Organisational Structure – Definition


Definition of organisational structure:
The shape of reporting lines between people and departments in an organisation, which defines how the business is managed and who makes key decisions.

What is an organisational structure?

An organisation structure can be visualised as a chart, which usually looks like a pyramid.

Organisational Structure - Definition
Organisational structures are easily communicated in charts like this one

At the top, is the Chief Executive Officer (CEO), who ultimately runs the company and takes responsibility for its activities.

Beneath the CEO will be a board of directors, who each specialise in an aspect of the company, such as its operations, finance, people, IT, public relations, sales and marketing.

Beneath these directors will sit entire departments, populated by a host of junior staff, and organised by middle managers.

Let’s begin with a junior member of staff and walk up through the reporting lines of a typical organisational structure:

Junior accountant – posts journal entries to the balance sheet.

Senior accountant – prepares the financial statements and disclosures.

Financial controller – reviews the financial statements for compliance with IFRS or local GAAP.

Finance director – writes the financial commentary on Key Performance Indicators (KPIs) which are published in the annual report.

Managing director – ensures that the report conveys the intended message to investors.

A generic organisational structure, like the above, is easy to describe because it is a common way for a corporate entity to arrange itself.

As employees move between companies, they begin to build a common understanding of what structures do work and which don’t.

However, companies in different industries and those with different scale may have dramatically different structures to each other.

Shallow versus deep organisational structures

Shallow organisational structures

A shallow organisational structure is one with very few middle managers between the very bottom of an organisation, and its top.

A start-up company with 10 staff, may have a very shallow structure in which every employee reports to the boss.

The advantages of a shallow structure are that junior employees have good access to key decision-makers. This can allow decisions to make more quickly. On the ground, this means that a business can be more nimble and agile in response to a change in conditions.

The downside of a shallow structure is a lack of ‘control’. By definition, shallow structures require more employees to be overseen by fewer managers. This means that the number of direct reports of each manager will be higher, this is known as the span of control.

If an employee is only one of 15 other direct reports, they will not receive much individual attention and must be more self-sufficient for the business to operate smoothly.

Deep organisational structures

A deep organisation structure involves many layers of middle management in between the key workers and the executive board.

It can take a long time for communication to cascade down the hierarchy if there are 6 – 8 different ranks between the senior management team and the foot soldiers.

Government and military organisations are renowned for inflexible, rigid organisational structures which hamper change and make it difficult for an employee to leverage a new idea.

That being said, they can be appropriate where the activity of employees requires a lot of oversight to avoid inconsistent outcomes or corruption. This is why government organisations are naturally tall.

How does the definition of an organisational structure relate to investing?

Growth investors like companies with shallow organisational structures in their investment portfolio, because it enables them to innovate and bring new ideas to the market quickly.

Bond investors may prefer companies with rigorous internal controls and plenty of checks and balances, to reduce the risk that a code of ethics breach will cause significant losses.

Investment books and investment courses will not conclude that one organisational structure is ‘optimal’ over another. In reality, the structure of an organisation should flex to the market, the region and even the personality of its executive board. Different organisational structures will help to deliver different outcomes better.

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