Management by

Objectives
 Definition

Management By Objectives (MBO) can be defined

as a process whereby the employees and the
superiors come together to identify common goals,
the employees set their goals to be achieved, the
standards to be taken as the criteria for
measurement of their performance and contribution
and deciding the course of action to be followed.
• Management by Objectives (MBO) is a process of agreeing
upon objectives within an organization so
that management and employees agree to the objectives
and understand what they are in the organization.

• The term "management by objectives" was first popularized

by Peter Drucker in his 1954 book 'The Practice of
Management'
 Main Concept
• The principle behind Management by Objectives (MBO) is to
make sure that everybody within the organization has a clear
understanding of the aims, or objectives, of that organization,
as well as awareness of their own roles and responsibilities in
achieving those aims.

• The complete MBO system is to get managers and empowered

employees acting to implement and achieve their plans,
which automatically achieve those of the organization.
 Management by Objectives
Principles
• Cascading of organizational vision, goals and objectives
• Specific objectives for each member
• Participative decision making
• Explicit time period
• Performance evaluation and feedback
 MBO Strategy: Three
Basic Parts
• All individuals within an organization are assigned
a special set of objectives that they try to reach
during a normal operating period. These
objectives are mutually set and agreed upon by
individuals and their managers.
• Performance reviews are conducted periodically
to determine how close individuals are to
attaining their objectives.
• Rewards are given to individuals on the basis of
how close they come to reaching their goals.
Peter Drucker’s Management By Objectives
The MBO Process
Define
Organization
al Goals

Define
Perfor mance
Employee
Appraisals
Objectives

Continuous
Monitoring
Providing
Of Employee
Feedback
Perfor mance
And
Progress
Perfor mance
Evaluation/
Reviews
Management By Objectives -
Principles
• Cascading of organizational goals and objectives.
• Specific objectives for each member.
• Participative decision making.
• Explicit time period.
• Performance evaluation and feedback.
8 Key Result Areas Where Managers Must Pursue
Clear Objectives - Kotelnikov, 2008

•Marketing

In order for a business to create a customer, there needs to be a market.

•Innovation

New ideas are required by a business in order to create a demand for a

product.

•Human organization
•Financial resources
•Physical resources

According to Drucker, 2007 the above three Key Result Areas are interlinked
and all businesses depend on them. These are known as the factors of
production.
8 Key Result Areas Where Managers Must Pursue Clear
Objectives Continued….

• Productivity

Resources must be used productively and the productivity must grow in

order for the business to survive.

• Social responsibility

A business exists in a society therefore it has certain obligations towards the

community and is responsible for its impact on the environment.

• Profit requirements

Profit is essential for a business to succeed. It is one of the main reasons

behind the existence of a business and without it there would be no way of
covering the risk of potential losses, financing future projects and most
importantly none of the other above areas would exist without profit.
 Features and Advantages of
MBO
• Motivation – Involving employees in the whole process of
goal setting. Increasing employee empowerment increases
employee job satisfaction and commitment.
• Better communication and Coordination – Frequent reviews
and interactions between superiors and subordinates helps
to maintain harmonious relationships within the enterprise
and also solves many problems faced during the period.
• The Smart Method
 Where to Use MBO

• The MBO style is appropriate for knowledge-based enterprises

when your staff is competent. It is appropriate in situations
where you wish to build employees' management and self-
leadership skills and tap their creativity and initiative.

• Management by Objectives (MBO) is also used by chief

executives of multinational corporations (MNCs) for their
country managers abroad.
The Smart Method

Clarity of goals – With MBO, came the

concept of SMART goals i.e. goals that are:
• Specific
• Measurable
• Achievable
• Realistic, and
• Time bound.
 The Smart Method
• The goals thus set are clear, motivating and there is a linkage
between organizational goals and performance targets of the
employees.

• The focus is on future rather than on past. Goals and

standards are set for the performance for the future with
periodic reviews and feedback.
 Core Concepts
•According to Peter Drucker, managers should "avoid the
activity trap", getting so involved in their day to day
activities that they forget their main purpose or objective.
Instead of just a few top managers, all managers should:
• Participate in the strategic planning process, in order to
improve the implement ability of the plan, and
• Implement a range of performance systems, designed to help
• the organization stay on the right track.
 Managerial Focus
• MBO managers focus on the result, not the activity.
• They delegate tasks by "negotiating a contract of goals" with
their subordinates without dictating a detailed roadmap for
implementation.
• Management by Objectives (MBO) is about setting yourself
objectives and then breaking these down into more specific
goals or key results.
 MBO in Action at Intel
A Manager's Guide at Intel provides the following directions.
• Start with a few well-chosen overriding objectives.
• Set your subordinates objectives that fit in with your
overriding objectives.
• Allow your subordinates to set their own key results to enable
them to meet their objectives.
 MBO in Action at Intel
• In Management by Objectives systems at Intel, objectives are
written down for each level of the organization, and
individuals are given specific aims and targets.
• The principle behind this is to ensure that people know what
the organization is trying to achieve, what their part of the
organization must do to meet those aims, and how, as

individuals, they are expected to help

 MBO in Action at Intel

• This presupposes that organization's programs and methods

have been fully considered.
• If they have not, start by constructing team objectives and ask
team members to share in the process
 MBO in Action at Intel
• "For Management by Objectives (MBO) to be effective,
individual managers must understand the specific objectives
of their job and how those objectives fit in with the overall
company objectives set by the board of directors.
• "A manager's job should be based on a task to be performed
in order to attain the company's objectives.
• "The manager should be directed and
controlled by the objectives of performance
rather than by his boss."
 Balance Between
Management and
Employee Empowerment
• The balance between management and
employee empowerment has to be struck, not by
thinkers, but by practicing managers. Turning
their aims into successful actions, forces
managers to master five basic operations:
• setting objectives
• organizing the group
• motivating and communicating
• measuring performance and
• developing people
 Individual
Responsibility
• Management by Objectives (MBO) creates a link
between top manager's strategic thinking and
the strategy's implementation lower down.
• Responsibility for objectives is passed from the
organization to its individual members.
• It is especially important for knowledge-based
organizations where all members have to be able
to control their own work by feeding back from
their results to their objectives.
 Individual
Responsibility
Management by objectives is achieved through
self-control, the tool of effectiveness. Today the
worker is a self-manager, whose decisions are of
decisive importance for results.
In such an organization, management has to ask
each employee three questions:
• What should we hold you accountable for?
• What information do you need?
• What information do you owe the rest of us?
MBO at Microsoft
By Bill Gates
• Eliminate politics, by giving everybody the same
message.
• Keep a flat organization in which all issues are
discussed openly.
• Insist on clear and direct communication.
• Prevent competing missions or objectives
• Eliminate rivalry between different parts of the
organization
• Empower teams to do their own things
 MBO: Key Advantages
and Disadvantages
Advantages
• MBO programs continually emphasize what
should be done in an organization to achieve
organizational goals.
• MBO process secures employee commitment to
attaining organizational goals.
Disadvantages
• The development of objectives can be time
consuming, leaving both managers and
employees less time in which to do their actual
work.
Steps in MBO
• To establish long-term and short-tem organizational goals
• To establish long-term and short-term objectives for each
manager, clarifying the key performance standards
• Periodic review of performance
• Encouraging managers to accept responsibility
Benefits of MBO
• The need for planning will be recognized
• It provides for objectives and accountability for
performance
• It encourages participative management
• It helps in job enrichment
• It provides for a good feedback system
Thank you