Management By Objectives MBO: Definition and How It Works.

Management By Objectives
Corporate Finance Institute

Management by objectives (MBO) means that a supervisor and subordinate set performance goals that are good for both of them. This article talks about the steps of management by objectives with its examples.

Management by Objectives Examples

Here are some real MBO goals to help you understand what they mean:

  • Human Resources should have a 95% retention rate every quarter, 10% of new hires should come from employee referrals, and each new employee should go through at least three interviews.
  • Reach a 20% win rate in sales, add 50 new customers per month, and generate 25% more leads.
  • Complete reviews of compensation agreements, make an annual operating budget, and also help increase shareholder value by 2.5% each quarter. 
  • Using the principles of performance management, we want to promote a new departmental supervisor, increase customer satisfaction by 80%, and lead our market.
  • There are many goals that can be set between an employer and its employees. A reasonable MBO for a call center would be to try to improve customer satisfaction by 10% while cutting the average call length by one minute. However, the onus is now on you to figure out how to reach this goal. Once that’s done, it’s time to rally the troops and keep track of their progress while giving them constructive criticism and praising their efforts.
  • Another example of how MBO works would be a business that wants to make 30% of its total revenue from marketing activities every quarter. Each team member is in charge of a different part of the overall goal.
  • The goal of each member of the digital marketing team is to bring in three new marketing clients every three months.
  • Managers keep an eye on what their workers are doing during the quarter to see if and how each worker is making progress toward his or her quarterly goals.
  • If a team member meets their quarterly goal, they will get a financial bonus.

How to Understand Management by Goals (MBO)

Management by objectives, or MBO, is a way to run a business that aims to boost productivity by getting upper-level leaders and lower-level workers to agree on goals and share them. The idea is that when employees help set organizational goals and come up with strategies, they are more likely to care about the success of the company and work together to reach those goals.

Management by objectives, which is also called “management by planning,” is the process of setting up a management information system (MIS) to compare how well goals are being met to data from the past. Proponents of MBO say that its main benefits are more engaged and committed employees and better lines of communication between management and staff.

More Information

One criticism of MBO is that it focuses too much on setting goals in and of itself and not enough on making a plan for how to reach those goals. Many people, including W. Edwards Deming, have said that MBO is bad because it encourages workers to cut corners that hurt quality in order to meet arbitrary goals like production quotas.

Peter Drucker came up with MBO, and it was first written about in his 1954 book “The Practice of Management.” It was talked about and used a lot until the 1990s when it seemed to fall out of use. Because the idea is used so often, it may not be given much thought because people think it doesn’t need to be explained further.

The book by Peter Drucker that gave MBO its name explained many of its parts.

Goals that are both ambitious and achievable are made with the help of employees. Each employee gets feedback every day, and the focus is on positive reinforcement rather than punishment. Instead of focusing on mistakes, the goal is to learn and get better.

MBO’s Structure

Even though the MBO process is made up of only five steps, there are a few things to keep in mind that affect each step. Even though the five steps sound simple, if you don’t pay attention to these things, you won’t get the results you want because they contribute to the success of MBO and the organization’s understanding of what it wants to accomplish. The following is the structure of the MBO below:

  • Several categories of MBO goals include: Initial goals, also called strategic goals, are the high-level, broad goals that the company’s leaders have set. However, these are the points from which all other goals can be made.
  • The second level of goals is called “tactical” or “team,” and it involves setting more specific goals for groups of people or whole departments. To reach this kind of goal, you may need to work with more than one group or team.
  • Individual or operational goals fall into this group. Different workers may have very different goals.
  • Quantification of Objectives: Quantification is the process of defining the parameters of each goal and giving a numerical estimate of how likely it is to be reached. Use the SMART framework to help people understand this information better.
  • The last step of MBO is a review of how well the team did, which includes things like an initial rating, feedback, and praise for good work.

What Is the First Step in Management by Objectives

The following are the first-step examples in management by objectives (MBO):

#1. Set the Goals for Your Organization

First of all, you should decide what you want your business to do. However, as a project manager, you might be asked to help set business goals or to tell your team what those goals are. In this step, you can use a template for company goals to help you organize your goals.

Setting goals is important for the growth of any business, but it can also be useful in other ways. Planning should involve many different kinds of managers. The goals that management has set for the company are only temporary because they are based on what they think the business can and should do in a certain amount of time.

#2. Set Individual and Group Goals

When the managers have been told about the overall goals, plans, and strategies to use, they can start working with their subordinates to set personal goals. At this one-on-one meeting, employees will talk to their bosses about how far along they are in reaching their personal goals, as well as the timelines and resources they have to help them reach those goals. Then, they might talk about which goals the group or division might be able to reach.

#3. Checking In on How Things Are Going All the Time

The management by objectives strategy is important not only for making managers as productive as possible but also for keeping track of how everyone in the company is developing and growing.

#4. Performance Is Taken Into Account

The review of performance in the MBO framework is based on what the relevant management says.

#5. Getting Responses

The most important part of the management-by-objectives approach is the constant feedback on results and goals because it lets employees keep track of their actions and change them as needed. In addition to the constant feedback, there are formal evaluation sessions where superiors and subordinates can look at each other’s feedback and the subordinate’s progress toward goals.

#6. Evaluation of Performance

In MBO businesses, formal reviews are the norm for judging how well an employee is doing their job.

What Are the Pros and Cons of Objective-Based Management? (Mbo)

The following step is the pros and cons examples of management by objectives (MBO) below;


  • When employees are assigned work that is within their areas of competence and where they can apply the knowledge and abilities they’ve already acquired, they feel valued and satisfied with their work.
  • Individualized goals give workers a sense of purpose, which makes them work harder and care more about the company.
  • The flow of information between the bosses and the workers has picked up.
  • The company’s management can decide how well it will do in the future.


  • The main focus of MBO is on goals and objectives, so the business culture, work ethic, and chances to participate and move up are often overlooked.
  • There is a lot of pressure on workers to finish their jobs in the time allotted.
  • Workers are pushed to meet goals no matter what, which makes it more likely that they will cut corners here and there.
  • If management only used MBO to do all of its jobs, it might run into problems in areas that aren’t covered by MBO.

What Is Management by Objectives

MBO, which stands for “management by objectives,” is a common way to set and reach goals. Performance management is a way to judge how hard an employee has worked by comparing their results to a standard that has already been set. However, most of the time, these goals are linked to a larger company or divisional goals.

What Is a Management by Objectives Example?

As an example of how MBO works, think about a business that wants to make 30% of its total income from marketing activities every quarter. Each team member is in charge of a different part of the overall goal.

What Are the Steps in the MBO Process?

The following are;

  • Set goals for your business.
  • Make a plan and set some targets.
  • Follow the progress.
  • Check out what’s going on.
  • Incentivize success.

What Are the Characteristics of Management by Objectives?

Management by objectives (MBO) means that a supervisor and subordinate set performance goals that are good for both of them. The goal of this method is to get employees more involved and loyal by getting everyone in the organization to work toward the same goals.

The SMART acronym lists the things that good goals should have. However, with SMART goals, you’ll know exactly who’s in charge of what and how it needs to be done. Also, the SMART framework is based on goals that are clear, measurable, attainable, relevant, and have a time limit. However, more goals should be, among other things, measurable, realistic, clear, hard, attainable, and the same across departments.

What Are the Types of MBO?

The following are;

  • Strategic.
  • Methods that use teamwork or strategic moves.
  • Meaningful either in terms of how it works or how it affects the person.

What Are the Benefits and Weaknesses of MBO?

The following are;

  • A better way to run things.
  • Outlining the structure.
  • Your dedication is a source of inspiration.
  • Putting together a check system.
  • Not teaching how to use MBO.
  • Not giving people who set goals any kind of structure.
  • There are problems with figuring out what the right goals are.
  • How important short-term goals are.

What Are the Key Elements of MBO?

The MBO process can be explained in large part by the following:

  • Making a decision about what to do.
  • Trying to reach goals that can be reached.
  • With everyone’s help, goals are set, plans are made, and progress is tracked.
  • Feedback.

What Is the Most Important Aim of MBO?

As part of the MBO method, each worker’s performance and progress are tracked and judged based on how well they meet the goals that were set up front. However, employees are more likely to follow through on their promises if they have a say in setting goals and figuring out how to reach them.

Proponents of MBO say that its main benefits are more engaged and committed employees and better lines of communication between management and staff.


MBO is a good way to ensure that employees share the same goals as the company. Motivated teamwork happens when team members work toward the same goals that help the company’s mission as a whole. Also, this is helpful for the growth of the business.

Management By Objectives FAQs

What does Peter Drucker mean by "management by objectives"?

In MBO, managers and their subordinates work together to set clear goals, find out what each person is good at, and set clear measurements for success. If you want to follow the SMART approach, you’ll need to make sure your objectives are detailed, realistic, time-bound, relevant, and measurable.

What are the two thirds of the importance of MBO (manage by objectives)?

Improved cooperation and coordination are common outcomes of the MBO method. Doing so helps workers know what is expected of them. The people in charge of each team member have told them what their goals and responsibilities are. The company sets individual objectives for each worker.

MBO: Is it a theory?

In his book Practice of Management, Peter F. Drucker lays forth his management theory known as Management by Objective (MO), also known as Management by Results (MBR) (1954).

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