Management by Objectives: Breaking Down the MBO Process

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Management by Objectives: Breaking Down the MBO Process

Business Essentials · Chapter 5: Management Functions and Strategic PlanningSection 5.7 · lesson 30 of 10514 min · free with a free account

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In this lesson

Setting goals with the people who do the work.

  • Describe the 4 steps of the MBO cycle
  • State the principles that make a goal effective
  • Write and critique a usable objective
  • Recognize MBO's failure modes and when it fits

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Management Functions and Strategic Planning

Management by Objectives: Breaking Down the MBO Process

Here's a puzzle. An employee meets every objective, every month, for a whole year. Yet the outcome those objectives were meant to improve doesn't move at all. This section explains how that happens, and how to prevent it. The approach is called management by objectives, or MBO. We'll walk through its cycle, from setting objectives to the final appraisal, and then look at the research on goal setting. Then we'll practice writing objectives that actually guide behavior, and stress-testing them before they're agreed. Objectives can sound like paperwork. In practice, they decide where people put their attention. That's exactly why writing them well matters so much.

What MBO Is

Objectives Agreed, Not Announced

Management by objectives is an approach in which managers and employees agree on specific objectives for a period. Progress toward those objectives is reviewed, and performance is judged against them. The premise underneath is simple. People commit to objectives that they helped to set. Compare two routes to the same objective. An objective imposed from above may be obeyed. But it's unlikely to be owned. Now take an objective the employee has discussed, questioned, and agreed to. That becomes a commitment the employee has made, not just an instruction received. So MBO is really two things at once. It's a method of setting goals. And it's a view about the relationship between manager and employee, where direction is arrived at by discussion, not simply announced.

Figure 5.7.1

The MBO Cycle Across a Review Period

The MBO cycle has four steps, spread across a review period. Step one is objective setting, through a discussion between manager and employee. In it, the objectives for the period are proposed, questioned, and refined. In step two, the parties agree on the measures and the timeframe, so both know how progress will be judged, and by when. Step three is periodic review, at intervals during the period. Progress is checked, obstacles are discussed, and objectives are adjusted if circumstances have changed. In this version of the cycle there are two review points, and at each one, every objective can be continued, revised, or dropped. Step four is appraisal at the end of the period, comparing results with the agreed objectives. Section ten point four develops that link to performance appraisal. For now, note that MBO appraises against objectives agreed in advance. So why do the review points matter so much? Because they keep the objectives relevant during the period. With only a start and an end, a cycle gives no chance to correct an objective that has become wrong.

Cascading Objectives

When the Link Dissolves

In a whole organization, objectives don't sit in isolation. They're cascaded. The organization's goals, set in the planning process of section five point three, are translated downward. First into objectives for each division, then for departments, teams, and individuals. The idea is that each person's objectives contribute to the ones above them. But the cascade has a known weakness, called cascade distortion. Below the second level, the connection between an individual's objectives and the organization's goals dissolves. Why? Because each step of translation adds interpretation. By the time an objective reaches the front line, it may have little visible connection to the original purpose. The remedy is to make the link explicit at every step. Of each objective, ask which higher-level objective it serves, and how.

The Evidence

Specific, Difficult Goals Work

Now to the research, which is unusually well supported among the findings of management. Decades of studies point the same way, in laboratories, in working organizations, and across many kinds of task. Specific and difficult goals produce higher performance than vague goals, easy goals, or an instruction to do your best. That last comparison surprises people. Do your best sounds generous, but it loses to a specific, demanding target. Two conditions are necessary. The first is commitment, because a goal that a person has rejected doesn't direct effort. The second is feedback. People must know how their progress compares with the goal, in order to adjust. The finding doesn't rest on any one study, so it's described here in words, without figures. There's one more qualification. The link between difficulty and performance isn't unlimited. Performance tends to rise as goals get more demanding, up to the point where the goal is judged unattainable. There, the person rejects it, commitment collapses, and performance falls. So a stretch goal, one set above what's comfortably achievable, works only while the person believes it can be reached with effort.

How Goals Work

4 Mechanisms, and a Trap

Goals work through four mechanisms. First, they direct attention toward what's relevant to the goal, and away from what isn't. Second, they energize effort. People work harder when the goal is demanding. Third, they increase persistence, so people keep going in the face of difficulty. Fourth, they prompt the search for strategies, when the goal can't be met by working the old way. Now here's the counterintuitive part. The first mechanism, the one that makes goals work, is also the source of most of their problems. Attention directed toward one thing is directed away from another. Give someone a demanding goal for speed, and they'll attend to speed. Quality, courtesy, and safety, if they aren't also specified, receive less. Keep that in mind. It explains most of the failures we'll meet later in this section.

Writing An Objective

6 Components of a Usable Objective

So how do you write an objective that actually works? Section five point three introduced six components of a usable objective, at the level of strategy. They apply just as well to an individual's objective. The outcome is what's to be achieved. The measure is how it will be judged. The target is the level to be reached. The baseline is where things stand now. The timeframe is the date. And the owner is the person accountable. Each component closes a gap that people would otherwise fill in their own way. Leave one out, and the wording starts to guide behavior, instead of the outcome you wanted. The next two slides show that happening, six times over.

Table 5.7.1 (1 of 2)

6 Objectives, Defective and Corrected

Here are six objectives, each in a defective and a corrected form. All the figures in them are illustrative, constructed for the exercise. Start with improve customer satisfaction. It has no measure, no target, no baseline, and no timeframe. So each person defines it differently. The corrected version raises the score on the quarterly customer survey from seventy-eight to eighty-four, by June thirtieth. Now effort focuses on the score. That brings a new risk, so you'd guard against asking only happy customers. Next, reduce costs. It has no baseline or target, and no guard against harm elsewhere. Left like that, people cut wherever it's easiest, including quality. The corrected version cuts cost per order from nine dollars twenty to eight dollars sixty, by December thirty-first. And it keeps on-time delivery at or above ninety-six percent. That floor is the guard. Third, close forty tickets a day. This one measures volume, not the outcome the customer needs. So tickets get closed fast, and then reopened. The corrected version resolves eighty-five percent of contacts at first contact, and keeps the reopen rate below eight percent this year. Now attention shifts to actually solving the problem.

Table 5.7.1 (2 of 2)

6 Objectives, Defective and Corrected

Fourth, increase sales. There's no baseline and no timeframe, so any increase at all counts. The corrected version increases sales of product line A from two million to two point three million dollars, in the next financial year. Now there's a clear target that anyone can check. Fifth, attend two training courses. That records an activity, not a result, so attendance becomes the goal. The corrected version applies the new scheduling method to all team rosters by March thirty-first. And it cuts overtime hours by fifteen percent against last year. Now the training has to change the work. Sixth, be the best team in the company. That depends on other teams' results, so it's outside the owner's control. Effort drifts toward comparison, and toward excuses. Corrected, the team delivers ninety-five percent of projects on the agreed date this year, against eighty-eight percent last year. That's a result the team controls. Across all six, the lesson is the same. A defective objective guides behavior toward whatever its wording happens to reward. A corrected one guides behavior toward the outcome that was actually wanted.

Conditions

What MBO Requires, and Where It Fits

MBO also makes three demands on the organization around it. First, objectives must be measurable. Otherwise the review and the appraisal have nothing to compare. Second, participation must be genuine. It can't be a formality where objectives are handed down and the employee is asked to sign. The whole premise depends on real influence over the goal. Third, review must be honest, with candid discussion of progress, and a willingness to adjust or drop objectives that have become wrong. Remove any one, and the approach degrades. Without measurability, it's vague. Without genuine participation, it's imposed. Without honest review, it becomes an annual paperwork exercise. So where does MBO fit? In roles where results can be measured, and the person has control over the result. The work also mustn't be so interdependent that individual attribution is misleading. Sales and production roles with clear outputs often meet those conditions. MBO fits less well where outcomes are hard to measure, or take years to appear, as in some research and creative work. And where results depend mainly on collaboration, team-level objectives or other approaches may serve better.

Failure Modes

How Objectives Go Wrong, and the Stress Test

MBO has recurring failure modes, and they follow directly from how goals work. First, unmeasurable work is driven out by measurable work. When only what can be counted gets an objective, mentoring, cooperation, and quality of judgment receive less attention. Second, goal displacement, where meeting the objective replaces the purpose it was meant to serve. Third, short-term focus. Objectives cover a period, so results within it are rewarded, at the expense of longer-term value. Fourth, shortcuts. An employee might raise a satisfaction score by choosing whom to ask. Fifth, harm to collaboration. Where goals are individual and the work is interdependent, helping a colleague reduces your own results. These are the dysfunctional effects of measurement described in section five point two. One discipline guards against many of them, and it's called the stress test. Before an objective is agreed, ask how it could be met in a way the organization would not want. Reduce the average handling time of a call? End calls early. Increase new accounts opened? Open accounts customers don't want. Where such a way exists, reword the objective or add a guard, like the delivery floor in the corrected cost objective.

Case Vignette (Composite)

Every Objective Met, the Outcome Unchanged

Here's a composite case, built for instruction, that brings the section together. Lucas is a customer support agent. His agreed objectives are to close forty tickets per day, and to keep the average handling time of each below six minutes. He meets both in every month of the year, and his rating is high. Over the same year, more customers contact the company again about the same problem. And the satisfaction score doesn't improve. Yet the purpose of those objectives was better customer service. Lucas is simply responding to the measures. To close tickets quickly he gives short answers, and a complicated problem gets a general reply, which the customer then reopens. His objectives directed his attention to volume and speed, and away from whether the problem was solved. He did exactly what he was asked. The outcome that mattered just wasn't part of it. The trade-off was between measures that are easy to count, and an outcome that's harder to measure. And the constraint was that the ticket system doesn't record resolution. A stress test would have asked how the objectives could be met without helping customers. It would have found the answer at once. So his manager plans to replace the volume target with a first-contact resolution measure, and a limit on the reopen rate. And to review the objectives with Lucas at the mid-period point.

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FAQ

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About Management by Objectives: Breaking Down the MBO Process

What is management by objectives (MBO)?
Management by objectives is an approach in which managers and employees agree on specific objectives for a period, review progress, and judge performance against them. Peter Drucker popularized the term in his 1954 book The Practice of Management. Its premise is that people commit to objectives they helped set. The cycle runs from joint objective setting, through agreed measures and timeframes and periodic reviews, to an end-of-period appraisal.
Do specific and difficult goals improve performance?
Yes; specific, difficult goals produce higher performance than vague goals, easy goals, or an instruction to do your best, a finding most associated with Edwin Locke and Gary Latham. Two conditions are needed: commitment to the goal and feedback on progress. Goals work by directing attention, energizing effort, increasing persistence, and prompting new strategies. The benefit stops when a goal seems unattainable, because people reject it and performance falls.
What are the disadvantages of management by objectives?
MBO's recurring failure modes are crowding out unmeasurable work, goal displacement, short-term focus, shortcuts, and harm to collaboration when individual goals cover interdependent work. They arise because goals pull attention toward what is measured and away from everything else. MBO also degrades without measurable objectives, genuine participation, and honest review. It fits best where results are measurable and largely under the person's control, as in many sales and production roles.
How do you stress test a performance objective?
Before agreeing an objective, ask how it could be met in a way the organization would not want, then reword it or add a guard. A target to cut average call handling time could be met by ending calls early; a target for new accounts could be met by opening accounts customers don't want. A guard, such as keeping on-time delivery at or above 96 percent while cutting cost per order, blocks the harmful route.

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