Introduction to Management by Objectives

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This guide explores 1) what is management by objectives, 2) its underlying key concepts, 3) pros and cons of using it, 4) a comparison with management by exception, and 5) the 5-step MBO process.


Management by Objectives, often shortened to MBO, is simply one of several management models that have been used, and are still being used even today. This technique allows management to focus on the attainable goals of the organization, and to work towards achieving the best possible results, using the resources available to the organization at that point in time.

The goal of this model is to improve the overall performance of an organization by defining its objectives clearly, and these objectives have to have been agreed to completely by the management, the employees, and the other members of the organization. In other words, it operates on the assumption that, if the goals of the organization are aligned with that of the employees, then achieving these goals through work performance will be more successful.

The origins of MBO can be traced back to 1954, when management expert Peter Drucker first introduced the term and the concept in his book, entitled “The Practice of Management”. Basically, he described it as an environment where management and employees join forces and work together to set and monitor the goals of the organization for a certain period.

MBO requires supervision and coordination, since it involves sets of individual and personal goals, which must then be coordinated together to move towards one common goal – which is the overall goals of the organization. Employees and their plans have often been likened to pieces of a puzzle which, when completed, represents the organization and its goals.

Now, where are you supposed to use MBO?

This style is considered to be most appropriate in organizations or enterprises that are knowledge-based, or where the organization mostly operates or runs using information or knowledge on its customers, competitors, product, and processes. If the staff or members of the organization are competent, MBO is sure to work.

If management is also keen on developing its employees’ personal and professional growth and skills, applying MBO is also a good idea.


To understand MBO better, let us take a look at its core tenets or concepts.

Awareness of all members of the organization

In MBO, knowledge will not be limited to top management or several key players of the organization. Everybody should have knowledge and a clear understanding of the goals, aims or objectives of the organization.

In addition, they should also be fully aware of their roles, functions and responsibilities as members of that organization, particularly with respect to the attainment of the organizational goals, aims or objectives.

But there are some reasons, why you should not focus on your goals (hint: it has to do with your behaviors).

Participation and commitment of employees

This personnel management technique holds that the objectives of an organization will have greater chances of being realized sooner if they are aligned within the ranks of the organization, and one way to ensure that is to encourage the participation of all members and bolstering their commitment to the organization and its goals. MBO helps accomplish that by including the employees in the goal setting activities of the organization.

Conventionally, strategic planning and decision-making will be left in the hands of several members of top management. MBO advocates that all managers will be involved, as well as its employees.

If employees get to have a say in the creation of action plans and their subsequent implementation, instead of being relegated to the role of simply following orders from top management, with no questions asked, they will feel more invested in their roles and responsibilities in the organization. As a result, their level of commitment to the organization and its goals and objectives will be very high.


As mentioned earlier, in MBO, employees are proactive and key players in what takes place in the organization. They are not just pieces left there to react when an event takes place or a problem arises. They take active part in it, and so they play a major role in the planning.

This planning is not limited to the organization, because the employees must also create personal plans that are aligned with that of the organization. Take, for example, a construction company that set a target of completing a series of housing projects within a three-year period.

The engineer and architect involved in the projects will also set their own personal goals. They may set their personal goal to completing a specific number of housing units in a year, in aid of meeting the three-year goal of the company.

Use of a management information system for performance measurement and monitoring

Management by Objectives advocates the establishment of a management information system, which will purposefully be used to measure the actual performance and achievements of employees – and the organization as a whole – against the objectives that have been defined and set prior.

It is to be noted that the goals that have been previously set are put into writing on a periodic basis. This is to facilitate continuous measurement and monitoring by the managers as they track the progress of work within the organization.

Continuous tracking and feedback

Since this technique is systematic and organized, the tracking and monitoring is also done on an ongoing or continuous basis. So is the provision of feedback. Feedback is provided at every turn to ensure that the goals are still in sight.

Rewards’ dependence on attainment of goals

Rewards are a given in MBO, but they will depend on the achievement of the goals. The extent of the reward will also be based on the attainment of these goals.


+ Disciplined approach to goal attainment

MBO provides a means for management to readily identify its goals and objectives, and plan on how they will be achieved. The problem most managers encounter involves vagueness when it comes to goals. They know they have to achieve something, but they are not clear as to what it is. In MBO, the objectives and goals are clearly defined and identified.

Logically, it would be difficult to start planning when you do not know what you are supposed to accomplish or achieve in the first place. MBO addresses that issue by starting with the identification of goals and objectives. This will provide direction for management to start planning.

+ Improved employee empowerment and commitment

Empowered employees are motivated employees, and employees will feel more motivated in their work performance if they feel that they are given importance and recognition by management. When an employee is asked for his thoughts or input on something related to work, this will visibly boost his confidence and make him strive more so he can contribute more.

An organization cannot expect commitment and loyalty from employees when it does not give them enough credit to ask for their input or opinion on important matters. Put yourself in the shoes of an employee in a company that simply gives out orders and expect them to be followed.

Now take a look at a company where the employee is asked for what he thinks should be done to improve an aspect of his work. Chances are, the employee in the latter company will have more commitment to his work and loyalty to the company that values his opinion.

Individual employee satisfaction will also have greater benefits, giving a boost to the overall organizational morale. A strong work force will naturally result to a strong organization.

+ Improved communication in the organization

Employees communicate with and among each other; that is already an established fact. However, one of the difficult areas of management is fostering communication between management and the employees.

The differences in rank and positions tend to create a divide or a distance between these two groups, where top management often do not care to communicate with those who are lower than them, and the employees hesitate to approach their managers. With MBO, that issue is addressed head on.

+ Clarity of objectives

It is a sad reality that, you ask an employee on what its company’s goals are, and they know nothing else beyond “making a profit”.

Through MBO, goals and objectives of the organization are reiterated and emphasized, so that all its members are made aware of them. Better understanding of the goals of the organization will make them better and more motivated members and workers.

+ Increased efficiency

If goals are properly set and managed, creation of plans will also be facilitated. Management and implementation of the plans will likewise be facilitated, which will increase the overall efficiency of the organization.

The organization will be able to generate savings, since waste would be minimized if not eliminated. Utilization of resources will be maximized, and performance will go smoothly as planned.

Of course, the resources saved by the organization may be used in other projects or areas, which will speed up the organization’s goal achievement process.

+ Contingency preparation

MBO promotes planning, which means it also provides the organization more chances to prepare for the unexpected. Businesses are bound to come across stumbling blocks to the plans, and if they are prepared enough, they will have contingencies and backup plans in place to deal with these problems.

Despite these advantages, MBO is not without its weaknesses, causing many managers to avoid using it in their organizations.

Emphasis on goal-setting and results more than implementation

MBO seems to put more emphasis on defining objectives and setting goals, instead of working on a plan that is systematic enough to actually achieve these goals and objectives. Implementation somehow takes a back seat, because the focus is on the involvement of members of the organization in the goal setting and planning stage.

Executives managing by objectives have their eye trained on the result, not on the activity conducted or how it was conducted. In essence, they do not care how the employees arrive at the goal, just as long as they get to it.

As a result, there is a possibility that product or service quality may suffer. For instance, the employees may have set a personal goal of finishing a specific quantity for a certain period of time. To achieve that target, they will not pay a lot attention on the quality, as long as they meet the quantity demanded.

Requires full involvement

This may be a problem in a very large organization. The concerted effort required in MBO means the involvement of a lot of people and personalities.

Unless there is a highly trained and capable manager, this will turn out to be a huge headache, bringing an entire group of different people together.

Limited perspective on external factors

The narrow approach taken by MBO is characterized once again by how it focuses too much on setting goals rather than looking at the bigger picture. After all, there are other factors at play in an organization other than its goals and its employees and management.

A company can set goals all it wants, but if it ignores external factors such as environmental and economic factors – those that are out of its control – then all that goal-setting will be all for nothing.

There is a possibility that the management may fail to take into account the scarcity of resources when it is setting its goals. Economic upheavals also have an impact on the operations of an organization, and may lay all the goals to waste.

Impracticality in simple tasks

There are some tasks or functions in an organization that are too simple, applying MBO will prove to be a waste of time and resources, and utterly impractical.

Take, for example, a production assemble line. All that is needed to be done is to take two separate parts, and snap them together to come up with one product.

Now this is too simple and mundane, it does not make sense for the worker to be setting personal or individual goals for it.


MBO is not to be confused with Management by Exception, or MBE, which is a different model altogether. In MBE, the management’s attention will only be called when there are significant deviations from a plan. It operates under the assumption that management should only dispense its attention on the areas or issues that matter.

The action or strategic plan created will be communicated to all stakeholders of the organization, and will serve as the guidelines or standards to be followed by all the members. Adapting MBE means that the managers will be on the lookout for the deviations from these standards that are deemed to be significant, and reporting them or taking action.

In this management model, the objectives are communicated to the employees, who are then tasked to focus or concentrate on whatever significant deviations that may arise, and put their energy into them.

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It goes without saying that, if the deviations are considered to be minor or insignificant, they will not be paid much attention to, and no action will be taken.

Why? Because it is deemed that top management have a lot more important and bigger things to do or pay attention to than some minor deviation. It is only when the exception has become significant as to need immediate correction or rectification that it will be reported to top management, for “appropriate and immediate” action.

This is seen as the advantage of MBE, because managers do not have to be everywhere at all times, monitoring and keeping an eye on everything. They can focus on the more important things instead of spreading themselves too thin. The disadvantage, of course, would be the limited participation of employees.

Unlike MBO, employees will not have much to do with the decision-making process, which won’t really do much for their motivation and level of commitment to their work and the organization.

These characteristics make the applicability of MBE more practical in accounting and financial processes and department, which are primarily tasked in budgeting and setting financial standards for the company to adhere to.


  • Employees are included in the determination and setting of goals and objectives. The flow of organizational goals and the planning process may be top-down, or from top management down to the lower ranks of the organization. However, employee involvement is still guaranteed, because these goals and plans are then translated into personal goals for each member of the organization.
  • Regular feedback. Ongoing feedback is delivered, focusing on whether the results have been attained or the plan is adhered to.
  • Focus on rewards over punishment. Since the emphasis is on the goals and the results, management will be keener on providing rewards for those that are able to provide results in accordance with the goals, over punishing those who are not able to meet them.
  • Emphasis on personal growth and development. The natural reaction of many when one fails to achieve certain objectives is to be negative about it. In MBO, there is no room for such negativity, because it will still be seen as a factor that contributes to one’s personal growth and development.


How will organizations be able to use this management model? There are five steps involved in putting MBO into practice.

Step #1 Determine or review the organizational objectives.

Take a look at the organization’s vision and mission. What are the objectives and goals of the organization?

The managers are expected to have a clear understanding of the overall goals and objectives of the organizations, partly so they can communicate them more clearly to the employees.

Most importantly, however, they are the managers, and the ones to supposedly steer operations towards the goals and objectives, so they should know exactly where they are headed.

Step #2 Translate the organizational objectives in a way that will be understandable to employees and members of the organization. Stimulate employee participation in setting goals and objectives.

It is important that the managers and the employees agree on the latter’s objectives and see if they are aligned to that of the organizations. This will require looking into the objectives and goals set by the employee.

The S.M.A.R.T. criteria, which were also introduced by Drucker, are handy in this scenario. This has been formulated to help managers and individuals come up with smart goals, or goals that have structure and offer tracking.

Compare these two goals:

  1. The company should reach an annual net income in the millions.
  2. The company should earn an annual net income of $10 million in its fifth year of operations.

Between the two, which is the smarter goal? Which do you think made use of S.M.A.R.T. goal setting?

That’s right. It is the second one.

Now let’s take a look at what S.M.A.R.T. really stands for.

S – Specific

A goal has to be specific in order increase its attainability. Compared to a general goal, a specific goal is less vague and seems easier to achieve. Specificity requires addressing the following:

  • What is to be accomplished or attained? What, exactly, do you want to achieve?
  • Who is involved? With whom are you going to coordinate with?
  • Why do you want the goal to be accomplished?
  • How will you accomplish this goal?
  • Where is the location?
  • Which constraints and requirements are involved? What are the conditions and limitations?

When we compared the two goals earlier, it is clear that the second one was more specific, which meant it provided clearer direction for everyone in the company. They know they will have to work together to achieve that level of net income in 5 years.

M – Measurable

There should be set concrete or specific criteria for measuring the progress toward the goal or objective. You have to be able to identify what you will see or encounter once the goal has been reached. In the goal example set above, the “annual net income of $10 million” demonstrates measurability.

You should be able to answer the following questions:

  • How much?
  • How many?
  • How will you know when something has been attained or the goal has been achieved?

A – Attainable

We have mentioned earlier how the goal must be realistic and attainable. It won’t do anyone any good if the goals set are actually impossible to achieve. A goal is attainable if you are capable of acquiring the necessary skills, capabilities and attitudes to achieve them.

This also applies to acceptability. Is the goal acceptable to you? What if it goes against your personal principles? Does it resonate with you on a personal and professional level?

Evaluating its acceptability may require that you weigh the effort and time that you will have to contribute towards its attainment. Are there other costs expected of you in order to achieve it? Do you think you will be able to deliver on them?

Identifying them early on will save you time and effort, since you can immediately assess whether you have the capacity to help in the attainment of the goal. If you take on a task, even knowing that you do not have the capabilities and skills to help achieve them, this may be demoralizing and end up making your miserable.

The good news is that you can rectify that lack by taking the necessary steps to improve yourself, so you can eventually come to a point that the goal will be acceptable and attainable to you.

R – Realistic

Realistic and attainable go hand in hand. It is not attainable if it is not realistic, and it is not realistic if there is no way to achieve it. Will you only be shooting for the stars with the goal you have set, or is it really capable of happening?

R may also stand for relevance. How is the goal relevant to you, personally and professionally?

In the goal example, what does it mean to you, personally, if the company does earn a net income of $10 million on its 5th year? Will you get a promotion for reaching that quota? Will you get an incentive, such a raise in your salary, an incentive bonus, or a travel package for you and your family? Weigh the relevance of the goal so you can decide whether it is a worthy goal or not.

This requires looking deeper within oneself. What is your real reason for working towards that goal? What is in it for you? Will achieving that goal really achieve that reason?

T – Time-bound

There should be a time frame when we set goals. Otherwise, you will only be working on an endless loop or cycle, with no end in sight. Having a time-bound goal will also increase the level of urgency so members of the organization will strive to work harder and put more effort into their work.

Employee empowerment stems from motivation on the part of the employees, and one sure way to increase their motivation is to encourage them to set their own objectives, alongside the organizational objectives.

Aside from being time-bound, the goal should also be timely. Scheduling and time management will definitely help, but you have to make sure that the goal is capable of being scheduled or mapped on a timeline. This will enable you to track your progress later on.

Step #3 Measure and monitor the progress of implementation.

It is imperative that the manager and the employee continuously monitor throughout the implementation process whether the objectives are being reached or not. Doing so will allow them to make corrective actions or adjustments.

Are they getting slow in achieving their goals? Then they have to step things up a bit and do better.

Are they on track? Then they should maintain that pace and, if possible, improve on it.

Step #4 Evaluation of progress.

Performance evaluation is also paramount in MBO. The managers will then review the performance of the employees or workers at the end of an operating cycle, or at predetermined times, to see whether the latter have reached the objectives.

When evaluating the performance of members of the organization, honest and objective feedback definitely goes a very long way. A manager cannot expect an employee to do better if he does not point out where the latter’s strengths and weaknesses are.

One cannot expect an employee to do a self-assessment all the time, because objectivity will be shot. Sometimes, an employee may not be aware that he is doing something wrong, unless someone else points it out to him.

Step #5 Giving the reward due.

Depending on the achievement of objectives, the employees will be rewarded. Of course, if they were unable to meet the objectives, they will not be rewarded. They will also not be punished, either.

The lack of reward will have a self-motivating effect, so that the employee will take it upon himself to do better or improve on his performance in the future.

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If you review the disadvantages of MBO, you will notice that most of them have something to do with the human factor. Human neglect, for instance, is a huge possible reason for MBO to fail. The organization may fail to conduct proper follow through once it has set its goals. It may not be able to properly and promptly monitor changes or track the progress of the work, so it won’t be able to make the necessary corrections or adjustments early on.

Just as Drucker pointed out, MBO is “not a cure-all”. Rather, it is a tool that must be utilized, which means that there is a possibility it will not work if the tool is not used properly or correctly. In his words, MBO “works if you know the objectives, 90% of the time, you don’t.”

As a tool, MBO cannot operate by itself. It requires the support from top management for it to be successful. The managers who will implement it should also have the proper and ample amount of training to ensure that it will be implemented fully. Before it can be implemented, it is also important that the organization has clearly defined goals and objectives.

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