What Is Management by Objectives?

Preparing your business plan is a key stage in launching your business successfully and objectives – sales and profit targets, for example – are the measurable element of your plan. Management by objectives (MBO) is a management system in which the objectives of an organisation are discussed and agreed on so that everyone in the organisation understands the way forward and their role in the task ahead.

Even if you start out as a one-man band, this is a good discipline to get into, and an essential practice when you start employing people. You can use this tool with outsourcers too.

MBO is generally seen as having five stages:

  1. Stage one: Provide employees with a clear understanding of their roles and responsibilities as well as the results they are expected to achieve.

    Involving employees in the goal-setting process increases employee empowerment, job satisfaction and commitment to achieving the objectives.

  2. Stage two: Cascading your objectives to those responsible for achieving them.

    For an organisation to achieve its mission, everyone on the payroll has to work in some way to that end. In order to make the process effective, the goals that are agreed have to be SMART:

    1. Specific: Ambiguous goals leave room for confusion. Having clear goals is the only credible way to monitor progress.

    2. Measurable: Activities that can be measured, such as sales targets or cost-reduction programmes, have a better chance of being achieved than less-concrete goals, such as improving a business’s image or the quality of training. What gets measured gets done.

    3. Agreed as being achievable: When the person responsible for achieving the goal has a hand in developing it, you’re more likely to get that person to buy into the aim.

    4. Realistic: Being realistic sets a limit on over-eager staff or hopelessly ambitious bosses.

    5. Time related: Tying objectives into the timeframe of the planning cycle provides an important constraint.

  3. Stage three: Monitor performance against agreed objectives.

    Monitoring performance against objectives you’ve agreed reinforces the idea that objectives should be measurable and that a system to report against them must be in place.

  4. Stage four: Evaluate performance against the agreed objectives.

    Some elements of performance are outside the control of even the most able, dedicated and committed individuals, so this step is critical. The assumptions on which the objectives depend come into play here. So if, for example, the organisation assumes that the economy will grow and a major credit crunch drags the world into recession, then the original objectives may reasonably fail the test of being realistic.

  5. Stage five: Reward for achieving results.

    For anyone in sales a reward could be sales commission, but a pat on the back often goes a long way too. While what gets measured gets done, what gets rewarded gets done again.

Studies have shown that companies whose top dogs have demonstrated high commitment to MBO showed significant gains in productivity, and that even those with only lukewarm commitment saw noticeable gains.

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