Management by Objectives (MBO): Definition, Process & Advantages

Management by objectives, in short, MBO is a popular managerial approach used by organizations to facilitates their daily operations and task so that the objectives can be achieved effectively and efficiently. Here we have shared short notes and important topics like meaning definition, process, advantages, and disadvantages of MBO – management by objectives.

What is Management by Objectives – MBO

Management by Objectives (MBO) is a personnel management technique or we can say approach where managers and employees work together to set, record, and monitor goals for a specific period of time.

Organizational goals and planning flow top to lower management through the organization and are translated into personal goals for organizational members.

Management by objectives is a systematic and organized approach. MBO aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization.

Meaning of MBO – Management by Objectives

Management by Objectives is a full form of MBO, it is also known as Management by results (MBR). MBO is a popular term among academicians and practitioners because of two reasons.

First, it focuses on objectives or results that are very crucial for managers to achieve them in a specific time period.

Second, it is based on participative management, an approach that provides high motivation to individuals in an organization.

Definition of MBO – Management by Objectives

The MBO technique was first outlined by the father of management Peter Drucker in 1954 and became commonly used in the 1960s. Since then, many businesses and non-business organizations adopted the MBO technique in some form or other.

MBO can be defined as follows,

MBO is a comprehensive managerial system that integrates many key managerial activities in a systematic manner.

It consciously directed towards the effective and efficient achievement of organizational objectives.

Other Definition

MBO defined as a management system in which specific performance goals are jointly determined by employees and their managers, progress toward accomplishing those goals is periodically reviewed and rewards are allocated on the basis of this progress.

Management by objectives (MBO) allows management to focus on achievable goals and make the best possible result from available resources.

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Important Concepts of MBO

The core concept of MBO is planning. It means that an organization and its members are not merely reacting to events and problems but are instead being proactive.

It is necessary for MBO that the employees set measurable personal goals based upon the organizational goals.

One more concept of Management by objectives (MBO) is that all managers should participate in the strategic planning process for better implementation of plans.

It includes ongoing tracking and feedback in the progress to reach objectives.

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 every other management technique.
  • Periodic review/feedback of performances is an important feature of MBO.
  • MBO provides more freedom to subordinates.
  • MBO is results-oriented.
  • MBO facilitates Participative management.

Element of Management by Objectives (MBO)

There are some major elements or Prerequisites for installing an MBO Program.

➤ Goal specificity (Purpose of MBO)

➤ Training for MBO

➤ Top Management Support

➤ Participation (Decision Making)

➤ Performance feedback.

Understand MBO With an Example

For Example, Hotels and Restaurants often use comment cards and ask customers to rate the servers. If a server is lacking in customer service skills or maybe he is not aware of how his working style can affect the organizational objectives. Then it can harm the business.

You could give that employee an objective to increase his customer service skills and interact better with the customers.

MBO is a supervised and managed activity so that all of the personal or individual goals can be coordinated to work towards the overall organizational goals and objectives.

The essence of MBO is participative goal setting (Smart goals), choosing a course of action, and the decision-making process.

An important part of the MBO is the measurement and comparison (Evaluation) of the employee’s actual performance with the standards set.

Smart Goals are set down in writing annually and are continually monitored by managers to check progress. Rewards are based upon goal achievement by individuals.

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MBO Process

mbo process

Management by objectives or MBO is a system for achieving organizational objectives, increasing employee participation. Therefore, its process and method should facilitate the translation of basic concepts into management practices.

The MBO process is characterized by the emphasis on rigorous analysis, clarity, and balance of objectives. The participation of the manager with the accountability of results.

The process of Management by objectives is not as simple as it appears to be. All managers need training and experience for developing the required skills.

The MBO process has many steps that are as follows;

  • Step 1 ➔ Setting Organisational 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 Organisational Purpose and Objectives:

The first basic step in MBO is to define organizational purpose and objectives.

Objectives can be determined by answering a few basic questions like why the organization exists? What business domain are we belong to? What will be the product and services?

These types of questions provide guidelines for the statement of purpose (SOP). These objectives in interaction with external factors determine the long-range strategic objectives like ;

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

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

➤ Defining the purpose of the organizational firm.

➤ Long-range and strategic objectives

➤ Short term organizational objectives

➤ Departmental/Divisional objectives

➤ Individual manager’s objectives.

2. Setting Subordinates Objectives:

The organizational objectives are achieved through individuals. Therefore, each individual manager must know clearly what he is expected to achieve.

Every 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 every level.

The process of objective setting begins with the superior’s proposed recommendations for his subordinates’ objectives.

3. Key Result Areas : (Monitoring)

Organizational objectives and planning premises together provide the basis for the identification of key result areas ((KRA).

It may be emphasized that Key Results Areas are derived from the expectations of various 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 the 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 indicate the resource planning requirement. In fact, resource availability becomes an 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 the subordinate is achieving his objective or not. If not, then what are the problems, and how these problems can be overcome.

The purpose of Performance appraisal is to ensure that everything is going as planned and the 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 other actions.

New objectives are neither start the top and communicated to the bottom nor are they set at the bottom and go up.

Setting Objectives is a joint process through interaction between superiors and subordinates. Therefore, activities of each level may affect other levels also.

The three aspects involved in the recycling process are;

➤ Setting Corporate Objectives at various level

➤ Action planning

➤ Performance Review.

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Advantages of MBO (Benefits)

MBO has a wide range of advantages and benefits for the organization, Such as;

  • Making planning effective,
  • Development of personnel,
  • Increase Team Spirit,
  • Better Utilization resources,
  • Facilitates Coordination,
  • Boost Employee Morale
  • The clarity in Organizational Action

Disadvantages of MBO (Limitations)

  • Time and Cost
  • Failure to Teach MBO Philosophy
  • Problems in Objectives Setting
  • Emphasis on Short term Objectives
  • Inflexibility
  • Frustration
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