Business Studies Part I
Business Studies Part II

Formal and Informal Organisation

In all organisations, employees are guided by rules and procedures.

To enable smooth functioning of the enterprise, job description and rules and procedures related to work processes have to be laid down. This is done through the formal organisation.

Formal organisation refers to the organisation structure which is designed by the management to accomplish a particular task. It specifies clearly the boundaries of authority and responsibility and there is a systematic coordination among the various activities to achieve organisational goals.

The structure in a formal organisation can be functional or divisional. The formal organisation can be better understood by a study of its features which are as follows:

(a)     It specifies the relationships among various job positions and the nature of their interrelationship. This clarifies who has to report to whom.

(b)    It is a means to achieve the objectives specified in the plans, as it lays down rules and procedures essential for their achievement.

(c)     Efforts of various departments are coordinated, interlinked and integrated through the formal organisation.

(d)    It is deliberately designed by the top management to facilitate the smooth functioning of the organisation.

(e)     It places more emphasis on work to be performed than

Formal Organisation

Advantages: Formal organisation offers many advantages. Some of the important ones are:

(a)     It is easier to fix responsibility since mutual relationships are clearly defined.

(b)    There is no ambiguity in the role that each member has to play as duties are specified. This also helps in avoiding duplication of effort.

(c)     Unity of command is maintained through an established chain of command.

(d)    It leads to effective accomplishment of goals by providing a framework for the operations to be performed and ensuring that each employee knows the role he has to play.

(e)     It provides stability to the organisation. This is because behaviour of employees can be fairly predicted since there are specific rules to guide them.

Limitations: The formal organisation suffers from the following limitations:

(a)     The formal communication may lead to procedural delays as the

established chain of command has to be followed which increases the time taken for decision making.

(b)    Poor organisation practices may not provide adequate recognition to creative talent, since it does not allow any deviations from rigidly laid down polices.

(c)     It is difficult to understand all human relationships in an enterprise as it places more emphasis on structure and work. Hence, the formal organisation does not provide a complete picture of how an organisation works.

Interaction among people at work gives rise to a ‘network of social relationships among employees’ called the informal organisation.

Informal organisation emerges from within the formal organisation when people interact beyond their officially defined roles. When people have frequent contacts they cannot be forced into a rigid formal structure. Rather, based on their interaction and friendship they tend to form groups which show conformity in terms of interest. Examples of such groups formed with common interest may be those who take part in cricket matches on Sundays, meet in the cafeteria for coffee, are interested in dramatics etc. Informal organisation has no written rules, is fluid in form and scope and does not have fixed lines of communication. The Table in the next page compares informal organisation with the formal organisation to provide better understanding of both types.

Informal organisation can be better understood with the help of the following features:

(a)     An informal organisation originates from within the formal organisation as a result of personal interaction among employees.

(b)    The standards of behaviour evolve from group norms rather than officially laid down rules and regulations.

(c)     Independent channels of communication without specified direction of flow of information are developed by group members.

(d)    It emerges spontaneously and is not deliberately created by the management.

Advantages: The informal organisation offers many benefits. Important among them are given below:

(a)     Prescribed lines of communication are not followed. Thus, the informal organisation leads to faster spread of information as well as quick feedback.

(b)    It helps to fulfill the social needs of the members and allows them to find like minded people. This enhances their job satisfaction since it gives them a sense of belonging in the organisation.

(c)     It contributes towards fulfillment of organisational objectives by compensating for inadequacies in the formal organisation. For example, employees reactions towards plans and policies can be tested through the informal network.

Disadvantages: The informal organisation has certain disadvantages. Some of them are as follows:
Informal organisation may become a disruptive force when it spread rumours.

  1. Formal organisation and Informal organisation are the two types of organisations which have been discussed.
    Formal organisation is the structure of authority relationships created deliberately by the management to achieve its objectives.
    Informal organisation is a network of social relationships arising out of the interaction among employees within an organisation.
  2. The difference between Formal organisation and Informal organisation is as follows:
S.No.BasisFormal OrganisationInformal Organisation
1.OriginIt arises as a result of company rules and policies.It arises as a result of social interaction.
2.AuthorityIt arises by the virtue of position in the organisation.It arises out of personal qualities of the members.
3.BehaviourIt is directed by rules of the organisation.There is no set behaviour pattern for the members.