Ambiguity is the arch-nemesis of corporate success. In competitive markets, businesses cannot operate based on rough estimates and guesses.
It is imperative to have clearly defined objectives in place to help the leadership and departmental teams plan their course of action. This is where the process of MBO comes to the rescue of enterprises struggling to create a coherent approach to achieve business goals.
Under Management by Objectives, employees and management have a say in setting the company goals, developing the action plans, encouraging equal participation, and aligning the objectives across the organization.
As a strategic management tool, the MBO process is leveraged by many companies operating in hypercompetitive environments.
What is Management By Objective MBO?
MBO, Management by Objectives, is a strategic tool used to boost the performance of an enterprise. Herein, the business goals are clearly defined by the management and are shared with every team member with the motive of achieving every objective.
At intervals, such as quarterly or annually, you compare actual performance with stated objectives.
Many experts agree that one of the advantages of management by objectives is that it boosts employee commitment and motivation, and also facilitates better communication between employees and management.
What are the three types of MBO objectives?
Here are the three common types of Management By Objectives:
1. Strategic objectives
These objectives are focused on long-term goals and the overall direction of the organization. Strategic objectives define the broad outcomes that the organization aims to achieve to fulfill its mission and vision.
They typically encompass areas such as market growth, competitive positioning, expansion into new markets, innovation, and financial performance. Strategic objectives provide a framework for setting more specific operational and tactical objectives throughout the organization.
2. Operational objectives
Operational objectives are concerned with the day-to-day activities and processes necessary to support the achievement of strategic goals. These objectives are typically more specific and tangible than strategic objectives and focus on improving efficiency, productivity, quality, and customer satisfaction within various functional areas of the organization.
Examples of operational objectives may include increasing sales revenue, reducing production costs, improving customer retention rates, or enhancing employee engagement.
3. Tactical or individual objectives
Tactical or individual objectives are specific goals set at the departmental, team, or individual level to support the accomplishment of operational and strategic objectives.
These objectives are directly linked to the roles and responsibilities of employees and are designed to align their efforts with broader organizational goals. Tactical objectives may include targets related to individual performance, project deadlines, task completion, skill development, or other measurable outcomes relevant to the employee's role and contribution to the organization.
Process of MBO - five steps
The purpose of management by objectives is to help a company enjoy better performance through clearly defined and communicated goals. To complete the MBO process, you must follow the following steps:
1. Define organizational objectives
Having clearly defined organizational objectives is essential for the success of an enterprise. However, this exercise has several other purposes also. To define these objectives, you must include all departmental managers and company leadership. The objectives are defined based on the understanding of what the business can and must attain in a given time frame.
2. Translate organizational objectives to team members
After the organization's objectives have been set, you must brief the employees regarding the broad plans and strategies to achieve these goals. Herein, you must also have a one-on-one discussion with every team member to help define their personal goals. Your team members will also share their feedback about the targets and convey the resources required to achieve those objectives.
3. Monitor employee performance
To leverage the benefits of management by objectives process, it is vital for you to constantly monitor the performance of every team member in every department. On top of that, you must monitor the efficiency of every manager to identify any changes that may be required.
4. Evaluate progress with milestones
It is now time to review every employee's performance according to the defined MBO framework. To do this, you must enlist the departmental managers to conduct in-depth reviews.
5. Reward achievements
every employee's performance according to the defined MBO framework. To do this, you must enlist the departmental managers
Under the process of MBO, it is imperative to share continuous feedback on the objectives and results with the employees. This would enable them to track their performance and take corrective actions. Herein, you must also evaluate and reward employee progress with incentive compensation plans. You also need to share an honest performance review to help the employees understand their performance.
MBO examples for different teams
Here are some examples of MBO for some of the common functions in an organization:
Marketing MBO examples
Marketing is a data-driven process that focuses on the results. Some useful MBO examples for the marketing department can be as follows:
- Ensure a 33% growth in social media likes and shares.
- Increase regular website visitors by 25% per week.
- Boost the time spent by visitors on the website by two minutes.
- Generate 500 new leads per month through the website.
Sales MBO examples
Management by Objectives (MBO) in sales involves setting specific, measurable goals for salespeople and then evaluating their performance based on the achievement of these goals. The process typically includes:
- Setting key sales objectives: Manager clearly defines individual and team sales goals. It can include things such as revenue brought, customer retention, pipeline generated. Each can have different weigtage helping reps to prioritize.
- Action plans: Manager develops plans and strategies to achieve these objectives with the team
- Monitoring progress: Everyone regularly tracks progress toward the goals.
- Performance evaluation: Manager assesses performance based on the attainment of objectives with HR.
- Feedback and rewards: Providing feedback and rewards based on performance.
Read about sales performance reviews, quotes and tips
Sales are one of the most common teams in any company. Some important MBO examples for sales teams can be as follows:
- Reduce the sales cycle by 15 days.
- Increase the average ticket size by 33% in a year.
- Onboard 100 new customers in six months.
- Expand overseas sales by 20%.
Human Resources MBO examples
Setting clearly defined HR MBOs, you can ensure perfect sync between the employees and company MBOs. Some examples of HR MBOs are as follows:
- Ensure compensation levels are at 8% more than the industry standard.
- Develop and implement a leadership training program.
- Meet with the finance team to understand new hiring requirements.
- Improve employee satisfaction levels by 25%.
Finance MBO examples
Another key operational area is where it is easy to set quantifiable MBOs. Some examples of finance MBOs are as follows:
- Prepare a plan to raise $20 million in the next fiscal year.
- Increase asset-to-debt ratio by 5%.
- Review new compensation agreements.
- Ensure compliance with new statutory regulations.
What are the Management By Objectives (MBO) advantages and disadvantages?
Here are some of the most important management by objectives pros and cons to help you understand the various aspects of this concept.
Benefits of management by objectives
- Better communication between company leadership and team members brings transparency to the goal-setting process.
- Employees have a higher motivation to give their best efforts to achieve the stated goals as they would match their skills and strengths.
- Employees feel a sense of loyalty towards the enterprise as their goals have been tailored as per their capabilities.
- Specific MBOs for different departments offer clarity to team members regarding the path to success.
Disadvantages of management by objectives
- Sometimes employees can interpret that their only target is to meet the stated goals. This can result in taking shortcuts which compromises the quality of work.
- Employees are under stress to push themselves to the limit to achieve goals within a given timeframe.
- The focus of management can deviate from other non-quantifiable aspects like work ethos, work culture, and scope for employee involvement.
- Management can get too focused on working per MBOs. Operations that are not covered under MBO can be left behind.
Should you implement Management By Objectives?
If your organization lacks clarity regarding its goals and objectives, implementing MBO can help align efforts and focus resources on achieving specific outcomes.
By communicating organizational expectations in clear terms, MBO ensures that employees are in a better position to meet those goals.
While MBO provides a structured approach to goal setting, it may not be suitable for organizations that require high levels of flexibility and adaptability. Consider alternative management approaches that may better suit your organization's needs and goals such as Management by Exception (MBE), Agile Management, or Results-Based Management (RBM), before deciding on MBO.
5 tips for implementing MBO in sales
If you are looking at implementing MBO for your sales team, here are some tips:
- Set realistic and attainable goals: Ensure that the objectives are challenging yet achievable to keep salespeople motivated.
- Involve your sales folks while goal setting: Engage salespeople in the process to ensure they buy into the objectives and understand their importance.
- Provide regular feedback during meetings: Offer continuous feedback and support to help salespeople stay on track and adjust strategies as needed.
- Align objectives with company and individual goals: Ensure that individual and team goals are aligned with the broader company objectives to maintain strategic focus. Also, try to ensure team members are aligned and that the goals help with their personal development.
- Leave room for adjustments: Regularly review progress and be flexible enough to adjust objectives and strategies in response to changing market conditions.
2 alternative approaches to Management by Objectives in Sales
- OKRs (Objectives and Key Results): The methodology involves setting ambitious and qualitative objectives and then defining specific, measurable key results to track progress towards these objectives.
So, a sales rep will have clarity on the end goal and the steps to be achieved to meet it.
For example,
Objective: Increase sales revenue by 15%
Key results:
- Increase sales calls by 30%
- Upsell to 5% of the customers
Based on the overall achievement with the objective, sales incentives are paid.
- SMART Goals + commissions: Similar to MBO but emphasizes setting Specific, Measurable, Achievable, Relevant, and Time-bound goals. And these goals are tied to commissions. Upon achieving this, they get commissions paid.
For example, a sales target of $1mn, and upon achieving, they get a 10% commission. Commissions are also SMART.
Both of these modern alternatives aims to address some of the limitations of MBO by emphasizing flexibility, continuous improvement, and a holistic approach to performance management.
FAQs on management by objectives
1. What is meant by management by objectives?
It is a management system that evaluates the performance of employees against a series of targets that would help them understand their overall performance during a given period.
2. Is management by objectives good?
Whether Management by Objectives (MBO) is considered "good" depends on various factors such as organizational culture, industry, and implementation effectiveness.
MBO can be beneficial for companies of any size that want to set goals, align employee efforts with organizational objectives, and improve performance. However, it also has limitations, including potential rigidity, and administrative burdens.
3. What are the 4 steps of management by objectives?
The four steps of MBO are:
- Define organizational objectives
- Communicate objectives to team members
- Monitor performance and evaluate progress
- Reward achievements
4. What are the advantages and disadvantages of management by objectives?
There are many advantages and disadvantages of management by objectives. The most important benefit is motivating employees to go for defined targets as they have better clarity. The most significant disadvantage is that it can lead to management focusing only on those areas where MBO is applicable.
5. What is the cycle of MBO?
MBO is generally a 12-month/ annual cycle. You can have check-ins quarterly or half-yearly to check if employees are meeting milestones.
