Management by objectives is a methodology for achieving goals. It requires management and employees to jointly agree to specific objectives, and then follow through on the implementation of those objectives using a standardized reporting system. Various rewards may be tied to the reported outcomes. By including employees in the objective-setting process, the theory assumes that employee efforts to achieve the objectives will be increased.
The key benefit of management by objectives is that a company no longer focuses merely on handling the current workload, but rather on the advancement of the state of the business. Examples of typical objectives are on reducing specific costs, increasing capacity levels in certain areas, reducing scrap rates, and reducing equipment setup times.
Management by objectives requires a clear measurement system, where all parties agree to which measurements shall be used to track progress, as well as how those measurements are to be calculated. If the measurements can affect the outcome of any compensation that is tied to the achievement of objectives, this can be an area over which there is considerable concern.
Before an objective is agreed to, it should meet the following requirements to the greatest extent possible:
- Quantifiable. It should be possible to measure the objective. For example, reducing the scrap rate by 10% is a quantifiable objective, while improving employee morale is more difficult to measure.
- Compatible with other objectives. An objective should not conflict with another objective. For example, reducing the amount of on-hand inventory by 50% while increasing sales by 20% may be conflicting objectives.
- Realistic. An objective should be achievable, within the resource constraints of the business. For example, it may not be possible to double sales if the company cannot afford to double the number of salespeople.
The concept is considered to provide demonstrable results, but can also become bogged down in a large number of meetings to discuss objectives, so that more time is spent on the process, and less time on achieving the desired outcomes. Also, it tends not to place enough emphasis on the quality of the underlying products and processes.