Management by Objectives: Advantages and Disadvantages

Management by objectives can be a powerful framework for business success, but it does come with downsides that not everyone is aware of. loves data and we embraced the MBO model from our early days. We've learned a lot about the pros and cons of the system, which we will share with you today.

What Does Management by Objectives Mean?

Management by Objectives (MBO), is a result-oriented, goal-setting management model that focuses on collaborative goal-setting between managers and employees. It is also known as Management by Results, Goal Management and Management by Planning,

With an emphasis on clear communication and a unified commitment to organizational objectives, the MBO technique measures employee performance against mutually determined goals, standards and expectations.

The MBO style, which is based on management guru Peter Drucker’s 1954 book, The Practice of Management, is a full-scale organizational operational model that involves all employees in the goal-setting process. The belief is that when individuals can pinpoint their contributions toward corporate goals they helped define, they are often more inclined to perform related tasks and duties. 

Additional key components of MBO include the call for open communication and collaboration between junior, mid and senior-level employees. The theory is that alignment between all levels of staff ensures synchronicity and productivity. That ranges from the specificity during planning stages when measurable group goals are defined to the ongoing refinement of individual responsibilities and expectations.

When implemented successfully, this strategic management model should enhance the performance of an organization by way of greater efficiency and transparency.

Related article: What is Incentive Compensation Management?

Why Manage by Objectives?

MBO has allowed countless organizations to achieve — and in many cases exceed — their goals since the mid-1950s. The common outcome of managing by objectives is increased productivity, teamwork and communication.

By its very nature, the MBO framework makes the roles and responsibilities of every employee explicit, which ensures every contributor is aware of their input and impact. 

MBO differs significantly from alternative management processes that operate from a predominantly siloed approach. There's usually a lower chance of success in instances like that, where the larger picture isn't visible to employees. 

A well-implemented Management by Objective model empowers employees to take ownership of their piece of the organizational puzzle, increasing engagement and productivity. MBO also encompasses the regular monitoring and evaluation of employees against agreed goals, and any associated variable compensation or non-financial incentives.

Management by Objectives is an exhaustively comprehensive management approach that affects the entire organizational structure. While many organizations sing its praises, others sing from another hymn sheet. 

Related article: 3 Key Objectives of a Sales Compensation Plan

Let’s take a look at the advantages and disadvantages of MBO together.   

Advantages of MBO

  • Detailed planning: Managers and employees work together to define measurable goals, leaving less room for uncertainty and more room to focus on what will drive success. 
  • Clearly assigned roles and responsibilities: When employees help set organizational goals and metrics, they better understand what success looks like, how to obtain it, and how you will evaluate them. 
  • Enhanced communication and transparency: Clear and effective communication between management and employees is part and parcel of MBO. Transparent communication minimizes ambiguity and cultivates confidence across the business. 
  • Increased productivity and morale: MBO highlights the relevance of each employee in achieving the goals that have been mutually set. When the employee knows that their unique contribution plays a fundamental role in the business's overall success, it can boost motivation, productivity and accountability. 
  • Regular feedback and opportunities for career development: MBO is a process of constant refinement which prompts managers to take a guiding role in areas for employee development. Since employees also understand where their current skills are being utilized, they are aware of areas that could be improved and can seek them out.
  • Quantifiable objectives: Specific goals and objectives are an agreed-upon benchmark to measure the performance of employees and the organization. With high significance placed on measurable objectives, the performance appraisal and evaluation process is more precise.
  • Overall improvement to the organization: With its performance and result-oriented focus, MBO brings about clarity, communication and collaboration among managers and team members. This winning combination promotes business growth in a proactive and responsive framework.

Image Source: Management by Objectives: Everything You Need to Know - HubSpot

Disadvantages of MBO

  • Unanimous support from all levels of the organization is required: The success of Management by Objectives hinges on senior management's complete support and acceptance. Many underlying issues may stall the process of unifying the goals of the ‘unequal’s,’ i.e. management and junior to mid-level employees. Cross-functional support is essential to overcome them.
  • Time-consuming: Integrating MBO is an investment that requires a concerted commitment to be beneficial. Additional time to define goals and evaluation processes is necessary, requiring meetings and paperwork that can infringe on daily work.
  • Some aspects are difficult to quantify: The emphasis on measuring everything that can be measured ignores non-measurable factors like teamwork, company culture and other interpersonal activities. That could lead to those factors being devalued and less practiced. The extreme focus on numbers and metrics could have an anxiety-inducing impact on employees who feel they have to be ‘always on’ and performing optimally.
  • Emphasis on short-term goals: Goals are usually set based on six to 12-month intervals, which often means long-term objectives aren’t treated with the same level of importance. With this being the case, it’s possible to lose sight and direction of overarching long-term goals.
  • Inflexibility: Fixation on particular goals could cause stakeholders to miss signs that the revision of a goal may be necessary or beneficial.
  • Potential gaps in management’s skillset: MBO, though deep-rooted in collaboration, rests heavily on the shoulders of leadership to create a sense of direction. If a manager lacks the skills, the potential benefits of the Management by Objectives model will not be realized.
  • Integration issues - Limited application: Seamless integration into an existing management system is unlikely, and businesses should be aware of this before attempting to do so.

Is MBO right for your business?

When integrated correctly, Management by Objectives can contribute to organizational efficiency, transparency and success.

MBO is a result-oriented management model that neglects many unquantifiable aspects of a business. A thorough evaluation of this style is a great starting point in determining whether your business could benefit from it.

If you're considering implementing a MBO model in your business, the best (and most fitting) place to start is by asking employees for the thoughts on it, as well as if and how they would like to be involved in the process.

The strength of the Management by Objectives framework is its collaborative nature, so if you want to build the strongest foundation, start there.

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