500k in quarterly revenue)
- Grow subscriber revenue by 20%
- Maintain 85% CSAT score
- Maintain Net Promoter Score of 80
- Ideate for three new product features
- Meet with programming and marketing departments to collaborate on new features
- Maintain production consistency ratio of 99.8%
- Meet with 10 high value clients ($50k+) for product feedback
- Complete survey of 250+ new customers to gauge new product interest
- Complete assessment of customer product usage behavior through software monitoring
- Contribute 50k in revenue by collaborating with the software engineering team to complete a product demo
- Create annual product plan to integrate competitors’ strongest product features
- Identify 5 leading competitors’ product strategies
- Complete market projections of product lifecycles
Customer Success MBO Examples
- Earn $100k in customer-success-related revenue
- Increase customer-success-related CSAT score to 90%
- Decrease onboarding time to three days
- Decrease customer service tickets during onboarding by half
- Achieve 20% higher customer satisfaction with onboarding process
- Increase customer references of qualified leads by 20%
- Maintain detailed profile of each premium client ($25k+)
- Increase contribution to premium client acquisition ($25k+) by 10%
- Monitor premium client ($25k+) software usage behavior to detect challenges
- Decrease customer success related quarterly churn rate by 15%
- Collaborate with sales department to increase upselling by 10%
- Collaborate with sales department to increase cross-selling by 10%
- Collaborate with marketing department to develop new target segment
- Devise annual customer success plan
Customer Support MBO Examples
- Maintain CSAT rating of 85%
- Decrease average first-response time to less than 10 minutes
- Meet customer-support related SLA agreements
- Increase customer service call capacity by 40% (open new call center)
- Decrease tickets per resolution by 20%
- Reduce call abandonment to 3.5%
- Hire and train 8 new outsourced workers
- Reduce incidence rate by 10%
- Reduce manager call intervention by 15%
- Maintain customer service feedback database
- Complete 5 new customer service script scenarios
- Collaborate with product department to help fix product issues
- Collaborate with customer support department to provide excellent service to premium customers ($25k+)
Finance MBO Examples
- Help raise $1m in new funding through investment preparation
- Finish financial planning and revenue projection
- Develop annual operating budget
- Develop annual procedures for cash handling and budgeting
- Complete independent financial audit
- Increase rate of debt collection by 25%
- Increase financial automation by 5%
- Finish reviewing and approving compensation agreements
- Research and approve the use of some crypto-currencies
- Resolve 50% of outstanding contract conflicts
- Maintain regulatory financial compliance
- Conduct patent research, application and resolution
- Increase asset to debt ratio by 2.5%
- Help increase quarterly shareholder value by 2.5%
Operations MBO Examples
- Create annual operational plan
- Project seasonal consumer demand prediction
- Reduce software development cycle by 2 weeks by instituting Agile
- Hold bi-weekly meetings to adapt planning throughout software engineering process
- Reduce software testing time to one week/li>
- Reduce product failure rate to under 2.5% (5/1 ROI)
- Reduce product sourcing and logistics expenses by 5%
- Reduce logistics shipping travel time & distance by 5% (local sourcing)
- Deliver 98.5% of products on time
- Fulfil 98.5% of SLAs
- Fulfill 100% of warranty obligations
- Help facilitate the fixing of new P-0 and P-1 bugs within 72 hours
- Contribute to 1.5% quarterly growth in company shares
- Seek one independent operational consulting report