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While the concept of formal and informal organization expressed in the answer above is valid to some extent, it does not reflect the commonly understood meaning of these term as used in profession and discipline of management.
It is quite true that some groups, like ad hoc volunteers group have only informal organization. But this does not mean that other well established organizations like Rotary Club, Boy Scouts, and Ford Motor Company have only formal organizations. All establishments with formal organization have a parallel informal organization coexisting with it.
Formal organization refers to the organization structure which is designed and prescribed by the management of an enterprise. It is generally, but not necessarily, represented in the form of an organization chart showing designation of various people employed in the organization, their hierarchical levels, reporting relationships, and other channels for control and coordination. This chart is backed up by a more detailed description of duties and responsibilities of each position shown in the organization chart. This formal organization represent the structure of duties, responsibilities and working relationships formally prescribed in the organization.
People in an organization generally work in accordance with the structure prescribed by formal organization. But at the same time people in the organization develop additional relationships in the organization, which may be rooted primarily on personal rather than work consideration, but are impact significantly the functioning of the organization. Perhaps the most important impact of such informal organization is felt in the area of information exchange in dissemination in the organization.
Both formal and informal organizations exist in all established institutions, and both can impact their functioning in positive as well as negative way. The benefits and advantages of formal organization include the following.
- They provide the basic structure of division of work and responsibilities. Without such a structure it will e very difficult for employees to agree between themselves on duties and responsibilities of each, and such difficulties multiply in geometric proportions with increasing size of the organization.
- It generates clarity on what support and input each employee can expect from others, and in turn what is expected of him by others.
- It promotes discipline in the organization.
- It makes it easier to review and revise organization with changing requirements.
- It provides a structure for laying down pay scales and taking other decisions linked to organizational levels.
- It helps in other human resources development activities such as recruitment, promotions, career planning and development and manpower planning.
The Informal Organization is one where the participants have no empowered central leader who has the power to enforce rules on the group.
Typical ad hoc volunteer groups have an informal leader whose only function is to keep it from falling apart and gaining recognition for the group.
Formal Organizations have a chain of command and empowered officers to enforce the agreed upon rules.
Any formal organization qualifies, Rotary Club, Boy Scouts, Ford Motor Company. All have a Charter stating their place and function in society, all have rules of behavior and officers to enforce compliance to those rules.
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