Management by Objectives (MBO) Strategy: 5 Steps [+Example]

Learn how to use Management by Objectives (MBO) to increase team alignment and achieve your company’s top goals.

By Tegan Samija  •   June 6, 2023  •   8 min read

Your organization’s effectiveness is determined by your ability to take a clear vision, translate it into specific goals, and effectively work towards these goals as a team. If you’re successful, your entire team will feel engaged and motivated, employees’ efforts will be directly tied to your mission, and seamless communication will make your team virtually unstoppable. However, if it feels like your team’s efforts are unfocused at times, or you’re not making measurable progress toward your overarching mission, then it may be time for a new approach. 

Management by Objectives (MBO) is a management philosophy designed to match your team’s activity with your highest-level targets to increase alignment and improve organizational efficiency. Read on to find out what MBO is, the pros and cons of implementing it, and how to get started.

What is Management by Objectives (MBO)?

Management by Objectives (MBO) is a management approach in which a company sets strategic high-level objectives and then develops goals that are directly tied to achieving these objectives for every team member. The goal of MBO is to improve company performance while increasing engagement and buy-in among employees. MBO was first proposed by Peter Drucker in his 1954 book The Practice of Management and is still used by organizations that strive to align employee actions with organizational goals. There are several benefits to implementing MBO; however, care should be taken to avoid the pitfalls and implement this management approach in a way that aligns with company values.

Managing a team?

Take control of your team meetings by having collaborative meeting notes and encouraging accountability with action items. Try a tool like Fellow!

Pros of the MBO strategy

1Aligns goals and objectives across the company

Organizational alignment is a key differentiator between high-performing and low-performing teams. MBO starts with a clear vision from the C-suite explaining why your company exists and what you want to achieve. This clarity allows managers to set short-term, measurable goals that align with the larger strategy and establish meaning and purpose behind their team’s work. Employees can clearly see how their goals help drive the business forward and feel connected to the overall mission. With its focus on strategically-set objectives, MBO is an effective way to for companies to align goals with their organizational structure and get everyone moving in the same direction.

2Boosts employee participation

Employees who feel their work is aligned with company goals are 3.5 times more likely to be engaged in their work. When executed thoughtfully, the process of setting, managing, and achieving goals is key to aligning employees’ individual goals with the company’s long-term strategy. MBO helps employees understand what’s expected of them and how their work fits into the big picture, and ensure they have the tools and resources they need to succeed. Encouraging employees to collaborate with their managers to set strategic goals engages increases team engagement and drives better long-term business results.

3Improves communication between management and employees 

MBO relies on strategic, clear, and consistent communication at every level of the organization. To successfully achieve their objectives, teams need to clearly communicate deadlines, decisions, and priorities, plus be on the same page for creative problem solving. Two-way feedback between managers and employees means employees feel comfortable providing input on team goals and the best ways to achieve them. With MBO, everyone’s encouraged to discuss obstacles affecting progress toward their objectives and to ask for help or clarity where needed. In companies where everyone’s working towards the same goals, a culture of openness and transparent communication can thrive.

Cons of the MBO strategy

1Puts added pressure on employees

The right amount of pressure can motivate employees to excel and achieve their goals, but too much pressure has the opposite effect and can damage employee morale. A ‘results over everything else’ mentality can negatively affect your team culture and make employees feel like they’re not valued as individuals. With MBO, unachievable objectives, unrealistic timelines, and excessive workloads can all contribute to a negative work environment. Excessive stress can cause decreased engagement and productivity, as well as erode trust between managers and employees. It’s critical to maintain strong team communication when implementing the MBO strategy so managers can apply the right amount of pressure to help their team thrive while avoiding unreasonable expectations.

2Encourages competition between employees

Another downside of MBO is that it can create unhealthy competition and set team members against each other. While an element of competition can be motivating for employees and spark creativity, an overly competitive environment leads to stress, anxiety, and disengagement. The healthiest and most productive team culture is one in which team members are united by shared goals and everyone’s rooting for each other to succeed. When competition levels are too high, it quickly becomes about winning at the expense of other team members and decreases psychological safety. With MBO, it’s key to remember that fostering supportive relationships between employees is just as important as achieving company objectives.

3Prioritizes goal setting over strategic planning

Putting too much focus on setting and achieving objectives can come at the expense of other key aspects of growing a healthy organization. Long-term strategic planning involves looking at a company’s vision, mission, values, and culture, and then deciding on the best ways to bring these to life. However, with MBO, it’s easy to end up chasing bigger and bigger goals and lose sight of why you’re working toward these goals in the first place. Companies that commit to

staying purpose driven and intentional about goal setting are on the right track to cultivating a workplace employees want to be a part of.

5 steps for implementing MBO

1Define clear company objectives

The first step to implementing MBO is to clearly define your organization’s objectives, which are the high-level goals that will help you achieve your mission and vision. Together with the rest of the leadership team, decide what success looks like for you as an organization and how you’ll measure it with both qualitative and quantitative goals. Take the time to consider your team’s strengths, clearly define your purpose, and visualize where you want the organization to be in 5-10 years. Focusing as much as possible on the big picture is key–these objectives will be the foundation for all your team’s hard work.

2Turn company objectives into goals

Next, take your high-level objectives and define the short-term goals that will help you reach them. For example, if one of your objectives was to successfully launch a new product next quarter, you’d need to set goals around designing the product, testing it, and marketing the launch. It’s a good idea to involve employees in the goal-setting process to increase team buy-in and instill a sense of ownership around these goals. Make sure each goal is linked to your top business objectives and create a schedule for regularly reviewing your goals so they stay aligned.

It’s essential to create goals that are measurable and realistic! Use a framework like SMART goals to set your team up for success.

SMART goal setting

3Monitor employee performance

Once you’ve set clear goals, you’ll need to consistently monitor your team’s progress toward them. Schedule regular check-ins with team members to track their efforts and break goals down into project milestones so they’re easy to stay on top of. Using a project management tool like Fellow will help you stay organized and make it easy to check off deadlines and assign tasks. The most important part of performance monitoring is maintaining clear lines of communication so your employees understand why you’re checking in. No matter what your system is for tracking progress, your team members should know you’re following up with them to support their success, not because you don’t trust them!

4Provide feedback on employee progress

Giving your team regular feedback is key to reaching your goals and improving trust and communication in your organization. Schedule frequent one-on-one conversations to go over what employees are doing well, as well as areas in which they could improve. Make sure your feedback is clear and solutions-focused, and that it’s clear you genuinely care about every team member’s success. Constructive feedback is key to growth and development; by making two-way communication about performance a regular habit, you’ll help motivate your team to reach their goals.

Looking for some guidance? Fellow enables your team to share real-time feedback on meetings, projects, and performance.

5Reward employees for their accomplishments

Finally, make sure to regularly reward your team for all their hard work! Taking the time to acknowledge employee achievements creates a big boost in morale and shows people’s efforts aren’t going unnoticed. Make sure to celebrate when people go above and beyond, so your whole team feels valued and appreciated. Celebrating goals is also a great opportunity for your team to reflect on what went well and how you can repeat your success for future goals. A team celebration, company-wide shoutout, hand-written card, or even a simple ‘thank you’ can go a long way!

Example of MBO

An example of MBO is a company that sets an annual objective to increase customer satisfaction ratings from 4 to 4.5 stars. Team members are assigned quarterly SMART goals for conducting surveys and qualitative interviews, leveraging popular review sites, and designing a reward for users who leave a review. Managers consistently monitor employee progress towards these goals and give feedback in weekly one-on-one sessions with each team member. When team members reach their goals, they receive a gift card and are recognized in the company newsletter.

Parting Advice

MBO is an effective approach for getting clear on your objectives and aligning organizational structure with your long-term strategy. There are several key benefits to implementing MBO; however, like most approaches, it comes with a few potential downsides. Whether or not you use MBO, its emphasis on aligning daily activities with your highest-level goals provides an important reminder for any team. After all, every daily action your team members take is either a step towards your goals or a step away from them. When your goals are embedded at every level of the organization, your whole team can see how they’re contributing to the company’s overarching vision.

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