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.

Management by Objectives (MBO) aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Management By Objectives term was first popularized by Peter Drucker in 1954 in his book 'The Practice of Management'.

MBO Principles

 Cascading of organizational goals and objectives,
 Specific objectives for each member,
 Participative decision making,
 Explicit time period, and
 Performance evaluation and feedback.

More popular, Management by Objectives also introduced the SMART method for checking the validity of Objectives, which should be 'SMART':

 Specific
 Measurable
 Achievable
 Realistic, and
 Time-related.

It is all too easy for managers to fail to outline, and agree with their employees, what it is that everyone is trying to achieve. Employees get strong input to identifying their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.

MBO substitutes for good intentions a process that requires rather precise written description of objectives (for the period ahead) and timelines for their monitoring and achievement. The process requires that the manager and the employee agree to what the employee will attempt to achieve in the period ahead, and (very important) that the employee accept and agree to the objectives (otherwise commitment will be lacking).

For example, whatever else a manager and employee may discuss and agree in their regular discussions, let us suppose that they feel that it will be sensible to introduce a key performance indicator to show the development of sales revenue in a part of the firm.

Then the manager and the employee need to discuss what is being planned, what the time-schedule is and what the indicator might or might not be. Thereafter the two of them should liaise to ensure that the objective is being attended to and will be delivered on time.

Organizations have scarce resources and so it is incumbent on the managers to consider the level of resourcing but also to consider whether the objectives that are jointly agreed within the firm are the right ones and represent the best allocation of effort.

Also, reliable Management information systems are needed to establish relevant objectives and monitor their "reach ratio" in an objective way.

According to Drucker managers should avoid 'the activity trap', getting so involved in their day to day activities that they forget their main purpose or objective.

One of the concepts of MBO was that instead of just a few top-managers, all managers of a firm should participate in the strategic planning process, in order to improve the implementability of the plan.

Another concept of MBO was that managers should implement a range of performance systems, designed to help the organization stay on the right track.

Clearly, Management by Objectives can thus be seen as a predecessor of Value Based Management!

However, it has been reported in recent years that this style of management receives criticism in that it triggers employees' unethical behaviour of distorting the system or financial figures to achieve the targets set by their short-term, narrow bottom-line, and completely self-centered thinking