What Is Management By Objectives? The Management By Objectives In A Nutshell

Management by objectives was popularised by notable management consultant Peter Drucker in his 1954 book The Practice of Management. Management by objectives (MBO) is a model used to improve organizational performance by defining objectives agreed upon by both management and employees.

Understanding management by objectives

The methodology suggests first defining organizational objectives management can convey to subordinates. Both parties subsequently work together to determine how each objective will be achieved in a sequence. Using this management system, individual goals are synchronized with organizational goals and a calm and productive work environment is created by leaders.

Ultimately, the model suggests employees involved in goal setting and action plan formation are more likely to behave in ways that align with organizational objectives. Better communication between the manager and the employee also increases motivation and buy-in.

Management by objectives in practice

There are five generally accepted steps to management by objectives:

Define organizational goals – these must be realistic, achievable, and well defined. Setting one to three organizational goals that can be achieved in the long-term is most effective.
Define employee objectives – in other words, the measurable steps the employee must take to achieve organizational goals. Managers must work with subordinates on an individual basis to establish goals they can realistically achieve using the available resources. Each employee must also be willing to participate in the process.
Monitor progress and performance – consider tracking sheets to monitor progress and periodic team meetings to recognize incremental achievements or tackle challenges.
Evaluate performance and provide feedback – managers must then return to the measurable steps defined in the second phase to evaluate employee performance. Extra guidance should be provided if performance is below par. Positive feedback should also be given at every opportunity to maintain motivation and productivity.
Performance appraisal – this involves the work of each employee being assessed over the life of the project. Appraisals highlight where an individual excelled and where there is still room for growth. Used correctly, these reviews can be an important driver of personal and professional growth.

Management by objectives examples

To get a better sense of management by objectives, we have listed some key organizational objectives below by department.

Company performance

Become a member of the Fortune 500 group of companies.
Increase asset to debt ratio by 10%.
Achieve a payback period of 18 months for new products.

Marketing

Increase marketing ROI by 9.5%.
Increase landing page conversion rates by 26%.
Implement continuous A/B testing of landing pages.

Human resources

Maintain a quarterly retention rate of 95%.
Hold a minimum of two interviews for new hires.
Assign at least a third of all managerial positions to internal applicants.

Product management

Maintain an 85% customer satisfaction (CSAT) score.
Meet with at least five high-value clients to gauge product feedback.
Analyze the product strategies of three direct competitors.

Customer success

Decrease the number of customer support tickets during onboarding by 40%.
Decrease customer churn rate by 20%.
Maintain a detailed profile for each premium client.

Key takeaways:

Management by objectives is a model used to improve organizational performance by defining objectives agreed upon by both management and employees. It was developed by notable management consultant Peter Drucker in 1954.
Management by objectives suggests employees involved in goal setting and action plan formation are more likely to behave in ways that align with organizational objectives. This also fosters better communication and relationships between managers and subordinates.
Management by objectives can be described by five general steps: define organizational goals, define employee objectives, monitor progress and performance, evaluate performance and provide feedback, and performance appraisal.