TOPIC 3 : External Business Environment & SHRM

Learning Outcome:
After completing this module the students will be able to:
1. Understand the concept of External Business Environment & SHRM
2. Understand the impact of SHRM on External Business Environment
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 manager become proactive to the
environment which is characterized by change and intense competition. Human
resource management is performed in two types of environments:
1. Internal 2. External.

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, and polices.

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 - 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
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 or beliefs by the members of the organization.
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 HR professional body

regulates the functions of HR practitioners in India. HR
practitioners are expected to declare their allegiance to the
Code of Ethics. Thus, professional bodies also influence HR
functions of an organization.

External Environment - external environment includes forces like economic,

political, technological, and demographic. These exert
considerable influence on HRM. Each of these external
forces is examined here.
1. Economic - economic forces include growth rate and strategy, industrial
production, national and per capita incomes, money and capital markets,
competitions, industrial labor and globalization.

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 organizations.

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 2. 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 or three branches namely:
a. Legislature - this is called the Congress where laws are enacted by
the legislature to regulate working conditions and
employment relations.

b. Executive - it is the Government that implements the law. In other

words, the legislature decides and the executive acts.

c. 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.

3. Technological - technology is a systematic application of organized

knowledge to practical tasks. Technological advances affect
the HR functions in more than one way:

a. Technology makes the job more intellectual or upgraded.

b. It renders workers dislocated if they do not equip themselves to the job.
c. Job becomes challenging for the employees who cope with the
requirements of technology
d. Technology reduces human interaction at the work place
e. Job-holders become highly professionalized and knowledgeable in the
job they perform.

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 4. Demographic - variables include sex, age, literacy, mobility, etc. Modern
work force is characterized by literate, women and scheduled
caste (social class) and scheduled tides workers. Now,
workers are called knowledge workers’ and the
organizations wherein their works are called ‘knowledge
organizations.

Employees are demanding parity in remuneration and responsibility among various

categories and levels of employees

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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.

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 labor market and labor supply which subsequently affect the recruitment and
selection patterns of the organizations.
Moreover in labor market, the decrease in supply of particular skilled labor shapes
the training and development strategies of organizations.

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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 organizations. Legal factors
which affect the SHRM practices are government labor policies, economic policy,
national labor laws and health & safety regulations (Sylvia, 2013).
With the passage of time more concrete and specific legal laws have developed to
safeguard the employees at workplace.

There are five (5) Modern HR Related Laws (according to Kramar et al., 2014)
which are being practiced globally. Implementation of all these laws are different in
every country according to their government policies and legal framework:
1. Equal Employment
2. Sexual Harassment Prevention
3. Safety and Health Management
4. Union Contract Grievances
5. Disability Accommodations

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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 organizations.
Therefore, organizations now have to keep balance in gender, racial and ethnic
diversity (Kramar, 2014).

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 organizations, people from different cultures are hired which create the
diversity and mismanagement of diversity can cause big damages to organizations
(MacKay, 2005).
According to MacKay (2005) every organization has its own culture and employees
tend to adjust themselves in that culture. He further stated that ethical behavior 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 globalization, cultural factors impact on HR
practices cannot be ignored.

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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 organizations (Kokkaew & Koompai, 2012).

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 Clientelism (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.

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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 re-shaping the HR practices in business environment.
According to MacKay (2005) IT has affected the efficiency 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.

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

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and practices that ensure the human capital of a firm that contributes to the
achievement of its business objectives. (Schuler and MacMillan, 1984).

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).

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
organization 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.

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