Management by objective (MBO) is a model that helps organizations improve their performance by clearly defining their objectives.
The uniqueness of this model lays in the manner in which the corporate objectives are diligently communicated down into employee objectives, to ensure the entire organization is working towards the same goal.
The core value behind management by objective is that if the entire organization has a clear understanding of the objectives, it will help to improve commitment and participation levels, as employees will feel more empowered and involved. This will enhance performance, productivity and profits.
MBO – Linking Strategy with Implementation
His student, George Odione, later developed on the subject of MBO and made it famous in the 1970s, through his ‘Management by Objectives’ book .
Hewlett-Packard were one of the first major companies to endorse MBO, as their top managers admitted that it helped them move away from a very hierarchical leadership to one that involved the entire organization.
However, the key to successfully implementing MBO was to actually be able to define the objectives.
These scorecards can be shared with the entire organization and used to understand business performance and make informed strategic decisions.
How Management by Objective Works
This was implemented by simply creating strategic objectives for the organizations and communicating them down into objectives for operational teams and employees.
These objectives are reviewed periodically in order to monitor progress.
Management by objective also works on a rewards basis, as the employees are rewarded for achieving their own objectives.
Editor's note: The OKR framework looks like another attempt to incorporate the best practices of both MBO and SMART approaches.
- Objectives had to be ordered according to their importance
- Objectives had to be quantitative
- Objectives had to be realistic
- Objectives had to be in line with organizational policies
- Objectives had to be compatible with each other
The 5 points is what kept the objectives well defined and suitable for corporate needs.
However, this seemed to become highly administrative and somehow restricted creativity.
More suitable models today are the SMART objectives;
- SMART stands for Specific, Measurable, Achievable, Realistic and Time.
MBO Five Step Process
MBO is also implemented on a five step process as outlined below:
- Start MBO for operational period
- Review and define corporate objectives
- Set employee objectives based on corporate goals
- Monitor progress
- Evaluate performance (at the end of the period)
- Reward employees’ achievements
Automation of MBO
Editor's note: Users of BSC Designer software can effectively automate all five steps of the MBO process:
- The operational period matches the update interval for the indicators and goals.
- Corporate level objectives can be linked to an employee scorecard (cascading) or explained by the supporting goals.
- Progress monitoring is achieved via assigning targets for the indicators and calculating performance and progress figures.
- The performance is automatically evaluated and presented via stop-lights, and additional performance analysis is possible.
- The software can automate reward calculation using indicator values in the incentives formulas.
Sign up with a free 30-day trial version of BSC Designer to try the software.
Using BSC Designer Software for Automation of MBO
The steps below show how an MBO-style scorecard can be automated with BSC Designer software.
1. Define review period via update interval
2. Define corporate objectives
3. Set employee objectives and indicators
4. Monitor progress using Progress and Performance columns
5. Do performance evaluation with the Analysis tab
6. Use values of other indicators in the reward formulas
Sign up with a free account at BSC Designer Online to try all the functions without limitations.
Management by Objective Benefits
- Employee motivation
- Job Satisfaction
- Employee commitment
- Employee empowerment
- Delivery of organizational strategies
The same is applied to employees, as through the MBO model they are encouraged to also work towards the bigger pictures and not fall into the daily ‘activity trap.’
Management by Objective and the Balanced Scorecard
The Financial Express  refer to the Balanced Scorecard as ‘an extension to the management by the objectives’ model.
The MBO model was first introduced to motivate employees and drive the organization towards results. However, the rigorous objective criteria and review models sometimes turned objectives into a way to ‘catch out staff.’
Aside from having their objective periodically reviewed, employees are now equipped with the right tools and information to take maximum control of their work and make the necessary changes in order to ensure the objectives are achieved.
The information provided by the BSC analysis takes employee motivation and commitment one step further from the MBO model, as now employees do not only have direction, but also knowledge and control over their objectives.
MBO, BSC and Organizational Goals
- ^ The Practice of Management, Peter F. Drucker, 1954, HarperBusiness
- ^ ‘Management by Objectives’, George S. Odione, 1965 Pitman Pub.
- ^ Management by objectives, The Economist, 2009
- ^ The Balanced Scorecard: An Extension Of Management By Objectives, Leslie Rebello, Director, L.R. Management Education Institute, The Financial Express, 2002