Management By Objectives: MBO Process in 5 Steps [Explained]

Process of MBO (Management By Objectives)

MBO i.e. management by objectives is the process of setting organizational goals/objectives that are agreed upon by supervisors and employees. It is a strategic management tool to increase the overall performance of the company.

Peter Drucker, the initiator of MBO has stated that management by objectives works if you know the objectives. Ninety percent of the time you don’t. He emphasized setting clear objectives that the company wants to achieve has a significant impact on results achievement.

Drucker has suggested 5 steps in the MBO process which start with defining companies’ objectives, translating them to employees, ensuring employee participation, and monitoring, and ends with an evaluation and reward to employees. Let’s discuss them individually,

Determine Organizational Objectives

In the first step of the MBO process, you should determine the objectives or goals the company wants to achieve. Objectives are the end result of the company.

Objectives need to be clear in order to make understand everyone why and how the organization wants to achieve them. They are determined on the basis of the company’s vision and mission statement. The top management has a preliminary role in defining the company’s objectives.

The determined objectives should have the quality to be communicable and acceptable to everyone involved in the organization. And, express the stipulated time within which the objective should be achieved.

Translate Objectives To Employees

Once you define the organizational objectives the next step in the management by objectives process is to translate them to employees. For this, the determined objectives should be recognizable by everyone in the organization and they should know what roles they have to perform in this.

Related: Pros and Cons of MBO

For organizational objectives to be recognizable, communicable, and understandable to each company member Drucker has pointed out that the objectives should be SMART, i.e.

  • Specific – The objective must not be vague and should only cover a specific area of the company’s vision and mission statement.
  • Measurable – When implemented the objectives should be measurable by some performance indicators.
  • Agreeable – The objectives should be acceptable to everyone involved in the setting and implementation process.
  • Realistic – Realistic objectives are those that are set while considering the resources at hand and what could be possible to accomplish.
  • Time-Bound – The set objective should also state the end time period within which it should be achieved.

Encourage Employee Participation in Objectives Setting

Since MBO itself is the participatory management model, in this step, for the effectiveness of set objectives and best performance the participation of each level of employees in the goal-setting process is necessary.

Employees are invited to the goal-setting process, the matters are discussed collectively in order to make understood everyone why things are being done and asked to align their personal objectives too. The aim of this third step is to align employees’ personal goals with organizational goals.

MBO believes that such a process increases the ownership of employees in organizational overall goals. Since employees’ opinions are valued, objectives are set including their personal objectives too, they feel motivated and contribute their best efforts.

It is to make believe that employees are not blindly following company goals only rather they are also achieving their personal goals also along with achieving the company’s goals. This increases the cohesive work culture and collective efforts toward the same direction.

Monitor The Progress

Though the MBO is designed to increase performance at all levels – continuous monitoring of the performance of employees is equally important for expected results.

Though you make SMART goals or objectives they do not measure themselves you have developed a system to measure each of these components. Your monitoring system should include the criteria within which the performance of employees will be monitored.

Related: Controlling Function

Further, the system should have a quality to address the issues and provide solutions before the issues actually arise. The system should be able to check the progress of everyone included in the process against the plans.

Evaluate and Reward Performance

Along with improving the manager’s performance, the MBO is also a good performance appraisal tool. The last step in the MBO process is the evaluation of employees’ performance and giving rewards to good performers.

MBO is designed to bring better performance and for this careful evaluation of employees’ performance is necessary. You have to evaluate employees’ performance in relation to set goals and objectives.

The good performers should be rewarded either in terms of bonus, praise, or promotion and the bad performers should not be punished. Rather they should be given proper feedback on their performance and what they should do to improve.

When you reward the good performer employees you give a clear message that you value the contribution of employees and the MBO is not just an additional exercise for them but an honest performance evaluation tool.

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