Management By Objectives (MBO): the Basics and an Example

Management by Objectives helps not only to put goals on paper but also to truly link them to accountability, progress, and results. This is valuable when a lot is being done, but it’s not always clear what contribution it makes. By jointly translating organizational goals into concrete and measurable agreements, you create greater focus, engagement, and ownership.

In this article, you’ll discover what Management by Objectives is, how Peter Drucker introduced the model, and how to apply it in five steps. You’ll learn how to translate organizational goals into clear agreements, monitor progress, and evaluate results. You’ll also find recommended books and publications to explore the topic further. Enjoy reading!

What is Management By Objectives?

Definition and essence

Management By Objectives (MBO) is a performance management approach in which a balance is sought between the objectives of employees and the company goals. MBO was developed by Peter Drucker, a renowned American author and consultant in the field of Organizational Development and management.

The essence of Peter Drucker ’s basic principle: Management By Objectives is to determine joint objectives and to provide feedback on the results. Setting challenging but attainable objectives promotes motivation and empowerment of employees. It also creates a performance based work environment.

By increasing commitment, managers are given the opportunity to focus on new ideas and innovation that contribute to the development and objectives of organizations. However, Peter Drucker sets a number of conditions that must be met:

• Objectives are determined with the employees or team members;
• Objectives are formulated at both quantitative and qualitative levels;
• Objectives must be challenging and motivating;
• Daily feedback on the state of affairs and key results at the level of coaching and development instead of static management reports;
• Rewards (recognition, appreciation and/or performance-related pay) for achieving the intended objectives is a requirement;
• The basic principle is growth and development not punishments.

Management By Objectives (MBO) is also known as Management By Results (MBR).

Management By Objectives Process and steps

Peter Drucker has developed five steps to put Management By Objectives into practice:

1. Determine or revise the organizational objectives

Strategic organizational objectives are the starting points of management by objectives. These objectives stem from the mission and vision of an organization. If an organization has not formulated these yet, it does not make sense to carry out the next steps.

2. Translating the organizational objectives to employees

In order to make organizational objectives organization-wide, it is important that these are translated to employee level. For efficiency reasons, Peter Drucker used the SMART Goals acronym SMART (Specific, Measurable, Acceptable, Realistic and Time-bound).

The element Acceptable is crucial in management by objectives as this is about agreement on the objectives between the employees and the organization. The management by objectives principle does not allow management to determine the objectives by themselves.

According to management by objectives, objectives should be clearly recognizable at all levels, for example customer service, and everyone should know what their responsibilities are in this. Communication is also an important item for consideration when it comes to expectations, feedback and to giving rewards for objectives that have been achieved.

3. Stimulate the participation of employees in the determining of the objectives

The starting point is to have each employee participate in the determining of personal objectives that are in line with the objectives of the organization. This works best when the objectives of the organization are discussed and shared throughout all levels of the organization so that everyone will understand why certain things are expected of them.

In this way, everyone can make their own translation of what their contribution can be to the objectives. This approach increases the involvement and commitment of the objectives. Instead of simply following expectations of managers and executives, everyone in an management by objectives approach will know what is expected of them.

By broadening the decision making process and responsibility throughout the organization, people are motivated to solve the problems they are faced with in an intelligent manner and they are given the information they need so that they can be flexible in the changing circumstances.

This participatory process ensures that personal objectives with respect to general team objectives, department objectives, business unit objectives and ultimately organizational objectives are made clear.

4. Monitoring of the performance

Because the goals and objectives are SMART, they are measurable. If they cannot be measured, a system will have to be set up in which a monitoring function is activated when the objectives are deviated from.

Detection must be timely so that large problems can be prevented. On the other hand, it is important that the agreed objectives do not cause abnormal behaviour of employees for example.

For instance, when a service call must be handled within seven minutes and as a result employees finish these calls after 6 minutes and 59 seconds to meet this requirement. There are always exceptions to a rule and these situations should always be supervised.

In Management By Objectives, employees are not supported by their management through annual performance reviews. Management By Objectives is about growth and development.

Each objective comprises mini objectives and it is about supporting these in small steps in the form of coaching by managers or executives. Create a clear path with sufficient evaluation moments so that growth and development can be monitored accurately.

5. Evaluate and reward achievements

Management By Objectives has been designed to improve performance at all levels within an organization. A comprehensive evaluation system is therefore essential. As goals and objectives have been SMART formulated, they make the evaluation of processes very easy.

Employees are evaluated and rewarded for their achievements in relation to the set goals and objectives. This also includes accurate feedback. Management By Objectives is about about why, when and how objectives can be achieved.

The management is supposed to organize frequent meetings in which the progress is discussed between superiors and subordinates.

Example of Management by Objectives in Practice

Management by Objectives becomes clearer when you apply it to a typical work situation. Suppose an organization wants to improve customer satisfaction. This organizational goal is first made concrete. For example: customer satisfaction must increase from a 7.2 to an 8.0 within one year.

This objective is then broken down into goals for departments, teams, and employees. For customer service, the goal might be to resolve customer inquiries more quickly and thoroughly. For an employee, this could mean responding to outstanding inquiries within two business days, better documenting complaints, and actively providing feedback to the customer.

The strength of Management by Objectives lies not only in measuring results. It is primarily about the joint discussion of what is achievable, what support is needed, and how progress is monitored. When an employee realizes that the goal is clear and that there is room for coaching, a greater sense of ownership develops.

During implementation, the manager regularly discusses progress—not just at the end of the year, but especially in between. This allows problems to be resolved more quickly. Perhaps it turns out that an employee needs additional product knowledge, or that the team lacks the time to properly handle complaints. By identifying these issues early, the goal remains relevant, and MBO becomes more than just an evaluation system.

At the end of the period, the results are reviewed. Has customer satisfaction improved? Which actions were effective? What needs to be adjusted? In this way, Management by Objectives links organizational goals to daily behavior, feedback, and development.

Benefits of Management by Objectives

Management by Objectives primarily provides greater clarity. Employees have a better understanding of which goals are important, why these goals were chosen, and how their work contributes to them. This makes it easier to set priorities and discuss progress.

Another benefit is that goals aren’t simply imposed from above. When employees are involved in setting their own objectives, they often develop a greater sense of ownership. This increases the likelihood that goals won’t just remain on paper but will actually be applied in day-to-day work.

MBO also helps to better align strategy with execution. Organizational goals become less abstract because they are translated into departmental, team, and individual commitments. This makes it clear how each person contributes to the bigger picture.

In addition, Management by Objectives encourages regular feedback—not just at the end of the year, but specifically during the course of work. This allows issues to be addressed sooner and enables quicker course corrections.

Pitfalls of Management by Objectives

A common pitfall is that Management by Objectives is used too much as an evaluation system. This shifts the emphasis primarily to numbers, targets, and accountability. This does not align well with the original concept of MBO, in which consultation, feedback, and development are key.

A second pitfall is that goals are formulated too narrowly. When only measurable results count, employees may exhibit behavior that looks good on paper but doesn’t help in practice. The example of a call center illustrates this well. A short conversation isn’t automatically a good conversation.

MBO can also become too time-consuming if goals, reports, and evaluations are structured too rigidly. This diminishes its practical value. The method works best when goals are clear, discussions are brief and frequent, and the focus remains on progress.

That is why Management by Objectives requires balance. Measurable goals are important, but the way in which results are achieved is just as important. Without coaching, trust, and room for discussion, MBO can quickly turn into a control mechanism.

What is the difference between MBO, SMART goals, and OKRs?

Management by Objectives, SMART goals, and OKRs are sometimes used interchangeably. However, they do not mean the same thing. They are related, though, because all three help make goals more concrete and make progress more visible.

Management by Objectives is a broader management approach. The method focuses on aligning organizational goals with goals for teams and employees. This involves mutual agreements, feedback, progress reviews, and evaluations.

SMART goals are primarily a tool for formulating objectives more clearly. SMART stands for Specific, Measurable, Acceptable, Realistic, and Time-bound. Within MBO, SMART can therefore help to refine goals, but SMART is not a complete management method in and of itself.

OKRs, or Objectives and Key Results, are similar to MBO because they also rely on clear goals and measurable results. The main difference lies in the approach. OKRs are often used over shorter periods and place greater emphasis on focus, ambition, and visible progress.

In practice, the three approaches can complement each other well. MBO provides the management framework. SMART helps make goals concrete. OKRs can help teams discuss progress more frequently and maintain greater focus.

Recommended books and publications on Management by Objectives

Management by Objectives helps organizations clarify goals and link them to performance, responsibilities, and progress. The method revolves around jointly formulating objectives, making agreements, and regularly assessing results. The books and publications listed below provide additional insight into goal-oriented management, performance management, goal setting, participation, feedback, and the practical application of MBO in organizations.

1. Aguinis, H. (2019). Performance Management. Chicago, IL: Chicago Business Press. → Aguinis provides a modern foundation for performance management. The book is relevant to Management by Objectives, because goals only gain value when they are linked to feedback, evaluation, development, and clear performance agreements.
2. Armstrong, M. (2017). Armstrong’s Handbook of Performance Management: An Evidence-Based Guide to Delivering High Performance. London, England: Kogan Page. → Armstrong demonstrates how performance management can be structured within organizations. This aligns well with MBO, as objectives are not separate from discussions, coaching, measurement, and course correction during work.
3. Doerr, J. (2018). Measure What Matters: OKRs: The Simple Idea That Drives 10x Growth. New York, NY: Portfolio. → Doerr connects goals to measurable results through Objectives and Key Results. OKRs are not a traditional MBO approach, but they do build on the same idea: clear goals help teams stay focused, track progress, and make more informed decisions.
4. Drucker, P. F. (1954). The Practice of Management. New York, NY: Harper & Row. → Drucker introduced Management by Objectives as part of modern management thought. This book is important because it shows that managers should not only focus on tasks, but above all on clear goals, accountability, and results.
5. Ivancevich, J. M. (1976). Effects of goal setting on performance and job satisfaction. Journal of Applied Psychology, 61(5), 605-612. → Ivancevich examines how goals influence performance and satisfaction. This aligns well with Management by Objectives, because MBO is not only about setting goals, but also about how those goals affect motivation, clarity, and engagement.
6. Latham, G. P., & Yukl, G. A. (1975). A review of research on the application of goal setting in organizations. Academy of Management Journal, 18(4), 824-845. → Latham and Yukl discuss how goal setting works in organizations. This publication is relevant to vocational education (MBO) because clear, challenging, and accepted goals often provide better guidance for behavior than general agreements or vague expectations.
7. Locke, E. A. (1968). Toward a theory of task motivation and incentives. Organizational Behavior and Human Performance, 3(2), 157-189. → Locke lays the foundation for goal-setting theory. His work is important for Management by Objectives (MBO) because MBO relies heavily on the idea that specific goals guide behavior, influence performance, and help people focus their attention more effectively.
8. Locke, E. A., & Latham, G. P. (1990). A Theory of Goal Setting and Task Performance. Englewood Cliffs, NJ: Prentice Hall. → This book provides a solid scientific foundation for goal-oriented work. It is valuable for Management by Objectives because it explains why goals must be specific, challenging, and measurable to have an effect on performance.
9. Locke, E. A., & Latham, G. P. (2002). Building a practically useful theory of goal setting and task motivation: A 35-year odyssey. American Psychologist, 57(9), 705-717. → Locke and Latham summarize decades of research on goal setting. This publication helps to better substantiate MBO, particularly when formulating goals, providing feedback, and monitoring motivation during implementation.
10. McConkie, M. L. (1979). Classifying and reviewing the empirical work on MBO: Some implications. Group & Organization Studies, 4(4), 447-476. → McConkie discusses the empirical research on Management by Objectives. This source is useful because MBO is often implemented differently in practice. The article helps to take a closer look at what does and does not work when implementing MBO.
11. Odiorne, G. S. (1965). Management by Objectives: A System of Managerial Leadership. New York, NY: Pitman. → Odiorne further developed Management by Objectives as a management system. The book is relevant because it demonstrates how MBO can be used to link goals, responsibilities, evaluation, and leadership.
12. Rodgers, R., & Hunter, J. E. (1991). Impact of management by objectives on organizational productivity. Journal of Applied Psychology, 76(2), 322-336. → Rodgers and Hunter used a meta-analysis to investigate the effect of MBO on productivity. This publication strongly supports the model because it shows that MBO is most effective when goals, participation, and feedback are properly structured.
13. Humble, J. W. (1970). Management by Objectives in Action. London, England: McGraw-Hill. → Humble focuses on the practical application of Management by Objectives. This book is useful because it shows how MBO can be translated into concrete agreements, performance indicators, evaluation points, and management routines.

How to cite this article:
Mulder, P. (2010). Management By Objectives (MBO). Retrieved [insert date] from Toolshero.com: https://www.toolshero.com/management/management-by-objectives-drucker/

Original publication date: December 26, 2013 | Last update: June 24, 2026

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