Management By Objectives (MBO) is a performance appraisal method in which subordinates set goals for themselves that are based on the overall goals and objectives for the organization. It is a system in which specific performance objectives are jointly determined by subordinates and their superiors, progress toward objectives is periodically reviewed, and rewards are allocated on the basis of this progress. MBO aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identifying their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.
MBO has the following characteristics:
Management by objectives is a technique applied primarily to personnel management. In its essence it requires deliberate goal formulation for periods of time (like the next calendar or business year); goals are recorded and then monitored. The management guru Peter Drucker (1909–2005) first taught and then described the technique in a 1954 book (The Practice of Management). In Drucker's formulation the technique was called "management by objectives and self-control," and Drucker saw it as one of the forms of "managing managers." It became popular in the 1960s, by then abbreviated as MBO, the "self-control" parts more or less neglected, at least in talking about the subject. It experienced both an upward and downward drift: it came to be applied to the organization as a whole and to employees below the managerial level as well so that in many corporations many employees labored and still labor, at least once yearly, in formulating objectives. It was and remains an activity practiced predominantly in large corporations, although it spread in the 1970s and 80s to midsized organizations, commercial and other. In the mid-2000s it is viewed in many circles as a somewhat dated technique not well adapted to the rapid changes and uncertainties of a dynamic Information Age. However, it continues to have committed and enthusiastic supporters. In current practice it has also undergone changes and refinements.
Planning is the central concept supporting MBO in the sense that individuals and organizations do better by formulating goals than just by working or living alone—simply responding to crises and events. If an organization has clear objectives and managers and employees have set themselves objectives which support and harmonize with the company goals, then a coordination and orchestration of conscious motives will be driving the corporate activity. Thus management by objectives moves corporate planning downward so that it becomes translated into personal goals. But MBO was always articulated as a collective and supervised activity rather than as a personal discipline—precisely so that objectives could be coordinated. Goal setting is an annual exercise. The employee is asked to set five to ten personal goals; ideally these should be measurable in some way. Goals are discussed with the supervisor one level up. If the objectives are too vague or too easy, the employee must try again. Goals are next fixed in writing. Finally, periodic reviews of accomplishments against goals are carried out, the manager evaluating the employee. Reward systems are built around achieving the objectives.
MBO came of age in a time of change and ferment in U.S. management history, with corporations then responding to the dramatic rise of Japanese industry and Japan's commercial invasion—most visibly of the automobile market. To be sure Japanese business culture had different roots than the American; it had its origins in tribal associations and featured a very loyal work force, the latter no doubt supported by Japan's practice of lifetime employment. Meanwhile the American system, based on the creative energy of the entrepreneur, had evolved into very large and bureaucratic organizations. In this environment Japanese techniques were admired and imitated—under the leadership of MBA programs in business schools. "Quality Circles" sprang up and corporations were adopting numerical quality control—a Japanese technique the Japanese had learned from an American, Dr. W. Edwards Deming, and then perfected. Along with these methods came the promotion of other innovations all based on the conviction that loyalty could be trained and commitment induced: catch-phrases like the "learning organization," "total quality control," "team management," "matrix management," "reengineering," and "empowerment" arose in this environment with battalions of consultants and gurus in business to teach the way.
The fundamental concept underlying management by objectives is based on wisdom: "If you don't know where you're going, you're certainly not going to get there." In any kind of complex activity, planning is good—be it a wedding or a new product introduction. Highly motivated individuals have conscious goals, pursue them with concentration, and do not rest until their aims are met. Effective individuals have to-do lists—on slips of paper, on personal digital assistants (PDAs), or in the head. In a sense MBO is simply the extension of the to-do list to a longer period with a few additional refinement: goals should be precise and measurable in some way. Discovering a measure in itself leads to closer attention to the goal. If the goal is broad and vague ("Greater Customer Satisfaction") looking for a measurement might refine it into ("Reduce Product Returns by 80 percent")—which goal will then more correctly focus attention on a company's quality problems or poor packaging. Focused, goal driven activity produces all sorts of benefits, not least more effective use of resources, saved time, and also higher morale. Conversely, companies and individuals that simply "go with the flow" may find themselves "swept away." One might say that effective managers and employees practice MBO knowingly or not.
The negative aspects of MBO have been due primarily to the more or less thoughtless and mechanical—and wholesale—application of the technique. MBO was and still is typically introduced as an exercise from the top and then administered by the numbers. Frequently employees with relatively narrow and straight-forward job descriptions (not just managers) are required to scratch their heads and come up with a precisely fixed number of goals. If the technique does not fit job descriptions well—if the only reasonable goals employees can come up with are restatements of tasks they ought to do in any case—the exercise becomes a ritual. Groups of people instinctively know when a technique is pro-forma. For this reason, in many organizations, the exercises resulted in detailed objectives recorded on paper and filed in notebooks to be routinely forgotten. Experience has shown that MBO works reasonably well where management leads and actively promotes goal achievement. But in such situations it is difficult to know whether it was the MBO program or leadership which actually achieved the results.
Rodney Brim, CEO of Performance Solutions Technology, LLC, and a critic of MBO, identified four reasons for the weakness of the MBO technique. He believed that the method went into decline in the market turn-down of the early 1990s when "downsizing," "right sizing," and other coping mechanisms captured management attention. "With the upturn of the market and the start of the Internet gold rush," Brim wrote, "management by objectives slipped further into the past. The term 'management' itself seemed to lose a sense of compelling interest. Riches were made based upon technology, upon acquisitions, upon something new, upon association with the WEB, not (for heaven's sake) management of work effectiveness." Brim's tally of weaknesses includes the following points:
Concerning the last point, Brim wrote: "People, the world over, set goals every year but don't follow them through to completion. One can surmise that this is the standard goal follow through behavior." Brim points out that business is well aware of this tendency, one reason why "work-out clubs … predictably sell more memberships at the first of the year than they plan on supporting through the year. The problematic assumption is that if you manage by goals and objectives, direct reports and team members will organize their work around what you are managing by, e.g. those same goals and objectives."
The small business owner who has a vague feeling that his or her business may be adrift might wish to look into management by objectives as a way of reviving focus. The owner will probably benefit from reading one or two books on the subject, including Drucker's own work, available in paperback—and then trying the method on him or herself. MBO was originally conceptualized as a management tool for managers—the managers presumed to be inherently motivated. MBO works well when its principles are internalized. It tends to fail when it is imposed. Its great benefits lie in the planning that it requires. In the case of the small business, corporate plans and the owner's personal plans often coincide, thus giving MBO ideal scope. The requirement of formulating measurable objectives is a good discipline. And "working the plan" with "self-control" applied, may produce quite tangible benefits. Experience with this technique, more than 50 years old and counting, indicates that committed management involvement is vital for success. If the MBO works well for the owner, the owner's own enthusiasm may act infectiously on other managers in the business. Use of the technique beyond a few key managers is more problematical.
Batten, Joe D. Beyond Management by Objectives: A Management Classic. Resource Publications, December 2003.
Brim, Rodney. "A Management by Objectives History and Evolution." Performance Solutions Technology, LLC. Available from http://www.performancesolutionstech.com/FromMBOtoPM.pdf. 2004.
Drucker, Peter F. The Practice of Management. Reissue Edition. Collins, 26 May 1993.
Weihrich, Heinz. "A New Approach to MBO." Management World. January 2003.