Table of Contents

Mastering Management by Objectives: 5 Steps, Benefits & Challenges

By

Adam Hayes

Updated October 01, 2025

Reviewed by

Natalya Yashina

Fact checked by

Pete Rathburn

Definition

Management by objectives is a management approach where objectives are set by an agreement between a manager and an employer to incentivize employee participation.

What Is Management by Objectives (MBO)?

Management by objectives (MBO) is a strategic management approach that involves aligning an organization's performance goals with both employee and management objectives. It has five steps: define objectives, share them with employees, encourage employees to participate, monitor progress, and finally, evaluate performance and reward achievements. In practice, a manager and an employee agree on specific performance goals and then develop a plan to reach them. MBO can foster employee engagement and commitment, enhancing results of work efforts. But it has its critics.

Key Takeaways

Management by Objectives (MBO) is a strategic approach that aligns company goals with employee objectives, promoting collaboration and clarity in organizational performance.
The process involves five key steps: defining objectives, communicating them to employees, encouraging participation, monitoring progress, and evaluating performance with rewards.
MBO can increase employee motivation and communication but may also place excessive focus on targets, potentially leading to shortcuts and overlooked company culture.
While MBO effectively aligns individual and organizational goals, it requires strong support from management and can be misapplied if relied upon exclusively.
Critics of MBO argue that the heavy emphasis on achieving specific goals might detract from broader organizational values and long-term growth.

Deep Dive into Management by Objectives (MBO)

Management by objectives, or management by planning, involves using a management information system (MIS) to compare actual performance with defined objectives. Practitioners say MBO boosts employee motivation and commitment, and improves communication between management and employees.

However, a cited weakness of MBO is that it unduly emphasizes setting goals to attain objectives, rather than working on a systematic plan to do so. Critics of MBO, such as W. Edwards Deming, argue that setting particular goals like production targets leads workers to meet those targets by any means necessary, including shortcuts that result in poor quality.

In the book in which he coined the term, Peter Drucker outlined MBO principles. Goals are set with employee input and should be challenging yet achievable. Employees get daily feedback with a focus on rewards instead of punishment, emphasizing personal growth over criticism.

Note

MBO can be a useful tool, but not a cure-all. It requires support from top management, clear objectives, and skilled managers for success.

Implementing MBO: A Step-by-Step Guide

MBO involves five steps organizations can use to implement this management approach.

Define or revise organizational objectives in line with the company's mission and vision.
Communicate these objectives to employees, leveraging the SMART criteria (specific, measurable, acceptable, realistic, time-bound).
Engage employees in setting individual goals, ensuring alignment with organizational objectives and fostering motivation through empowerment.
Continuously track and monitor employee progress to ensure goals are being met within the designated timeframe.
Conduct evaluations to provide feedback and recognize achievements, rewarding progress to encourage ongoing engagement and productivity.

Pros and Cons of Management by Objectives (MBO)

MBO comes with many advantages and disadvantages.

Advantages

Employees take pride in their work and are assigned goals they know they can achieve that match their strengths, skills, and educational experiences.
Tailored goals give employees a sense of importance, boosting their productivity and loyalty.
MBO enhances communication between management and employees.
Management can create goals that lead to the success of the company.

Disadvantages

Since MBO focuses on goals, it might overlook company culture, work ethos, and areas for employee involvement.
Strain is increased on employees to meet the goals in a specified time frame.
Employees might take shortcuts to meet goals, risking work quality.
If management relies solely on MBO for all management responsibilities, it can be problematic for areas that don’t fit under MBO.

What Is the Goal of Management by Objectives (MBO)?

Management by objectives (MBO) uses a set of quantifiable or objective standards against which to measure the performance of a company and its employees. By comparing actual productivity to a given set of standards, managers can identify problem areas and improve efficiency. Both management and workers know and agree to these standards and their objectives.

What Is an Example of MBO?

A company can set various goals with its employees. In the case of a call center, an MBO could increase customer satisfaction—say, by 10%—while reducing call times by one minute. The onus is now on finding ways to achieve this goal. Once that’s decided on, it’s important to get employees on board and then monitor their progress, provide feedback, and reward those who do a good job.

What Are Some Drawbacks of Using MBO?

As MBO is entirely focused on goals and targets, it often ignores other parts of a company, such as the corporate culture, worker conduct, a healthy work ethos, environmental issues, and areas for involvement and contribution to the community and social good.

What Is the Difference Between MBO and Management by Exception (MBE)?

In management by exception (MBE), management only addresses instances where objectives or standards are transgressed. Thus, workers are left alone unless productivity is not met.

The Bottom Line

The central concept of MBO is alignment of employee goals with company objectives for enhanced performance. The five steps of this strategy involve defining objectives, sharing with employees, encouraging participation, monitoring progress, and evaluating performance with rewards. MBO can improve motivation and communication but may result in goal-focused shortcuts. If your organization decides to try MBO, be sure that your strategy fits your organizational needs, be clear about the need for top management support, and set realistic and clear objectives.

Article Sources

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Printing Color and Process Control Blog (Bruce Leigh Myers). “A Critical Look at Management by Objectives (MBO).”
Greenwood, Ronald G. “Management by Objectives: As Developed by Peter Drucker, Assisted by Harold Smiddy.” The Academy of Management Review, vol. 6, no. 2, 1981, pp. 225–230.
Temple University, Fox School of Business, Management Information Systems. “There’s a S.M.A.R.T. Way to Write Management’s Goals and Objectives.”

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