Organizational structure analysis Vs Financial analysis; Which is a better investment decision tool?

 

It's common for an investor to do the financial analysis of the company they want to invest in. It's uncommon for an investor to do the organizational structure analysis. The latter is usually done by management for the purpose of internal decisions.

The organizational structure of a company defines its business approach. The way a company approaches its business operations has a significant impact on its performance. Its performance is the primary determinant of either profitability or non-profitability.

The profitability of a company is known by carrying out the financial analysis of its performance within its industry over a range of financial years. 

Profitability and its consistency form the primary concern of an investor. It is the consistency in profitability that guarantees regular payment of dividends, interest on debt and return of principal.

The foregoing indicates that both organizational structure and financial analyses of investment options could improve investment decisions reached.

By studying the organizational structures of the companies they're interested in, an investor can compare these structures, assess weaknesses and identify strengths to better understand the performance behind the figures in the financial reports.

It is important or understand that the organizational structure of company defines its levels of control. For instance, an organization with a hierachical structure gives managers high levels of control over what employees do and how they work. An employee in this kind of organization reports  to a manager who in turn is responsible for outcomes 

Why should an investor be interested in levels of control managers have over employees?

An investor that is interested in investing in a stable business environment should prioritize a company with the hierarchical organizational structure. This structure gives managers high levels of control to demand that employees either produce accepted levels of performance or get disciplined.

On the other hand, an investor looking to invest in a rapidly changing business environment should consider a company with the matrix organizational structure. The matrix has lower levels of control.