Definition of MBO:
"MBO is one of the rational school of management's successful products."
â€“ The Economist
Management by objectives (MBO) is a systematic and organized approach that allows management to focus on achievable goals and to attain the best possible results from available resources. It aims to increase organizational performance by aligning goals and subordinate objectives throughout the organization. Ideally, employees get strong input to identify their objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the process to reach objectives.
Management by Objectives (MBO) was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In the 90s, Peter Drucker himself decreased the significance of this organization management method, when he said: "It's just another tool. It is not the great cure for management inefficiency.
Features of MBO:
1. Management by Objectives is a philosophy or a system, and not merely technique.
2. It emphasizes participative goal setting.
3. It clearly defines each individual responsibility in terms of results.
4. If focuses attention on what must be accomplished (goals0 rather than on how it is to be accomplished.
5. It converts objective needs into personal goals at every level in the organization.
6. It establishes standards or yardsticks (goals) as operation guides and also as basis of performance evaluation.
7. It is a system intentionally directed toward effective and efficient attainment of organizational and personal goals.
8. MBO process (or management by Objective cycle or key elements of management by Objectives or minimum equirements of management by objectives.
Steps in MBO:
There are four important and essential steps or elements in the management by Objectives process as follows:
Goal-setting or objective setting is a multistage process. It starts with the examining of the current stat3e of affaires, level of efficiency, threats, and opportunities. Then the key result areas are identified, such as product markets, improved services, lowered costs, work simplification, employee motivation, profitability innovation and social responsibility. The performance of these areas is critical for organization in the sense that failure in these areas may result in failure of the organization. And this is why they are known as â€œkeyâ€ result areas. Peter says, objectives are important in every area where performance and results directly affect the survival and prosperity of business.
Developing Action Plans:
Set objectives must be translated into action plans. It requires assignment of specific responsibilities to different departments, division, and individuals. It also requires allocation of necessary resources needed to perform the assigned responsibilities. Time dimensions are also to be decided in order that targets are reached without any unwarranted delays.
Periodic Review or Monitoring The Progress:
After setting objectives and developing action plans, it is necessary to establish a proper monitoring system with a view to regularly keeping the activities. He progress is monitored without day path leading to the ultimate objective. It is ensured that the deviations found, if any, are thoroughly discussed and immediate corrective actions are taken to set them right on the course. Such a regular monitoring and periodic review not only provide feedback which is essential for completion of work in time. But also motivates the managers accountable for performance. Periodic review and monitoring are done at departmental level generally.
This is the last phase of MBO program that evaluates performance annually. The annual review or appraisal is comprehensive and is done at the organization level. The actual annual results are evaluated against the set objectives. Such assessment is also used for determining targets for next year, for modification in standards (goals0 if needed, and for taking corrective actions in order to avoid deviations form predetermined objectives.
Advantages of MBO:
â€¢ MBO programs continually emphasize what should be done in an organization to achieve organizational goals.
â€¢ MBO process secures employee commitment to attaining organizational goals.
â€¢ Motivation â€“ Involving employees in the whole process of goal setting and increasing employee empowerment increases employee job satisfaction and commitment.
â€¢ Better communication and Coordination â€“ Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the enterprise and also solve many problems faced during the period.
â€¢ Clarity of goals â€“ With MBO, came the concept of SMART goals i.e. goals that are:
4. Relevant, and
5. Time bound.
The goals thus set are clear, motivating and there is a linkage between organizational goals and performance targets of the employees.
In some sectors (Healthcare, Finance etc.) many add ER to make SMARTER, The ER can have many meanings incluing
â€¢ E=End-minded R=Ritualistic
â€¢ E=Energizing, Exciting and Ethical Goals or E=Evaluate R=Reviewed and Resourced or R= Redo Goals or Recorded 
â€¢ E=Ecological - consider 'whole' self R=Reasons and Reward 
Disadvantages of MBO:
â€¢ It over-emphasizes the setting of goals over the working of a plan as a driver of outcomes.
â€¢ It underemphasizes the importance of the environment or context in which the goals are set. That context includes everything from the availability and quality of resources, to relative buy-in by leadership and stake-holders. As an example of the influence of management buy-in as a contextual influencer, in a 1991 comprehensive review of thirty years of research on the impact of Management by Objectives, Robert Rodgers and John Hunter concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Companies with CEOs who showed low commitment only saw a 6% gain in productivity.
â€¢ Companies evaluated their employees by comparing them with the "ideal" employee. Trait appraisal only looks at what employees should be, not at what they should do.
â€¢ It did not address the importance of successfully responding to obstacles and constraints as essential to reaching a goal.
The use of MBO needs to be carefully aligned with the culture of the organization. While MBO is not as fashionable as it was before 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. Engagement of employees in the objective setting process is seen as a strategic advantage by many.