A business organization can be formed with certain properties and specific characteristics. Since business organization is an association of persons, the manner of forming and the objectives of the association decide the form of organization. Individuals form an organization because they are unable to achieve their goals individually. An organization provides opportunities to exploit the existing potential of men and materials. It explores the future possibilities of exploiting human and physical resources. Individuals interested in getting benefits out of the present and potential resources form an association, better known as an organization, to attain the group goals. The dynamics of individuals and the organization are used to gain maximum benefits. They work in a particular manner to obtain the objectives. They can form formal or informal organizations.
A formal organization develops in a well-defined system and has specific properties. It bears definite measures of authority, responsibility, obligation and accountability for attaining the specific objective of the organization, i.e., the company. Although there is no uniform structure of formal organization, the structures formed are well-defined and their functions are well-known to individuals attached to them, who will carry out their responsibilities to the organization as a whole. A formal organization has certain special features such as a definite objective, specialized function, unified command and other specific properties.
- Objectives – A formal organization has well-defined objectives. The organizational objectives are laid down for the individuals to achieve goals systematically. These objectives will facilitate policy formulation and the planning process. The objectives are established after predicting the future needs of consumers and potential technology. The objectives are broken into small parts known as goals which are to be achieved within a specified time by a set number of individuals. Their attitudes, capacities and characters will determine the forming of the objectives. Individuals are required to perform their jobs in a rational manner.
- Specialized functions – Individuals in an organization have specialized functions. They are assigned jobs, duties and responsibilities and are responsible for achieving their attached objectives within a specified period of time. Their achievements and failures are individually known. Specific jobs are performed by specialized and expert people. These responsibilities and authorities are well-defined, and there is a high degree of work specialization.
- Formal structure – The structure of an organization is specifically laid down for adapting people to work. Specialists will perform their jobs within the structure already laid down by the management. The superior and subordinate as well as superior and superior relationships are specifically given in the structure. There is no place for an arbitrary structure. The management clearly lays down the form and body of organization within which individuals will perform their respective jobs. A chain of command, formal structure and other methods are used for developing a formal structure.
- Perpetual functions – The functions of an organization continue where individuals are constantly involved. A person may come and go, but individuals as a whole perform functions perpetually.
- Coordination – Since individuals perform their respective jobs, their activities are required to be coordinated to attain the corporate objectives of the organization. A committee or some other definite form of organizational setup is developed for coordinating the activities of individuals and departments. Coordination and control are essential in the informal organization to lead the performance in the right direction.
- Unity of direction – Formal organizations with specific structures and activities are manages using unity of direction. Rules and regulations are extensively used in a formal organization. Jobs become routine and mechanized. A one man command helps unity of direction. Individuals have to work within the structure and framework of the organization. They do not have separate identities and activities. They work jointly, are collectively responsible and attain the organizational goals effectively within a specified time.
An informal organization is an association of persons without any formality and having no binding rules. Persons having common characteristics and motives form an organization. The common characteristics are based on likes, dislikes, religion, caste, creed, race, language, regions, education, cadre, etc. They become strong forces in the company and outside the company because their ties are based on some concrete understanding and sentiment. They form a natural association. An informal organization should not be confused with an organization having no legal sanctity. An informal organization may or may not have a legal identity, but its force is much more useful. If the leader belongs to their sect or religion or region, employees will have regard for him and develop an allegiance to him. It becomes easy for the company to manage such employees because managing employees with formal authority is sometimes ineffective. Therefore, many Indian corporations have appointed leaders of the same sect and region to which the employees belong.
An informal organization is spontaneous and its people do not need formality and well-defined activities for organizing such an association. The spontaneous and natural support of employees of a particular region at every level of management helps in forming their association. These associations can function effectively by honoring the sentiments of the employees. It has been observed that informal organizations have been more useful than formal organizations in many cases. Many subordinates in private enterprises perform extra work out of sheer respect to their superiors and not by way of compulsion as in formal relations. The organization heads and other managers in the hierarchy, generally use informal relations with their subordinates. They discuss problems informally and find suitable solutions thereof. Formal organizations without use of informal relations cannot effectively perform their duties. It has even been accepted by bureaucrats that informal relations make the job more easy and effective because informal communication satisfies the attitude, impulses and egos of subordinates.