An organization is formed by a group of people who share a common goal. The members of an organization come together to achieve this shared objective. The two main types of organizations are formal organizations and informal organizations. The main difference between the two is that formal organizations adopt a systematic way of doing things such as official communication and a hierarchy structure where each individual directly reports to a supervisor. The members of a formal organization have well-defined responsibilities which lead to a division of labor.
An informal organization lacks a systematic structure. There are neither defined objectives nor a hierarchy where a subordinate reports to a superior within an informal organization. There are no official channels of communication; information is passed through the grapevine.
An informal organization can develop organically within a formal organization. As people work together, they form social relationships with their colleagues and can become good friends. Most workplaces are both formal and informal organizations where relationships are defined in a hierarchy and where informal connections are also fostered.
Modern management tends to focus more on how informal organizations work. This is not because informal organizations are better or worse than a formal structure, but because the rigid hierarchies of a structural organization are better understood. Most people understand how a chain of command works and how military rank defines relationships. They don’t need a course on this. In contrast, informal organizations are not as well understood, are harder to create, and are more of an art
Macroeconomic changes are also causing us to focus more on informal organizations. Informal organizations tend to be better environments for creativity and collaboration, which have become increasingly valuable.
For these reasons, modern MBA instructors are emphasizing soft skills which teach students how to foster vibrant, informal organizations.
As stated above, organizations exist for a specific purpose. Formal private businesses such as banks, plants, and insurance companies exist to make a profit at minimal cost. Nonprofit organizations (also called non-governmental organizations, or NGOs) operate differently than private companies. Monetary gain is not the main driver for NGOs. Instead, they aim to tackle problems which other for-profit organizations do not tackle directly. For example, the Red Cross Society’s main purpose is to assist people who are in a state of humanitarian crisis irrespective of their race, sexuality, or religious beliefs. Their main objective is to serve the global community.
Government entities are also a category of organizations which are tasked with diverse functions. They enforce rules of exchange such as property law and contracts while establishing an environment conducive for private business by identifying and discouraging unhealthy anti-competitive practices. There are some organizations whose existence is essential to society and without which there would be disorder. For example, prison facilities are coercive organizations where law breakers are sent to be corrected for their wrongdoings. Government entities are unique in that participants may be forced to participate and that they are commissioned from a governmental body. These attributes are in contrast to NGOs and for-profit businesses which are created by private citizens and other private entities with willing participants who have the right to leave or quit as they wish.
Management instructors will often use “firm,” “company,” “corporation,” “business,” and “organization” interchangeably. This is not meant to be an insult to NGOs and government entities but is just a shorthand. NGOs and government entities need excellent management teams as much as for-profit businesses do.
The management concepts taught in MBA programs can be valuable to all organizations, including government agencies or charities. The goals of nonprofit organizations are more diverse, but typically they have mission statements with measurable outcomes they hope to achieve. For example, consider a nonprofit organization whose mission statement is to boost physical fitness in young people in a small community. The managers of the nonprofit have to choose to fund different programs to encourage exercise, healthy eating, and other activities related to physical fitness. These managers will have to decide which projects they will pursue based on how much they are expected to cost, how effective they are thought to be, how long they will take to achieve results, and the odds of them working according to plan. This is almost the same financial analysis that a for-profit company would make even though these entities have very different goals.
Other aspects of management are also needed for this nonprofit, such as marketing to attract local youths. It will need to recruit and qualify volunteers and paid employees to work with children. Management should take care to create a healthy culture within the organization. The managers will need to exercise leadership to keep the project together. Project management concepts will help make every goal along the way more attainable.
Clearly, MBA tools and concepts are valuable to any organization, be it a for-profit firm with a profit motive or another kind of organization with a different mission statement.