Management by Objectives (MBO) is a process in which a manager and an employee agree upon a set of specific performance goals, or objectives, and jointly develop a plan for reaching them. The objectives must be clear and achievable, and the plan must include a time frame and evaluation criteria. For example, a salesperson might set a goal of increasing customer orders by 15 percent in dollar terms over the course of a year.
MBO is primarily used as a tool for strategic planning, employee motivation, and performance enhancement. It is intended to improve communication between employees and management, increase employee understanding of company goals, focus employee efforts upon organizational objectives, and provide a concrete link between pay and performance. An important factor in an MBO system is its emphasis on the results achieved by employees rather than the activities performed in their jobs.
To be successful, an MBO program should be part of a small business's overall system of planning and goal setting. The first step in implementing MBO is to establish long-range company goals in such areas as sales, competitive positioning, human resource development, etc. A small business owner may find it helpful to begin by defining the company's current business and looking for emerging customer needs or market trends that may require adaptation. Such long-range planning provides a framework for charting the company's future staffing levels, marketing approaches, financing needs, product development focus, and facility and equipment usage.
The next step in establishing an MBO system is to use these long-range plans to determine company-wide goals for the current year. Then the company goals can be broken down further into goals for different departments, and eventually into goals for individual employees. As goal-setting filters down through the organization, special care must be taken to ensure that individual and department goals all support the long-range objectives of the business. Ideally, a small business's managers should be involved in formulating the company's long-range goals. This approach may increase their commitment to achieving the goals, allow them to communicate the goals clearly to employees, and help them to create their own short-range goals to support the company goals.
At a minimum, a successful MBO program requires each employee to produce five to ten specific, measurable goals. In addition to a statement of the goal itself, each goal should be supported with a means of measurement and a series of steps toward completion. These goals should be proposed to the employee's manager in writing, discussed, and approved. It is the manager's responsibility to make sure that all employee goals are consistent with the department and company goals. The manager also must compare the employee's performance with his or her goals on a regular basis in order to identify any problems and take corrective action as needed.
Formulating goals is not an easy task for employees, and most people do not master it immediately. Small business owners may find it helpful to begin the process by asking employees and managers to define their jobs and list their major responsibilities. Then the employees and managers can create a goal or goals based upon each responsibility and decide how to measure their own performance in terms of results. In the Small Business Administration publication Planning and Goal Setting for Small Business, Raymond F. Pelissier recommended having employees create a miniature work plan for each goal. A work plan would include the goal itself, the measurement terms, any major problems anticipated in meeting the goal, a series of work steps toward meeting the goal (with completion dates), and the company goal to which the personal goal relates.
Small business owners may also find it helpful to break down employee goal setting into categories. The first category, regular goals, would include objectives related to the activities that make up an employee's major responsibilities. Examples of regular goals might include improving efficiency or the amount and quality of work produced. The second category, problem-solving goals, should define and eliminate any major problems the employee encounters in performing his or her job. Another category is innovation, which should include goals that apply original ideas to company problems. The final category is development goals, which should include those goals related to personal growth or the development of employees. Dividing goal setting into categories often helps employees think about their jobs in new ways and acts to release them from the tendency to create activity-based goals.
Another requirement for any successful MBO program is that it provide for a regular review of employee progress toward meeting goals. This review can take place either monthly or quarterly. When the review uncovers employee performance that is below expectations, managers should try to identify the problem, assign responsibility for correcting it, and make a note in the MBO files.
Given that MBO represents an unusual way of thinking about job performance for many employees, small business owners may find it best to introduce MBO programs gradually and to include a formal training component. A small business's managers can be introduced to MBO through a classroom seminar taught by the small business owner or by an outside consultant. Either way, it is important that the managers be allowed to express any doubts and reservations they may have, and that the training include preparation of an actual goal by each participant. When MBO is brought back to the small business, it may be best to start slowly, with each employee only preparing a few goals. This approach will allow employees to learn to prepare goals that are achievable, develop ways to measure their own performance, and anticipate problems that will prevent them from attaining their goals.
Another factor determining the success of MBO programs is the direct involvement of the small business owner. Pelissier noted that the small business owner needs to champion the MBO system from the beginning, as well as set an example for the company's managers, in order for it to succeed. Since managers have a natural tendency to focus their attention upon their own functions rather than on the goals of the overall organization, it can be difficult to educate them about MBO. It is also important for the small business owner to remain patient during the implementation phase: in fact, Pelissier claimed that it may take three to four years before an MBO program creates quantifiable results in a small business. As David Dinesh and Elaine Palmer indicated in their article for Management Decision, partial implementation is one of the major potential problems associated with MBO programs.
Implemented correctly, however, MBO can provide a number of benefits to a small business. For example, MBO may help employees understand how their performance will be evaluated and measured. In addition, by allowing them to contribute to goal setting, it may increase the motivation and productivity of a small business's employees. MBO also stands to provide a small business's employees with the means to prioritize their work on a daily basis. Although employee performance evaluation is still a complex task under an MBO system, MBO can also provide an objective basis for evaluation. However, it is important to note that an employee's failure to meet preestablished goals can be attributed to many things besides personal failure. For example, the failure to meet goals could result from setting the wrong objectives, not taking into account company restrictions that may impinge upon performance, establishing an improper measures of progress, or a combination of all of these factors.
Overall, establishing an MBO system in a small business may be difficult, but it is usually worth it. The most difficult aspect of implementing MBO may be simply getting people to think in terms of results rather than activities. Even when an MBO system is implemented well, a small business may encounter problems. For example, employees may set low goals to ensure attainment. Similarly, managers' objectives may focus on the attainment of short-term rather than long-term goals. Finally, employees and managers alike may fall victim to confusion and frustration. Some of the most common reasons for the failure of an MBO program include a lack of involvement among the top management of a small business, inadequate goal setting on a company-wide basis, implementation of an MBO system that occurs too rapidly, or the failure to instruct a company's managers and employees in the basics of MBO. But even though establishing an MBO program may be problematic, it can also offer significant rewards to small businesses.
Bateman, Thomas S., and Carl P. Zeithaml. Management: Function and Strategy. Homewood, IL: Irwin, 1990.
Dinesh, David, and Elaine Palmer. "Management by Objectives and Balanced Scorecard: Will Rome Fall Again?" Management Decision. July-August 1998.
Pelissier, Raymond F. Planning and Goal Setting for Small Business. Washington, D.C.: Small Business Administration, n.d.