Management By Objectives

Updated on March 20, 2024
Reviewed byDheeraj Vaidya, CFA, FRM

What is Management By Objectives (MBO)?

Management By Objectives (MBO) is a management model that focuses on organizational goals by setting a benchmark. The management and employees work together to fulfil the same mission by having clear intentions, open communication, and shared goals.

The model is based on Peter Drucker’s book, The Practice of Management which was published in 1954. Emphasis is laid on transparency and ease of communication. Superiors and subordinates, together, take part in goal setting.

Key Takeaways

  • Management by objectives is a model that emphasizes communication and clarity when defining the goals of an organization.
  • It uses realistic goals and metrics to create objectives that will be achieved by the employee. This way, human resources are used in an efficient manner.
  • MBO is excellent in giving employees a fair understanding of their responsibilities. This way, it encourages expected behaviour.
  • It’s a method to improve transparency and efficiency over time.

How Does Management by Objective Work?

MBO is a full-scale organization strategy. It involves people from top to bottom of the productive chain. At first, the managers identify the main goals of the company. Next, they set up strategies to communicate company goals to the staff.

The sole concept behind this management model is clarity. When employees have clarity about the goals, they are more efficient at meeting them. The goals are hard but also realistic.

All objectives are quantified and monitored to ensure that the strategies are working. In the end, the employees receive feedback based on their performance. Over time, the organizations fine-tune these goals and increase overall productivity.

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Management by Objectives Process

Peter Drucker introduced this strategy in his book, The Practice of Management. It was published in 1954. The execution of this process comprises the following steps.

Management by Objectives Process

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Step #1 – Defining Goals

The company heads determine or revise the current goals of the organization. These goals are derived from the mission of the company. This is already defined in most cases except startups.

Step #2 – Defining Specific Objectives

This is the most important step of the management by objectives method. As soon as goals are set, the company should determine how to reach them. This analysis will list out the objectives. The employees will have specific objectives depending on their position.

It is recommended to design only one to three objectives per person. Anything beyond that would lead to confusion and a lack of focus.

In his book, Drucker mentions the following SMART goals for a company. The goals should be:

  • Specific, it cannot be vague.
  • Measurable, so that the organization can assess if they are succeeding.
  • Acceptable, so that they won’t seem unfair to the employees.
  • Realistic; otherwise, goals would never be met.  
  • Time-bound, to measure results and determine success.

This prevents failure due to unrealistic expectations, which may diminish morale.

Employees should set their own goals. It will make them feel like a part of the organization and help them stay motivated.

Step #3 – Monitoring the Process

The process should be monitored at all times, as results will determine the future plans. It also prevents the management from losing track of progress. By doing so, organizations can avoid failures by spotting flaws in the process early on.

Step #4 – Evaluating the Performance

It’s essential to use solid metrics to evaluate the performance. Firms should focus on the key performance metrics used from the beginning.

Firms should define boundaries for what is acceptable, what is successful, and what could be an utter failure. Successes should be rewarded, and failures need to be addressed.

Step #5 – Feedback

All employees must get a clear response on their performance. If they do well, they should be rewarded. This motivates them to keep up the good work.

Employees who did not achieve the goals, however, need to figure out the flaws in their process. They need to come up with a strategy to overcome the flaws and improve.

Examples of Management by Objectives

Consider the following example emulating the steps of management by objectives.

Many noteworthy companies have used MBO. The management at the computer company Hewlett-Packard (HP) considers the policy a huge component of its success. Many other corporations praise the effectiveness of MBO, including Xerox, DuPont, and Intel.

Advantages and Disadvantages

Like any other organizational model, MBO has both advantages and drawbacks.


  • Overall, management by objectives increases the productivity of an organization over time because it continuously evolves the process.
  • It increases the quality of teamwork and communication between the management team, as they need to constantly cooperate to ensure clarity in the strategies and provide feedback.
  • Employees may achieve their goals more easily because they will be coherent and achievable.
  • It enhances the transparency of the organization and the efficiency of the management. Thus, it improves productivity by minimizing ambiguity.


  • It emphasizes the goals too much.
  • Some relevant parts of a company are often ignored by MBO, such as company culture, work ethos, and interpersonal activities.
  • MBO can cause burnout as it puts a heavy strain on employees to meet the goals set by management.

Frequently Asked Questions (FAQs)

What is meant by management by objectives?

Management by Objectives (MBO) is a management model that focuses on organizational goals by setting a benchmark. The management and employees work together to fulfil the same mission by having clear intentions, open communication, and shared goals.

Which is an example of MBO?

Consider the following example emulating the steps of MBO. The financial department wants to raise $1 million in funding and increase financial automation by 10%. After debating these goals with the heads of the department, they decide to talk with the employees to set their objectives. All employees would be focused on one of the points.

Finally, heads of the department collaborate and assess the results. By evaluating successes and failures, they promote changes and define goals for the future.

What are the 5 objectives of management?

Management objectives could be the following:

• Proper use of available resources.
• Business Development and Growth.
• The creation of quality products or services.
• Maintaining a proactive workplace.
• Reduce market risks.

This has been a Guide to What is Management by Objectives (MOB) and its Definition. Here we discuss the MBO process, how it works, along with examples, advantages, and disadvantages. You may also have a look at the following articles to learn more –