Classification of Organizations
There are many ways of classifying organizations. The most common way of classifying is on
the basis of authority and responsibility assigned to the personnel and the relationship with each
other. In this way, an organization can be either formal organization or informal organizations.
Formal Organization is formed when two or more persons come together. They have a
common objective or goal. They are willing to work together to achieve this similar objective.
Formal Organization has its own rules and regulation. These rules must be followed by the
members (employees and managers). A formal organization has a system of co-ordination. It
also has a system of authority. It has a clear superior-subordinate relationship. In a formal
organization, the objectives are specific and well-defined. All the members are given specific
duties and responsibilities. Examples of formal organization are: - a company, a school, a
college, a bank, etc. An organization established under certain rules and regulation is called
formal organization. In such organization the duty, authority, responsibility and accountability of
the person involved are clearly defined.
Characteristic Features of Formal organization:
• Formal organization structure is laid down by the top management to achieve
organizational goals.
• Formal organization prescribes the relationships amongst the people working in the
organization.
• The organization structures is consciously designed to enable the people of the
organization to work together for accomplishing the common objectives of the enterprise
• Organization structure concentrates on the jobs to be performed and not the individuals
who are to perform jobs.
• In a formal organization, individuals are fitted into jobs and positions and work as per
the managerial decisions. Thus, the formal relations in the organization arise from the
pattern of responsibilities that are created by the management.
• A formal organization is bound by rules, regulations and procedures.
• In a formal organization, the position, authority, responsibility and accountability of each
level are clearly defined.
• Organization structure is based on division of labor and specialization to achieve
efficiency in operations.
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• A formal organization is deliberately impersonal. The organization does not take into
consideration the sentiments of organizational members.
• The authority and responsibility relationships created by the organization structure are to
be honored by everyone.
• In a formal organization, coordination proceeds according to the prescribed pattern.
Merits of Formal Organization
• The formal organization structure concentrates on the jobs to be performed. It, therefore,
makes everybody responsible for a given task.
• A formal organization is bound by rules, regulations and procedures. It thus ensures law
and order in the organization.
• The organization structure enables the people of the organization to work together for
accomplishing the common objectives of the enterprise
• There is no conflict among the employees since their respective duties and
responsibilities are clearly defined.
Demerits or criticisms of Formal Organization
• The formal organization does not take into consideration the sentiments of
organizational members.
• The formal organization does not consider the goals of the individuals. It is designed to
achieve the goals of the organization only.
• The formal organization is bound by rigid rules, regulations and procedures. This makes
the achievement of goals difficult.
• There is a delay in taking a decision since rules and regulations are getting importance
than situation.
Informal Organization
The informal organization exists within the formal organization. It is a network of personal and
social relations existing in a formal organization. People in the organization do not always follow
formal lines. Employees in one department know those in other departments. They may like to
know what is happening in each other department. In such cases informal organizations get
developed. It does not have any definite structure. So it cannot be shown by any chart. Informal
organization refers to the relationships between the people in the organization based on personal
attitudes, emotions, likes, dislikes etc. This structure comes into existence as per desire of the
people. According to Keith Davis, informal organization is a network of personal and social
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relations not established or required by the formal organization but arising spontaneously as
people associate with another.
Informal organizations generally emerge by default. Policies, procedures or ranks do not play a
role in establishing them. People end up creating them by interacting with each other. An
informal organization always exists in a formal one. Managers can prevent its creation but they
can certainly regulate it. Some scholars say that informal organizations basically emerge from
joint personal activities. People always end up creating them subconsciously by interacting with
each other. Thus, personal and social relationships are mainly responsible for creating an
informal organization.
Characteristics Features of Informal Organization
• Informal organizations depict very peculiar features. Firstly, they emerge and develop
spontaneously. Formal policies and procedures do not play a role in their creation as in
the case of formal organizations.
• Secondly, an informal organization emerges from social interactions between people.
Ranks and functions of people have no relevance here. This is why personal prejudices
and attitudes are so important in informal organizations.
• People generally tend to interact more with those with whom they can relate. Hence,
things like social, political, cultural, religious outlook are important in this regard.
• Another feature of informal organizations is that they exist in each and every enterprise.
This is because social interactions between people are inevitable.
• Managers cannot prohibit informal organizations; they can only regulate them. This
regulation is important because it can affect the productivity and morale of the people
involved.
• If employees do not gel with each other well, they may not work cordially with
cooperation. This, in turn, affects the financial profitability of the organization itself.
• Membership of informal groups can be overlapping as a person may be member of a
number of informal groups.
• Informal organizations are based on common taste, problem, language, religion, culture,
etc. it is influenced by the personal attitudes, emotions, whims, likes and dislikes etc. of
the people in the organization
Functions of Informal Organization
• The primary function of informal organizations is basically to maintain cultural values of
people. When people can associate themselves with each other socially, they always feel
a sense of togetherness. Consequently, another function of informal organizations is to
provide social satisfaction to members.
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• Finally, an informal organization also provides an effective means of communication to
its members. They can interact with each other freely and efficiently. Managers can use it
to send across messages quickly and directly.
Benefits of Informal Organization
The merits or benefits of informal organizations include:
• Informal organizations have several benefits. Firstly, they inculcate a sense of unity and
togetherness among their members.
• This happens because of the social interactions they indulge in with each other. This
consequently leads to work satisfaction and stability in the organization.
• Furthermore, a robust informal organization can be an effective means of swift
communication. Both employees and well as managers can use this.
• Managers also benefit from informal organizations by using them to understand the
grievances of employees. Since employees freely interact with each other, they can unify
and address their problems collectively.
Demerits of Informal Organization
The demerits of informal organization include:
• The main problem of informal organizations is that they can make members averse to
change. Their social interaction with each other creates lifestyles, cultures, and
conventions. People do not positively respond to changes to these things easily.
• For example, employees of many companies organize gatherings and functions for
festivals. If the management suddenly decides to ban such social events, it will definitely
face resistance.
• Another problem with informal organizations is that members have to conform to a set of
togetherness. This, in turn, can lead them away from the larger organizational objectives.
A conflict of roles like of this kind can be detrimental to the organization.
Other Classification of Organizations
Organizations can also be classified in other ways based on different criteria, such as their
purpose, ownership, industry, size, geographical reach, legal structure, and more. Here are some
common classification approaches:
• Purpose/Industry:
o Commercial/Private Sector: These organizations operate with the primary goal
of generating profit. They can be further categorized into various industries like
manufacturing, retail, finance, technology, etc.
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o Nonprofit/Voluntary Sector: These organizations work towards a social or
public interest goal without aiming for profit. Examples include charities, NGOs,
and community groups.
o Government/Public Sector: These organizations are governmental bodies that
provide public services and maintain law and order.
• Ownership:
o Public Organizations: These organizations are owned and operated by the
government and exist to serve public interests.
o Private Organizations: These organizations are owned by individuals or groups
of individuals and operate for profit.
o Cooperatives: These are owned and operated by their members, who share
profits and decision-making power.
• Size:
o Small and Medium-sized Enterprises (SMEs): These are typically defined by
their employee count or revenue. Definitions vary by country, but they generally
have fewer employees and lower revenue compared to larger corporations.
o Large Enterprises/Corporations: These organizations have significant
resources, a wide market reach, and often operate in multiple locations or
countries.
• Geographical Reach:
o Local Organizations: These operate within a specific local area or region.
o National Organizations: These operate within the boundaries of a single
country.
o Multinational/Global Organizations: These have operations in multiple
countries and regions.
• Legal Structure:
o Sole Proprietorship: A business owned and operated by a single individual.
o Partnership: A business owned by two or more individuals who share profits and
responsibilities.
o Limited Liability Company (LLC): A business structure that combines features
of a corporation and a partnership, offering limited liability to its owners.
o Corporation: A legal entity separate from its owners, offering limited liability
and various ownership structures (publicly traded or privately held).
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o Nonprofit Corporation: A corporation formed for nonprofit purposes.
o Cooperative: An organization owned and democratically controlled by its
members.
• Legal Status:
o For-profit Organizations: These aim to generate profit for their owners or
shareholders.
o Nonprofit Organizations: These operate for charitable, educational, religious, or
social purposes without distributing profits to individuals.
o Government-Owned Organizations: These are owned and operated by the
government.
• Mission and Function:
o Service Organizations: These provide services to customers or clients.
o Product-Oriented Organizations: These produce and sell physical goods.
o Hybrid Organizations: These combine elements of both service and product-
oriented functions.
• Structure:
o Functional Organizations: These are organized by different functions, such as
marketing, finance, HR, etc.
o Matrix Organizations: These have a combination of functional and project-
based reporting structures.
o Flat Organizations: These have few hierarchical levels and promote
collaboration and direct communication.
• Profitability:
o Profitable Organizations: Those that consistently generate profits.
o Non-Profitable Organizations: Those that struggle to generate profits.
These are just a few ways organizations can be classified, and often, organizations can fit into
multiple categories simultaneously. The classification that best fits a specific organization
depends on the context and criteria being considered.
Steps in the Process of Organization
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Organization means identifying, arranging and integrating different elements of organization into
efficient working order. It requires the management to follow the following process of
organization.
Division of work: The main function is divided into sub-functions and entrusted to the different
departmental heads. The result is the establishment of departments like Purchase, Sales,
Production, Accounts, Publicity and Public relations. The departments can be further classified
just as production department into (1) Planning (2) Designing, (3) Operations, (4) Production
Control and (5) Repairs and Maintenance. The division of the work is based upon the fact that
specialization is keynote of efficient organization.
Grouping of Job and Departmentation: The second step is to group similar or related jobs into
larger units, called departments, divisions or sections. Grouping process is called
departmentation. The department may be based upon functions such as manufacturing,
marketing and financing etc. Department may also be based on products, such as textiles,
cosmetic, stationery etc. These departments may have different sections as per requirement
Grouping jobs or Departmentation aims at achieving coordination and facilitates unity of efforts.
The departments are linked together on the basis of interdependence. The divided task is
assigned to specific individual or group of individuals who are supposed to be the most qualified
and specialized persons for the task.
Assigning duties: The work to be performed by every individual is clearly defined and made
known to him. Everyone must know, what he is required to do in order to avoid any
misunderstanding, duplication or overlapping in the work.
Granting authorities and fixing responsibilities: Assigning of duties to individuals must
coincide with the appropriate and relevant authorities. Every employee must know, what the
authorities granted to him and for what and to whom he will be responsible, liable and
accountable.
Delegation of authority: Those who are made responsible for specific tasks are given due
authority. Both responsibility and authority go hand in hand together. Reasonable powers are
delegated to heads and supervisory staff to enable them to do their work with ease and
efficiency.
Effective communication: Effective communication is the keynote of efficient organization.
There should be proper arrangement of communication messages from executives to
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subordinates and vice-versa. Proper communication system establishes harmonious relationship
between employees and enables execution of work in the right manner at the appropriate time
and in an atmosphere of perfect mutual adjustment.
Co-ordination of activities for common objectives: Business activity is a team work or the
group activity, so the efforts of every employee must be co-ordinate effectively to achieve the
common objectives of the enterprise.
Structure of Organization
In order to achieve the desired goals, sound and effective organizational structure is necessary.
Organizational structure, as we know is the system of job positions, roles assigned to these
positions and specifying authority, responsibility and task of every positions. The structure
undoubtedly provides basic framework for executive and employees to perform their task
smoothly. The following points must be taken into consideration while building organizational
structure.