Fundamentals of Business Economics and Management · Planning, Organizing, Staffing and Leading

Management by Objectives (MBO) and Decision Making

Updated 10 October 2026 · Fact-checked

Management by Objectives (MBO) is a method where managers and employees set clear goals together, work towards them, and review results against them. Decision making is choosing the best option from alternatives. To solve questions, identify the MBO step or decision type from the keywords, then match it to the definition.

Understand Management by Objectives and Decision Making

Management by Objectives (MBO) is a system in which a manager and a subordinate agree on specific objectives for a period. Performance is then judged by how far those objectives are achieved. The idea was popularised by Peter Drucker. The key word is participation: goals are agreed, not just ordered from above.

Think of a sales manager at a Pune company. Instead of saying 'sell more', she and her team agree on 'increase sales of Product A by 10% in six months'. The target is clear, measurable and time-bound. At the end of six months, they review the result together and set new goals.

MBO helps because people know what is expected, work with more commitment, and are judged on results. It also has limits. It takes time, it can focus too much on numbers, and it fails if top management does not support it or if goals keep changing.

Decision making is the process of choosing one course of action from several alternatives. Every manager does this daily. A good decision follows a logical sequence: find the problem, collect information, list options, judge them, choose one, act on it and check the result.

Decisions are of different types. Programmed decisions are routine and repetitive, made using set rules. For example, reordering stock when it falls to a fixed level. Non-programmed decisions are new, unusual and need judgement. For example, entering a new market or launching a new product. Lower levels of management mostly take programmed decisions. Top management mostly takes non-programmed ones.

Key formulas to remember

MBO process (sequence): Set organisational goals → Set individual/unit objectives jointly → Plan action → Implement → Monitor progress → Appraise performance → Give feedback and reset goals; Questions often ask for the correct order or the step that comes first. Goal setting comes first and review and feedback come last.
Features of good MBO objectives: Specific, Measurable, Achievable, Relevant, Time-bound; This is the commonly used SMART checklist. Use it to judge whether an objective is well stated.
Decision-making steps (sequence): Identify problem → Gather information → Develop alternatives → Evaluate alternatives → Select best alternative → Implement → Follow up and give feedback; Different books merge or split steps slightly, but the logical order stays the same. Defining the problem is always first.
Programmed vs non-programmed decisions: Programmed = routine, repetitive, rule-based, low level, low risk. Non-programmed = unique, non-repetitive, judgement-based, top level, high risk.; Match the keywords in the question to one side. Do not mix the two lists.

How to solve Management by Objectives and Decision Making questions

Most questions on this topic test definitions, sequence, or classification. Use this method for any of them.

1Read the question and decide if it is about MBO or decision making.
2Underline the keywords, such as 'jointly agreed', 'routine', 'first step', 'limitation'.
3If it asks for a sequence, recall the full order and place the given step in it.
4If it asks about types of decisions, check whether the situation is repetitive with set rules (programmed) or new and unusual (non-programmed).
5If it asks for a benefit or limit of MBO, ask whether the point is about clarity, motivation and control (benefit) or time, rigidity and number focus (limit).
6Eliminate options that contradict the keywords, such as an option calling a routine decision non-programmed.
7Pick the option that matches fully, not just partly.

Quickest way: Keyword matching for MBO and decision questions

When to use it: Use it for one-line MCQs on definitions, order of steps, and decision types, where you have under a minute per question.

Spot the trigger word: 'jointly', 'participation' or 'measurable' points to MBO.
Spot 'routine', 'rules', 'repeated' for programmed and 'new', 'unique', 'judgement' for non-programmed.
For order questions, remember that problem identification is first and follow-up is last.
For MBO, remember that goal setting is first and appraisal and feedback are last.
Cross out options that fit the opposite concept and choose from what remains.

Common mistakes in Management by Objectives and Decision Making

Thinking MBO means the manager sets goals and the employee follows them.
Students link goals with top-down orders.
Fix: Remember that MBO needs joint goal setting. Participation is its core feature.
Saying selecting the best alternative is the first step in decision making.
Students focus on the final choice, which feels like the main act.
Fix: Learn the order. Identify the problem first, then gather information, then list and evaluate alternatives, and only then select.
Treating decision making as finished once a choice is made.
The word 'decision' suggests a single moment.
Fix: Include implementation and follow-up. A decision is incomplete without checking results.
Mixing up programmed and non-programmed decisions.
Students read 'programmed' as 'planned' and assume it is the important one.
Fix: Think of a computer program: fixed rules, repeated use. Programmed means routine. Non-programmed means new and unstructured.
Listing only advantages of MBO and ignoring limitations.
MBO sounds like a purely positive system.
Fix: Learn both sides. Limits include time-consuming process, stress on quantity over quality, difficulty in setting measurable goals, and lack of top-level support.
Assuming top managers take only non-programmed decisions and lower managers only programmed ones.
Textbook statements are read as absolute rules.
Fix: Treat it as a general tendency. Both levels take both types, but the mix differs.

Worked examples

Example 1

A store manager in Jaipur reorders 200 units of rice every time stock falls to 50 units. What type of decision is this, and why?

Show the solution

Check the nature of the situation. The reorder happens again and again.
Check whether a fixed rule exists. Yes: reorder 200 units when stock reaches 50.
Because it is routine and rule-based, it needs little judgement.
So it fits the definition of a programmed decision.

Answer: It is a programmed decision, because it is routine, repetitive and governed by a fixed rule.

Example 2

Arrange the following MBO steps in the correct order: (A) Appraise performance, (B) Set objectives jointly, (C) Monitor progress, (D) Set organisational goals. Which sequence is correct?

Show the solution

Start with the top level: organisational goals are set first, so D comes first.
Next, the manager and the subordinate agree on individual objectives, so B follows.
Then work is carried out and progress is monitored, so C comes next.
Finally, results are appraised against objectives, so A is last.

Answer: The correct order is D, B, C, A.

Exam tips

Expect direct questions on definition, features, benefits and limits of MBO. Learn one-line points for each.
For decision-making steps, memorise the full order and watch for options that swap two adjacent steps.
In programmed vs non-programmed questions, find the keyword (routine or unique) before reading options.
Match each example in the question to a type of decision. Examples often use stock reorders, salary payment, new plant location or new product launch.
Since there is no negative marking, attempt every question. Eliminate two options and then choose.

Practice questions from Planning, Organizing, Staffing and Leading

Management by Objectives and Decision Making in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Management by Objectives and Decision Making: frequently asked questions

What is the MBO process in simple words?

Top management sets overall goals, and managers and employees then agree on their own objectives. They plan action, work, monitor progress, and review results at the end. The review feeds into the next cycle of goals.

What are the main advantages and limitations of MBO?

Advantages include clear goals, better motivation, better control and fair appraisal. Limitations include the time it takes, too much focus on numbers, difficulty in setting measurable goals and the need for strong top-level support.

What is the difference between programmed and non-programmed decisions?

Programmed decisions are routine and follow fixed rules, such as reordering stock. Non-programmed decisions are new and need judgement, such as entering a new market. The first are usually made at lower levels and the second at higher levels.

What is the first step in the decision-making process?

The first step is to identify and define the problem. Without a clear problem, the later steps of collecting information and listing alternatives have no direction.