CHAPTER TWO

HUMAN RESOURCE MANAGEMENT ENVIRONMENTS

INTRODUCTION
Human resource management cannot take place in isolation from the external and internal
environment. The functions of Human resources are executed on permeable systems. These
environments affect the human resource functions and shape the policies and practices of human
resource management. Today HRM is much more integrated into both the management and the
strategic planning process of the organization. The basic reason for this expanded role is that
organizational environment has become more diverse and complex.

Many interrelated environmental factors affect human resource management. Such factors are
part of either the organization's external environment or its internal environment. The
organization has little, if any, control over how the external environment affects management of
its human resources. These factors impose influences of varying degrees on the organization
from outside its boundaries. Moreover, important factors within the firm itself also have an
impact on how the organization manages its human resources.

Every organization exists in an environment that has both external and internal components. As
such, a human resource management program functions in a complex environment both outside
and inside the organization. Human resource managers therefore should be aware that rapid
changes are occurring within the environment in which organizations operate.

2.1. The external environment

External environment is the environment that exists outside the organization. They influence the
organizational performance but largely beyond management’s control. It provides opportunities
and threats to the organization and human resource management.

According to Griffin (1990), the external environment consists of everything outside an

organization that might affect it. However, the boundary that separates the organization from the
external environment is not always clear and precise. The external environment has a significant
impact on human resource management policies and practices.

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It helps to determine the values, attitudes, and behavior that employees bring to their jobs. The
external environment is composed of two layers: the general environment and the task
environment.

I. The General Environment

An organization's general environment consists of the nonspecific dimensions and forces in its
surroundings that might affect the organization's activities. These elements are not necessarily
associated with other specific organization or groups. Instead, they are general forces or
processes that interact with each other and also affect the organizations as a whole. Each
embodies conditions and events that have the potential to influence the organization and its
human resource management activities in significant ways. The general environment of most
organizations includes the Political (Legal), Economic, Socio-Cultural and Technological
(PEST) environments.

2.1.1 Political - Legal Factors

Political variables are the factors that may influence organizations activities as a result of the
political process or climate. The Political system, such as, democratic or not, nature of the
government and favoring the employee over the employer, affects the human resource functions
of an organization.
The political-legal environment is also made up of the laws and regulations within which an
organization conducts its affairs. Government has a significant impact on human resources
management. Each of the functions performed in the management of human resources, from
employee recruitment to termination, is in some way affected by laws and regulations established
by the government. Human resource managers must follow all laws and government regulations.

Government through the enforcement of different laws also has direct and immediate impact on
HRM function. Government made different laws that regulate relationship between employer
and employees including issues, such as equal employment opportunity (EEO), affirmative
action, safety and health, wages and salaries, hours of work, etc.
a) Equal Employment Opportunity: Government laws require providing applicants equal
opportunity for employment with regard to race, religion, sex, disability, age or national
origin. There should not be discrimination during recruitment and selection of candidates
employees.

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 b) Affirmative Action: Affirmative Action is taken for the purpose of eliminating the
present effects of the past discrimination. It is the practice of recruiting, hiring or staffing
underrepresented groups or minorities such as women, disability and the disadvantaged
groups of the society.
c) Government passes legislations that will enforce the employee’s safety and health.
d) Government may set minimum level of wages and salaries, equal pay for equal work,
hours of work, holiday, leaves, etc. The deluge of government regulations and laws has
placed a tremendous burden on human resource managers.

2.1.2 Economic Factors

The economic environment refers to the general economic conditions and trends that may affect
the human resource management activities of an organization. The economic variables include
unemployment, demand and supply, inflation, interest rates, the labour market, and
others. When, for example, unemployment is high, the organization is able to be very selective
about whom it hires. Increased or decreased demand for a firm's products or services will have
important implications for recruitment or layoff. Inflation has had a significant impact on human
resources program, necessitating periodic upward adjustments in employee compensation.

Economic parameter like GNP, per capital income, an employment rate, inflation rate, etc.
affects HRM. If the economy is booming and unemployment rate is low, it may be harder to
acquire and retain the staff. In times of economic decline, unemployment rate increases and a
greater choice of labor is available to the employer. For example, when the economy expands,
during recovery and boom period demand for the product will be high; this makes production
level high and demands more employees. At this time hiring new employees and training
programs may be needed.

Therefore, to retain competent employees, it is necessary to improve benefit packages and

working conditions. Higher wages /salaries and better benefit become serious burden when the
business cycle turns downward. During recession and depression demand for the product will
decline or decrease and this leads to the reduction in the production level, and as a result it forces
to reduce the number of employees. Therefore, human resource manager should aware the
economic condition of the nation and the globe and manage the human resources accordingly.

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 2.1.3 Socio-Cultural Factors

The socio-cultural dimension of the general environment is made up of the customs, values, and
demographic characteristics of the society in which the organization functions. The socio-
cultural dimension influences how employees feel about an organization. Human resource
management, today, has become more complex than it was when employees were concerned
primarily with economic survival. Today, many employees have more social concerns than mere
economic interest as early times.

These factors are created by the society on human resource management, such as demographic
factors and culture. Demographic factors describe the composition of the workforce, such as age,
sex, race, and language. Culture is the belief and custom (religion) of the society. It affects the
attitude and activities of workers. HR managers need to understand the culture and society from
which their employees are recruited.

2.1.4 Technological Factors

Technological factor refers to the technology available for the organization to use. Technologies
have an impact on HRM by changing the entire working methods and systems. Technological
change will continue to shift employment from some occupations to others, i.e., labor-intensive
and clerical jobs will decrease while technical, managerial and professional jobs will increase.
Jobs and the skills of employees are changed by technology. For example, the introduction of
computer in an organization changes the skill requirement of the employee.

The technological environment includes advances in sciences as well as new developments in

products, processes, equipment, machinery and other materials that may affect an organization.
Technological advancements have tended to reduce the number of jobs that require little skill and
to increase the number of jobs that require considerable skill. Technological advances also have
training implication. The challenging areas in human resource management will be training
employees to stay up with rapidly advancing technology. Because, as technological changes
occur, certain skills also are no longer required, this necessitates some retraining of the current
workforce.

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How Technology Affects HRM Practices

Technology has had a positive effect on internal operations for organizations, but it also has changed the
way human resource manager’s work. HRM professionals have become the primary source of
information in many organizations. Information can quickly and easily be communicated via company
Web sites and intranets, e-mail, and messaging. Human Resource Information Systems (HRIS) allow
HRM professionals to better facilitate human resource plans, make decisions faster, clearly define jobs,
evaluate performance, and provide cost effective benefits that employees want. Technology helps to
strengthen communications with both the external community and employees. How? Let’s look at some
specific examples.
 Recruiting Contacting a pool of qualified applicants is one of the most critical aspects of
recruiting. Word of mouth, newspaper advertisements, and college visits are often supplemented
or replaced altogether by job postings on the Internet. Posting jobs on company web sites, or
through specific job-search web sites such as careerbuilder.com and Monster.com, help human
resource managers reach a larger pool of potential job applicants and assist in determining if an
applicant possesses some of the basic technology skills. Additionally, rather than ask for a paper
copy of a résumé, many organizations are asking applicants to submit an electronic résumé—one
that can be quickly scanned for “relevance” to the job in question.

 Employee Selection Hiring good people is particularly challenging in technology based

organizations because they require a unique brand of technical and professional skills. Employees
must be smart and able to survive in the demanding cultures of today’s dynamic organizations. In
addition, many such “qualified” individuals are in short supply and may be offered a number of
opportunities for employment. Once applicants have been identified, HRM must carefully screen
final candidates to ensure they fit well into the organization’s culture. Many Internet tools make
background searches of applicants quick and easy. The realities of organizational life today may
focus on an informal, team-spirited workplace, one in which intense pressure to complete projects
quickly and on time is critical, and a 24/7 (24 hours a day,7 days a week) work mentality
dominates. HRM selection tools help to “select out” people who aren’t team players, can’t handle
ambiguity and stress, or are a poor fit with company culture.

 Training and Development Technology is also dramatically changing how human resource
managers orient, train, and develop employees and help them manage their careers. The Internet
has provided HRM opportunities to deliver Web based training and development to employees on
demand, whenever the employee has the time to concentrate on the material. Teleconferencing
technology allows employees to train and collaborate in groups regardless of their location.
Organizations that rely heavily on technology find an increased need for training. Online training
and teleconferencing also allow HR departments to deliver cost effective training that help stretch
the HR budget.

 Ethics and Employee Rights Electronic surveillance of employees by employers is an issue that
pits an organization’s desire for control against an employee’s right to privacy. The development
of increasingly sophisticated surveillance software only adds to the ethical dilemma of how far an
organization should go in monitoring the behavior of employees who work on computers.

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 Paying Employees Market Value It’s becoming more difficult today for organizations to find and
retain technical and professional employees. Many companies have implemented an extensive list
of attractive incentives and benefits rarely seen by non managerial employees in typical
organizations: for instance, signing bonuses, stock options, cars, free health club memberships,
full-time on-site concierges, and cell phone bill subsidies. These incentives may benefit their
recipients, but they have downsides. One is the perception of inequity if they are not offered to all
employees. The other is the increasing problem created by offering stock options as a benefit to
employees. While they look good when a firm is growing and the stock market is performing
favorably on the company’s future, stock options can reduce employee motivation when market
conditions reduce the value of the stock.

 Communications The rules of communication are being rewritten as information technology

creates more opportunities for communication. Employees today can communicate with any
individual directly without going through channels. These open communication systems break
down historical organizational communication pattern flows. They also redefine how meetings,
negotiations, supervision, and water-cooler talk are conducted. For instance, virtual meetings
allow people in geographically dispersed locations to meet regularly. Moreover, it’s now easier
for employees in Baltimore and Singapore to covertly share company gossip than for off-line
employees who work two cubicles apart.

 Decentralized Work Sites For human resource managers, much of the challenge regarding
decentralized work sites revolves around training managers how to establish and ensure
appropriate work quality and on-time completion. Decentralized work sites remove traditional
“face time,” and managers’ need to “control” the work must change. Instead, greater employee
involvement will allow workers the discretion to make decisions that affect them. For instance,
although a due date is established for the work assigned to employees, managers must recognize
that off-site employees (or telecommuters) will work at their own pace. Instead of focusing work
efforts over an eight-hour period, the individual may work two hours here, three hours at another
time, and another three late at night. The emphasis, then, will be on the final product, not on the
means by which it is accomplished. Working from home may also require HRM to rethink its
compensation policy. Will it pay workers by the hour, on a salary basis, or by the job performed?
More than likely, jobs such as claims processing that can be easily quantified and standardized
will earn pay for actual work done.

 Skill Levels What are the skill implications of this vast spread of technology? For one,
employees’ job skill requirements will increase. Workers will need the ability to read and
comprehend software and hardware manuals, technical journals, and detailed reports. Another
implication is that technology tends to level the competitive playing field. It provides
organizations, no matter their size or market power, with the ability to innovate, bring products to
market rapidly, and respond to customer requests. Remember that Globalization 3.0 allows
individuals to compete worldwide in purchasing or providing services. Many companies have
found that services in technology, programming, radiology, and financial analysis can be
provided by skilled employees in India as easily as an employee in the United States.

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  A Legal Concern Organizations that use technology—especially the Internet and e-mail—must
address the potential for harassment, bias, discrimination, and offensive sexual behavior abuses.
Evidence is increasing that many employees fail to use the same constraints in electronic
communications that they use in traditional work settings. As one individual noted, human
resource managers “all know that they can’t hang up a Penthouse calendar in the workplace. They
all know that they can’t make a racist or sexist joke in the workplace.” But those same people
may think it’s acceptable to send racist and sexist jokes via e-mail or to download pornography at
work. Consider what happened at Chevron, which settled a sexual harassment lawsuit for $2.2
million because offensive e-mails—such as “25 reasons why beer is better than women”—were
readily circulated on the company’s e-mail system. Organizations such as Citigroup and Morgan
Stanley have also been taken to court by employees for racist e-mail proliferating on their e-mail
systems. As one researcher pointed out, federal law views a company’s e-mail no differently than
if offensive materials were circulated on a company’s letterhead. HRM policy must define
inappropriate electronic communications, reserve the right to monitor employee Internet and e-
mail usage, and specify disciplinary actions for violations.

II. The Task Environment

The task environment of an organization consists of individuals, groups and organizations that
directly affect a particular organization. According to (Barney, 1992), the task environment
refers to the specific environment of an organization and may include:

 The Customers
 The Suppliers
 The Regulators ( government officials)
 The Owners
 The Competitors and
 The Partners

All these elements are much closer and specific to a given organization. Whereas the elements
of the general environment affect virtually all organizations in the society; the elements of the
task environment are pertinent (more relevant) to a specific organization.

2.2. The internal environment

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The environment that exists within an organization is known as the internal environment. The
internal environment consists those factors that affect an organization's human resources from
inside its boundaries. An internal environment is the environment that exists inside the
organization. It contributes to the strength and weakness of the organization. According to
(Mondy & Noe, 1990), some of the internal factors include:
A) Strategy of an organization: Organizations have several strategies (goals and
objectives), such as growth strategy, survival strategy or exit strategy.
B) Leadership style of the organization: Leadership styles practiced by top management
and supervisors will affect the relationship between supervisors and subordinates. The
style of leadership might be autocratic, democratic or laissez-faire. Leadership styles
adopted in an organization influences human resource functions.
C) Nature of the task: The type of the task to be performed in an organization highly
affects human resource management. This is because some jobs can attract or retain
workers, while others might be the causes of high labor turnover. The elements of the
nature of the task include:
 Degree of physical exertion: Some of the tasks require more physical
exertion while others may require less physical exertion. In general, people
like to work with less physical exertion.
 Working environment: People, generally, prefer to work in a pleasant
environment, i.e., enjoyable pleasing, attractive, and friendly work
environments are the main elements of the task which retain workers.
 Physical location: Some tasks are done far from the employee’s residence
and other tasks are performed near to the place of employee’s residence.
Most employees prefer to work near to their residence.
 Degree of human interaction: Some tasks provide opportunity to interact
frequently with other people and others do not. People prefer to work the
tasks that provide interaction with their workmates or peers.
D) Mission
Mission is the organization's continuing purpose or reason for its existence. Each
management level should operate with a clear understanding of the firm's mission. The

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 specific organizational mission must be regarded as a major internal factor that affects the
tasks of human resource management.

E) Policy

A policy is a predetermined guide established to provide direction in decision making. As

guides, rather than hard and fast rules, policies are somewhat flexible, requiring
interpretation and judgment in their use. They can exert significant influence on how human
resource managers accomplish their jobs.

Although policies are established for marketing, production, and finance, the largest number
of policies often relate to human resource management. Some potential policy statements that
affect human resource management are:

 To provide employees with a safe place to work

 To encourage all employees to achieve as much of their human potential as
possible
 To provide compensation that will encourage a high level productivity in both
quality and quantity.
 To ensure that current employees are considered first for any vacant position for
which they may be qualified.

2.3. Human resource management model /Approaches

Three theoretical approaches to HRM can be identified. The first is founded on the concept that
there is ‘one best way’ of managing human resources in order to improve business performance.
The second focuses on the need to align HR policies and practice with the requirements of
business strategy so that the latter will be achieved and the business will be successful. Thirdly, a
more recent approach to HRM is derived from the resource-based view of the firm and the
perceived value of human capital. This view focuses on the quality of the human resources
available to the organization and their ability to learn and adapt more quickly than their

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competitors. Supporters of this perspective challenge the need to secure a mechanistic fit with
business strategy and focus instead on long-term sustainability and survival of the organization
via the pool of human capital.

1. Universalist approach - Best practice

This approach is based on the assumption that there is a set of best HRM practices that are
universal in the sense that they are best in any situation and that adopting them will lead to
superior organizational performance.

Adherents of a best practice perspective argue that there are certain HR practices and
approaches to their operation which will invariably help an organization in achieving competitive
advantage. There is, therefore, a clear link between HR activity and business performance, but
the effect will only be maximized if the ‘right’ HR policies are pursued.

A number of lists of ‘best practices’ have been produced, the best known of which was produced
by Pfeiffer (1998), namely:

 employment security
 selective hiring
 self-managed teams
 high compensation contingent or based on performance
 training to provide a skilled and motivated workforce
 reduction of status differentials
 sharing information

A great deal of evidence has been published in recent years, using various methodologies which
appear to back up the best practice case. While there are differences of opinion on questions of
detail, all strongly suggest that the same basic bundle of human resource practices or general
human resource management orientation tends to enhance business performance in all
organizations irrespective of the particular product market strategy being pursued.

2. Fit or contingency approach - Best fit

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The alternative ‘best fit’ school also identifies a link between human resource management
practice and the achievement of competitive advantage.
Here, however, there is no belief in the existence of universal solutions. Instead, all is contingent
on the particular circumstances of each organization. What is needed is HR policies and practices
which ‘fit’ and are thus appropriate to the situation of an organization. What is appropriate (or
‘best’) for one will not necessarily be right for another. Key variables include the size of the firm,
the dominant product market strategy being pursued and the nature of the labour markets in which
the organization competes. It is thus argued that a small organization which principally achieves
competitive advantage through innovation and which competes in very tight labour markets
should have in place rather different HR policies than those of a large firm which produces low-
cost goods and faces no difficulty in attracting staff. In order to maximize competitive advantage,
the first (small organization) requires informality combined with sophisticated human resource
practices, while the latter (large firm) needs more bureaucratic systems combined with a ‘low
cost – no frills’ set of HR practices.

The concept of best fit emphasizes that HR strategies should be congruent with the context and
circumstances of the organization. ‘Best fit’ can be perceived in terms of vertical integration or
alignment between the organization’s business and HR strategies.

To a great extent the jury is still out on these questions. Proponents of both the ‘best practice’
and ‘best fit’ perspectives can draw on bodies of empirical evidence to back up their respective
positions and so the debate continues.

3. Resource-based approach

The resource-based view of the firm is concerned with the relationships between internal
resources (of which human resources are one), strategy and firm performance.

This approach uses (human) resources as a starting point. The unique strengths and capabilities
of the employees determine the range of possible business strategies to be implemented. It
focuses on the promotion of sustained competitive advantage through the development of human
capital rather than merely aligning human resources to current strategic goals.

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The Resource Based View states that internal resources (like for example, human resources)
which are scarce, valuable, inimitable, and non-substitutable, serve as the basis for a sustained
competitive advantage.

The resource-based view may demonstrate the fact that strategies are not universally
implementable, but are contingent on having the human resource base necessary to implement
them. Whereas fit models focus on the means of competitive advantage (HR practices), the
resource-based view focuses on the source (the human capital). Researchers argue that while the
practices are important they are not the source of competitive advantage as they can be replicated
elsewhere, and they will produce different results in different places because of the differential
human capital in different places.

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