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.
The term "management by objectives" was first popularized by Peter Drucker in his 1954 book 'The Practice of Management'.
Domains and levels
Objectives can be set in all domains of activities (production, services, sales, R&D, human resources, finance, information systems etc.).
Some objectives are collective, for a whole department or the whole company, others can be individualized.
MBO is often achieved using set targets. MBO introduced the SMART criteria: Objectives for MBO must be SMART (Specific, Measurable, Achievable, Relevant, and Time-Specific). In some sectors (Healthcare, Finance etc) many add ER to make SMARTER.
Several managers have employed this management technique and have applied it to their company. These managers include Mukesh Ambani, Don Sheelen and Steve Jobs.
Objectives need quantifying and monitoring. Reliable management information systems are needed to establish relevant objectives and monitor their "reach ratio" in an objective way. Pay incentives (bonuses) are often linked to results in reaching the objectives
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.
The use of MBO needs to be carefully aligned with the culture of the organization. While MBO is not as fashionable as it was pre the 'empowerment' fad, it still has its place in management today. The key difference is that rather than 'set' objectives from a cascade process, objectives are discussed and agreed, based upon a more strategic picture being available to employees. Engagemant of employees in the objective setting process is seen as a strategic advantage by many
A saying around MBO and CSF's -- "What gets measured gets done" is perhaps the most famous aphorism of performance measurement; therefore, to avoid potential problems SMART and SMARTER objectives need to be agreed upon in the true sense rather than set.