Items Description of Module

Subject Name Management

Paper Name SHRM
Module Title External Business Environment & SHRM
Module Id Module 4
Pre- Requisites Understanding of the basic concepts of SHRM and external Environment of Business
Objectives To Understand SHRM and External Business Environment
Keywords SHRM, Organizational Performance, External Business Environment
 QUADRANT-I

1. Module : External Business Environment & SHRM

2. Learning Outcome
3. Introduction
4. External Factors of Business Environment Impacting SHRM
5. Strategic HRM in Changing Business Environment
6. Summary

1. Module : External Business Environment & SHRM

2. Learning Outcome:
After completing this module the students will be able to-
 Understand the concept of External Business Environment & SHRM
 Understand the impact of SHRM on External BusinessEnvironment

3. Introduction
In simple words, environment comprises all those forces which have their bearing on the
functioning of various activities including strategic human resource management. Environment
scanning helps HR manger become proactive to the environment which is characterized by
change and intense competition. Human resource management is performed in two types of
environments- internal and external. These are discussed one by one:

Internal Environment:
These are the forces internal to an organization. Internal forces have profound influence on
SHRM functions. The internal environment of SHRM consists of unions, organizational culture
and conflict, professional bodies, organizational objectives, polices, etc. A brief mention of these
follows.

Unions:
Trade unions are formed to safeguard the interest of its members/workers. HR activities like
recruitment, selection, training, compensation, industrial relations and separations are carried out
in consultation with trade union leaders.

Organizational Culture and Conflict:

As individuals have personality, organizations have cultures. Each organization has its own
culture that distinguishes one organization from another. Culture may be understood as sharing of
some core values or beliefs by the members of the organization “Value for time” are the culture
of Reliance Industries Limited. The culture of Tata conglomerate is “get the best people and set
them free”.

HR practices need to be implemented that best fit the organization’s culture. There is often
conflict between organizational culture and employee’s attitude. Conflict usually surfaces
because of dualities such as personal goal vs. organizational goal, discipline vs. autonomy, rights
vs. duties, etc. Such conflicts have their bearings on HR activities in an organization.

Professional Bodies:
Like other professional bodies, the NIPM as the HR professional body regulates the functions of
HR practitioners in India. HR practitioners are expected to declare their allegiance to the code of
ethics of NIPM. Thus, professional bodies also influence HR functions of an organization.
 External Environment:

External environment includes forces like economic, political, technological, demographic etc.
these exert considerable influence on HRM. Each of these external forces is examined here.

Economic:
Economic forces include growth rate and strategy, industrial production, national and per capita
incomes, money and capital markets, competitions, industrial labour and globalisation. All these
forces have significant influence on wage and salary levels. Growing unemployment and
reservation in employment also affect the choice for recruitment and selection of employees in
organisations.

Political:
Political environment covers the impact of political institutions on HRM practices. For example,
democratic political system increases the expectations of workers for their well being.
The total political environment is composed of three institutions:

1. Legislature:
This is called Parliament at the central level and Assembly at the state level A plethora of labour
laws are enacted by the legislature to regulate working conditions and employment relations.
2. Executive:
It is the Government that implements the law. In other words, the legislature decides and the
executive acts.
3. Judiciary:
This is like a watchdog above the two. It ensures that both the legislature and the executive work
within the confines of the constitution and also in the overall interest of the people. These affect,
in one way or the other, all HR activities from planning to placement to training to retention and
maintenance.

Technological:
 Technology is a systematic application of organized knowledge to practical tasks.Technological
advances affect the HR functions in more than one way:

First; technology makes the job more intellectual or upgraded.

Second, it renders workers dislocated if they do not equip themselves to the job.
Third, job becomes challenging for the employees who cope with the requirements of technology
Fourth, technology reduces human interaction at the work place. Finally job-holders become
highly professionalized and knowledgeable in the job they perform.

Demographic:
Demographic variables include sex, age, literacy, mobility, etc. Modem work force is
characterized by literate, women and scheduled caste and scheduled tides workers. Now, workers
are called knowledge workers’ and the organisations wherein they work are called ‘knowledge
organisations’.

Employees are demanding parity in remuneration and responsibility among various categories
and levels of employees.

4. External Factors of Business Environment Impacting SHRM

Strategic human resource management is an outcome of globalization (Hassija, 2014). SHRM
practices have been changed globally due the economic, political, legal and technological factors
affecting business management practices. Therefore, there is a strong need to develop clear
understanding of the impact of external factors on SHRM practices.

“External factors are uncontrollable and dynamic for SHRM”, the statement proclaims the
inevitable importance of influence of external factors on SHRM practices. That is the reason why
SHRM practices vary from organization to organization at national and international level.
Human resource management is being considered one of the vital factors affecting organizational
performance; because it is human resource that can provide competitive advantage in highly
competitive business environment (Noe et al., 2012). In this regard, the most important issue
which should be addressed is rapidly changing environment faced by HR managers. There are
several factors that affect the roles and responsibilities of HR managers and SHRM practices
within the organizations. Internationally, the most important factors which can affect SHRM
practices within the organizations are international economic conditions and technological
advancement. At national level; economic, legal and political circumstances, cultural and
demographic factors are the factors which affect SHRM practices. In changing business
environment influenced by external national and international factors the traditional and basic HR
practices are becoming insignificant (Hassija, 2014). Therefore, to solve such external issues HR
managers ensure to develop HRM strategies. International HRM is a particular example of
changing SHRM practices with effect of globalization (Torrington et al., 2008). So, it can be
concluding that external factors are uncontrollable and dynamics in SHRM.

The impact of economic, legal, political, demographic, cultural and technological factors on
recruitment and selection, compensation and benefits, training and development and performance
management has been analyzed below with the help of examples.

Impact of Economic factors on SHRM Practices

Economic factor is one of the biggest external factors which have altered the SHRM practices
directly or indirectly. Country’s economic conditions are directly related with labour market and
labour supply which subsequently affect the recruitment and selection patterns of the
organisations. Moreover in labour market, the decrease in supply of particular skilled labour
shapes the training and development strategies of organisations.
Per capita income and DGP decides the minimum wage rate which is the part of compensation
and benefits (Hassija, 2014) and according to Varma&Budhwar (2008) negative GDP drives cost
cutting and rigid HRM practices. Several SHRM practices linked with relative economic
prosperity of the country as Torrington et al. (2008) explained the economic conditions of UK
and discussed the lack of particular skilled labour in many industries of UK in relation with
unemployment. Vosa (2010) conducted a study on the relationship between economic instability
of Estonia and SHRM practices and found that economic instability has influenced the HRM
practices. Vosa (2010) found that Recruitment& Selection, Training & Development and Reward
Management practices has influenced the most. Companies of Estonia started maintaining basic
in-house training programs instead of paying external trainers. Companies also canceled
performance appraisals and salary negotiations. Similarly, Varma&Budhwar (2008) explained
that the number of tourists in Fiji declined from 585,031 in 2008 to 542,186 in 2009 due to global
financial crisis. The phenomenon results in labour cost cutting and suppressing employees’ wages
practices in tourism organisations of Fiji.

Impact of Legal factors on SHRM Practices

Political and legal environment of a country actually gave birth to the standard SHRM practices
within the public and private sector organisations. Legal factors which affect the SHRM practices
are government labour policies, economic policy, national labour laws and health & safety
regulations (Sylwia, 2013).With the passage of time more concrete and specific legal laws have
developed to safeguard the employees at workplace. According to Kramar et al. (2014) Equal
employment, Sexual harassment prevention, Safety and health management, Union contract
grievances and Disability accommodations are the modern HR related laws which is being
practices globally. Implementation of all these laws is different in every country according to
their government policies and legal framework.

Legal framework decides the application of different SHRM practices throughlabour and
employment laws. Researchers have found that legal framework of a country (labour laws) has
direct impact on SHRM practices (Varma&Budhwar, 2008). Labour policy addresses the
companies on labour laws, minimum wage law, labour practices and compensation and benefits.
British American Tobacco is a large multinational corporation operating a subsidiary company in
Fiji. The company is providing the facility of maternity leave and paternity leave as well. In Fiji,
British American Tobacco subsidiary obeying the legal requirements imposed by the government
through Essential National Industries (Employment) Decree ERP (2007). Maternity leave is a
requirement of ERP (2007) but at the same time, company is also providing paternity leave
according to UK standards of managing employees.

Impact of Demographic factors on SHRM Practices

Demographic factors are the characteristics of workforce such as gender, education level, race
and cultural background (Varma&Budhwar, 2008). Ratio of men and women in workforce and
the cultural diversity has its impact on organizational performance. On the other side
demographic factors have an impact on SHRM practices within the organisations. Organisations
now have to keep balance in gender, racial and ethnic diversity (Kramar, 2014).

Moreover, companies now have to design jobs by keeping the work-life balance in consideration.
Thus, demographic factors have its impact on SHRM practices related to HR Planning,
Recruitment & Selection and Workplace Security. Varma&Budhwar (2008) stated an example of
Hotels Industry of Fiji. They explained the employee turnover ratio in different departments and
according to them the ratio is comparatively high in Cleaning and Food & Beverages departments
when compared with Front Office. So, the companies are practicing different employee
motivation and retention strategies for both types of employees.

Impact of Cultural Factors on SHRM Practices

Cultural factors are very complex to manage for HR professionals and with the passage of time
many new practices have been observed in HR field to manage the culture. In large organisations,
people from different cultures are hired which create the diversity and mismanagement of
diversity can cause big damages to organisations (MacKay, 2005). According to MacKay (2005)
every organisation has its own culture and employees tend to adjust themselves in that culture. He
further stated that ethical behaviour has become a central focal point in those cultural values. This
is the reason it has become a common HR practice to design an ethical code of conduct at
workplace which every employee has to sign and follow. Meshksar (2012) stated that in today’s
time of globalisation, cultural factors impact on HR practices cannot be ignored. Meshksar (2012)
used Hofstede model and investigated the impact of cultural factors on HR practices and found
that although culture is a factor which is responsible for reshaping many of HR practices. But HR
practices redesigning is not confined to cultural factors only. It also includes socio-economic
factors, political & legal factors and technological factors. He concluded that in high power
distance countries such as Belgium, central decision making is executed regarding the recruitment
and selection process, training and development process, pay and benefits process etc. Meshkar
(2012) also found that in countries with collectivism culture the hiring is mostly done in
organisations internally while in individualistic countries hiring process is executed through
external sources such as advertisements, hiring agencies and from institutions.

Impact of Political Factors on SHRM Practices

Political factors are one of the major forces which are responsible for a company’s mission and
strategy (Singh, 2010). Noe et al. (2012) found that political & legal factors are one of those
factors which affect HR practices.

Kokkaew&Koompai (2012) stated that in Thailand political factors have also affected HR
practices. They further stated that government policies in any country also pose some threats and
hurdles for HR professionals. For example in Thailand the minimum wage level is very high set
by government and it has posed a threat to HR managers to cope with this issue because this
matter has increased the labor cost for companies (Kokkaew&Koompai, 2012). Labor cost is the
major proportion of cost structure in most of the Thailand manufacturing organisations
(Kokkaew&Koompai, 2012). Tayeb (2005) also developed a model which shows the flow of the
impact of political factors on HR practices.

In some countries such as Lebanon political factors also a part of recruitment process. For
example in Lebanon, the selection criteria for applicants who apply for bank jobs is not confined
to education and experiences only. It is also compulsory for candidates to provide the references
of some politicians because it is the central practice of HR in Lebanon and this process is known
as Clientalism (Nakhle, 2011). Moreover in Lebanon, workers are not allowed to discuss politics
at their workplace so HR managers have to ensure the strict adherence of these types of rules as
well in Lebanon (Nakhle, 2011). Shaw et al. (2013) also investigated the impact of political
factors on HR practices in the markets of Hong Kong and Singapore. They found that in Hong
Kong government has adopted the policy of non-interventionism while in Singapore government
 has been monitoring the HR practices and government is heavily monitoring the pay & incentive
systems so HR professional has to make it sure to comply with government rules and regulations.

Impact of Technological Factors on SHRM Practices

Technological advancements are affecting all the fields of life. Impact of technological
advancements can be observed in every field of life. Businesses have been transformed from
industrial state into information technology age with the passage of time (Ensher et al., 2002).
Long (2009) investigated the impact of information technology (IT) on HR functions and found
that IT has been influenced the HRM functions positively. He further stated that IT has
transformed HRM into strategic HRM. He also concluded that HRIT (Human Resource
Information Technology) has helped management activities to be more effective and efficient.
Johnson &Gueutal (2011) also described the importance of impact of technology in the field of
HRM and HR practices. They urged upon the fact that in today’s advanced technological era it
has become essential for HR professionals to be expert not only in HR skills and but also be
proficient in applying their HR skills through the efficient usage of technology. Ramirez
&Fornerino (2007) also investigated the impact of technology on HR practices on the basis of
neo-contingency approach and found that technology has played an effective role in reshaping the
HR practices in business environment. According to MacKay (2005) IT has affected the
efficiently of hiring process. With the help of technological advancements we now see online
recruitment process everywhere while in the past companies when wish to hire the employee call
for application through advertisement.

Afterwards, a lot of applications were received in hard copy and companies have to go through all
the applications manually while in recent times, companies provide online application forms
where applicant information is processes with certain conditions and then only those candidate
data is shown which fulfills the job criteria.

5. Strategic HRM in Changing Business Environment

 SHRM is considered a relatively new concept, despite its continuous development over the past
two decades. Although there is still no consensus on an exact definition of SHRM among
scholars, broad agreement has been reached on its basic function, which involves designing and
implementing a set of internally consistent policies and practices that ensure the human capital of
a firm contributes to the achievement of its business objectives (Schuler and MacMillan, 1984;
Baird and Meshoulam, 1988; Jackson and Schuler, 1995). Strategic Human Resource
Management (SHRM) is a set of human resource strategies designed and implemented to ensure
that business objectives are achieved. (Baird &Meshoulam, 1988; Delery& Doty, 1996; Huselid,
et al., 1997; Jackson & Schuler, 1995). Strategic human resource management (SHRM) is a
strategic approach to manage human resources of an organization. It is the linkage between the
HRM and strategic goals and objectives in order to improve business performance and develop
organizational cultures that foster innovation and flexibility. By combining the HRM function
with business strategy, SHRM reflects a more flexible arrangement and utilization of human
resources to achieve the organizational goals, and accordingly help organizations gain a
competitive advantage (Wei, 2006). According to Hendry & Pettigrew (1986), SHRM is a logical
approach to people management which is based on the organizational philosophy and the strategy
and it views the people as the strategic resource for creating competitive advantage. The linkage
between HR practice and business strategy has been emphasized in studies related to SHRM
(Miles and Snow 1984; Baird &Meshoulam 1988; Wright and McMahan 1992; Kazmi and
Ahmad 2001; Devanna et al. 1981; Torrington and Hall 1995). Strategic HRM to meet changing
environment:

6. Summary

It is concluded that external environment of the business is changing with rapid pace so it has
become essential for HR professionals to get ready to cope with the changing requirements. It is
also concluded that external factors around the business are not controllable and they have intense
impact on business performance. These factors not only affect business performance but also
enforce the HR professionals to take necessary measures to cope with issues due to the impact of
external business factors which results in re-designing of SHRM practices. These external factors
include economic factors, legal factors, demographic factors, cultural factors, political factors and
technological factors. All these mentioned factors have transformed the HR practices with the
passage of time and now SHRM practices have become more efficient in delivering the value to
organisation through changing the system of recruitment & hiring, training & development, and
compensation and benefits. In the end, it is true that all external factors are affecting HR practices
around the globe and these factors cannot be controlled as well.