Management by objective (MBO) is a model in which employees and their managers collaboratively develop, define and explicitly agree to objectives. The purpose of MBO is to increase employee productivity and efficiency and, as a result, corporate performance.
Business management expert Pete Drucker developed the concepts of management by objective in his 1954 book, The Practice of Management. Drucker also provided a best practice framework for establishing objectives. According to his SMART goals evaluation scheme, objectives should be specific, measurable, achievable, realistic and time-bound.
Pete Drucker outlined the following five steps for implementing MBO:
1. Establish or clarify organizational objectives in line with the company's mission and vision.
2. Ensure that employees fully understand the objectives of the company as a whole.
3. Involve employees in determining their personal objectives to help achieve corporate goals.
4. Monitor and measure employee performance relative to the goals.
5. Evaluate progress, reward success and provide feedback.
Andy Grove, the former CEO of Intel, borrowed from management by objectives concepts to develop his OKRs (objectives and key results) model, often considered an agile version of MBO.
See John Doerr's presentation on the importance of setting goals: