There are three steps involved in the MBO process. These are setting objectives in each key result area, action planning, and performance review.

Setting Objectives

Key result areas are usually more durable than objectives. While Key Result Areas(KRAs) delineate the broad areas within which the organisation must focus its. attention, the objectives represent the specific results expected to be achieved within these KRAs.

Thus the first step is to identify the KRAs and pin responsibility for results with specific managerial positions. Making people responsible for KRAs is a very critical step for translating MBO theory into practice. KRAs and the persons responsible for them must be identified at the level of the entire organisation as well as each functional area.

Having identified KRAs, the next step is to set objectives within them. At the organisational level, these will be the corporate objectives. Corporate objectives define the purpose and mission of the organisation and can be described by seeking to answer the question `what is our business’. Following out of the corporate objectives are the long and short-term strategic objectives. Five to ten years is the usual time horizon for long range plans while anything between three to five years describes the short-range. Strategic objectives spell out those objectives related to choice of product, market and technology. Derived from these are the unit level objectives in the case where an organisation consists of several different business units. 

Action Planning

Planning enables the objectives to be turned into reality. If objectives describe the ‘what’, plans describe the ‘how’ or the way in which the objectives are to be achieved. Managers are paid to achieve certain objectives. The objectives can be achieved only if the manager converts them into specific action plans spelling out the various steps or activities to be performed and the specific time within which these must be performed.

There are four broad steps involved in every action plan:

  • Choosing strategies which are appropriate to the objectives
  • Assigning responsibility for achieving the objectives
  • Allocating resources for achieving the objectives
  • Scheduling specific activities to achieve maximum utilisation of resources.

Activities form the basis of every plan. Activity refers to the thing or series of acts which have to be done in order to achieve the objective. Further, these activities have to be arranged sequentially in the most logical manner and a time frame has to be specified for the completion of each activity. This is known as scheduling. It is only when this has been done that the plans get converted into ‘action’ plans.

There are many techniques which are extremely useful in planning. Some of the more common ones are Activity Networks, Decision Trees, Milestone Charts, Programme Evaluation and Review Technique (PERT), and Critical Path Method (CPM). Depending on the specifics of your plan you can use the appropriate technique to make them more useful.

In MBO, objectives are set for the organisation or the unit as well as for specific individuals. Therefore two kinds of plans are needed: plans for the team and individuals’ plans. The reference point for team or group plan may be the sales team, or group of R & D engineers working on new product development or even the entire regional office striving as a team to achieve the objective of a specified sales figure. Wherever objectives are specified for a group of people working together towards a common goal, a team plan is required. Within the team individuals are assigned specific objectives for achieving and these individuals need individual or personal plans. 

Performance Review

Regular performance review is one of the main features of MHO. In the absence of a review system the MBO system cannot function. In the MBO process, the focus of the performance review is on:

  • performance
  • improvement
  • future corrective action
  • frequency of reviews
  • self-appraisal

It is on the basis of these five elements that the performance review system of MBO is distinguished from other kinds of appraisal system. In MBO the purpose of evaluating performance is to provide corrective feedback to the concerned person. In an appraisal system, the appraisal may be done for the purpose of assessing the individual’s potential and his compensation, for career planning and identification of training and development needs and also includes appraisal of personality traits and not merely performance. Figure I present a system of performance review in an organisation where the MBO approach is followed. 

Performance review


The MBO process seems apparently simple but to practice it requires great analytical skill and clarity of purpose on the part of the management. MBO is not a managerial technique which can simply be introduced at a moment’s notice. MBO involves people who have their own fixed ideas, attitudes, values and perception which can make the MBO implementation a very complex affair. The prerequisites of a successful MBO are:

  • Evaluation
  • Preparation
  • Top management support
  • Time horizon and
  • Proper entry point 


The first step is to evaluate what you expect from MBO. The most commonly made mistake is that MBO is visualised either very narrowly as a just another appraisal system or as merely another way of tackling the problem of writing job descriptions or it is visualised as a solution to all problems. This leads to unrealistic expectation from MBO. To avoid this, it is best, first of all, to evaluate the existing organizational performance, culture, management style, systems of planning, controlling and monitoring and then decide upon the specific needs which can be fulfilled by MBO. It must be remembered that MBO is a powerful tool which can be used for improving the entire organisational performance, provided there is clarity about the expected results. 


The next step is to prepare the people for accepting MBO. Human nature always resists change. The best way to overcome this resistance is to disseminate maximum information about MBO and educate the concerned key people about its expected benefits. If possible, all the managers should be given a formal training exposure to MBO. This stage of preparation is very critical as MBO can be successful only if people willingly accept and practice it. 

Top Management Support

For MBO to be successfully implemented it is important that it has the full backing and support of the top management. In the process of implementation, there may be some redefining of objectives which in turn may lead to jobs being redefined, restructured or even totally scrapped in some cases. This is bound to lead to conflicts and friction and top management intervention may often be required to soothe disturbed emotions and find practical solutions. Top management needs to exhibit great patience, understanding, and perseverance to see the MBO through its teething stage. 

Time Horizon

Management by Objectives (MBO) MBO means change which implies upheaval and disturbances. Just as some people can accept and adapt to change quicker than others; similarly one organisation’s adaptability to change is different from that of another. Depending on its personality and attitude towards change (whether it is resistant or highly flexible) each organisation has to decide upon the rate of change which it can withstand. How quickly is MBO to be introduced and implemented in the organisation? In phases or at one go? In certain departments or in all departments simultaneously? These are the issues best decided on evaluation of specific characteristics. There can be no hard and fast rule except that sufficient time should be allowed to give MBO a fair trial.

Entry Point

If MBO is being introduced in phases, then the best point for beginning its implementation is the top management level. But the top management must really be serious about it and not merely profess to practice without actually doing so. Starting at the top has the advantages of setting an example for the rest of the people and the relatively small number of people involved. 


The benefits accruing from MBO can be discussed in terms of the specific benefits to the subordinate, the superior and the organisation:

i) Benefits to subordinates include greater role clarity, measurement of performance and increased job satisfaction. W hen specific objectives have been agreed upon, the subordinate knows exactly what he has to achieve and can plan his various activities towards this end. Role and goal clarity ensure that there is no wastage of scarce organisational resources, on the one hand and single minded dedication to achievement of objectives on the other.”

MBO implies regular feedback and measurement of performance against objectives. This serves as a great motivating factor for people to put in their best effort to achieve the objectives. It also helps to weed out the non-performer and identify the real contributors. Clear, specific objectives and unbiased feedback about performance contribute to increased job satisfaction as compared to a situation where a person does not know what is expected of him and how, if at all, his performance will be judged. Job satisfaction emanates from the feelings of having done a job well to the best of your capability as well as public recognition and approval for it. The former is possible only when there are specific objectives while the latter can occur only if there is a system of review and reward. A worker or manager who derives satisfaction from his job will work harder in order to improve his performance while a dissatisfied, discontented manager will make a negative contribution. Thus MBO can serve to bring about a change and put people on the self-propelling cycle of role clarity, increased job satisfaction and increased productivity.

ii) Benefits to Superiors: The benefits accruing to the subordinate will, of course, also accrue to the superiors. But besides these, the other specific benefits for superiors are that MBO motivates subordinates, strengthens superior-subordinate relationship, and provides an objective appraisal method.

MBO is based on the concept of participation and this leads to greater motivation. Setting objectives implies that both the superior and the subordinate have to sit across the table and openly discuss their respective roles, work, obstacles and competencies. Such candid discussion always leads to increased mutual trust and confidence in each other and provides an enduring bond to the relationship.

One of the biggest advantages of MBO is that it provides an objective basis for reviewing performance on the basis of achievements rather than personality traits. Reviewing a person on the basis of his personality not only puts him on the defensive but serves no purpose from the organisation’s point of view. The only thing that matters is results. People are retained by organisations to produce results and not because they are sociable, soft spoken, introverted or possess any other such personality characteristic which has no bearing on their competence or capability.

iii) Benefits to the organisation: MBO focuses on managerial effectiveness as a central value in the entire organisation. And this emphasis permeates down to the lowest level, influencing each manager and worker. This shows up in all the decisions which each manager makes and the overall performance of the organisation is improved. Secondly, MBO with its focus on objectives improves concentration and coordination of managerial effort. There is maximum utilisation of resources and conflicting pulls in opposite directions are avoided. Thirdly, the periodic review in MBO helps identify advancement potential of workers and managers. It also helps in identifying workers-who are under-utilised or not making the full contribution. Lastly, MBO creates many centres of accountability as against one centralized accountability point. It is not only the managing director or proprietor who is accountable for producing the desired results but each manager is responsible for achieving the agreed-upon objectives. Thus MBO leads to greater decentralisation in terms of setting and achieving objectives. 

Some limitations:

In practical implementation you could sometimes encounter one or more of the following limitations of MBO.

Problems in joint objective setting among unequals. MBO implies a process of point or consultative objective setting between the superior and the subordinate. But this very relationship, based upon status, may prove to be a hindrance in free, frank and open communication between the two, and stall the process of setting goals in an objective manner;

Problems of MBO being effective at the lowest level. Theoretically, MBO is supposed to percolate throughout the organisation right down to the lowest level since the manager as well as the worker at each level have set their own agreed upon objectives. However, in reality, the workers or managers at the lower levels often do not have the full freedom to set their own objectives. This is because MBO operates from top to down, starting with the corporate objectives. Thus, the process of objective setting implies that the objectives at the lower level have already been locked in and managers down the line have to match their own objectives with those of the level above them only. If the process of objective setting is reversed to overcome this limitation, and objectives are first set at the lowest level, it would mean that the entire organisation is being guided by people who have less experience, less education, less knowledge and awareness; and it is Difficult to implement in a situation of change. MBO assumes a stable environment in which the objectives once set will hold good till they are achieved. In reality, however, many unforeseen changes may occur which may render the objective impossible to achieve, or irrelevant, or invalid. In a situation where sudden changes occur frequently MBO is difficult to implement.

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