HUMAN RESOURCE MANAGEMENT EXTERNAL AND INTERNAL ENVIRONMENT

1. MR. RONIT RAJENDRA KHARADE
(ASSISTANT PROFESSOR & TPO)
THE HUMAN RESOURCE
MANAGEMENT ENVIRONMENT

2. The Human Resource Management Environment
The term environment, in general, refers to the entirety of the surrounding
conditions. In human resource management, it means the combination of
factors that have an influence on the working of HR department. Human
resource management can not function in isolation and, hence, it is
necessary to identify the factors that influence HR policies and practices.
These are external factors and internal environmental factors. The events
occurring outside the organization but influencing the HR activities of the
firm are called external factors. Since external environmental factors
operate outside the business, organizations will have little or no control
over these factors. On the other hand, internal environmental factors are
the ones that are internal to the organization and have a significant
influence on its HR environment.

3. External Factors
External environmental factors are usually made up of the macro
environment and industry environment. The major external
environmental factors include social, technological, political, legal and
economic factors. We shall now see each of these factors in detail.

4. Social Environment Factors
The social environment is created in general by the educational levels,
attitudes, beliefs and values of the people who live in a specific region.
The social environment of an organization consists of the beliefs and
behaviour of the employees, customers, suppliers, shareholders and all
others who interact with the organization. Each society normally has a
distinct cultural identity that separates it from others. Employees as a
member of the society bring in their societal values to the organization.
These values, in turn, directly and indirectly influence the HRM
activities of an organization.

5. Demographics
A scientific study of the size and structure of the population and its
development is usually described as demographics. The demographics
of the Indian workforce are broadly diverse in nature. The composition
of the workforce in Indian industrial organizations has undergone a
tremendous change in the recent decades. The marginalized sections of
the society like women, the physically challenged, minorities and
people belonging to scheduled castes, schedule tribes and backward
communities have joined the organizations in sizeable numbers.

6. Educational status
Education is another factor that greatly influences the social
environment, which, in turn, affects the behaviour of the employees. The
success of training and development programmes undertaken by an
organization largely depends on the existing educational levels of the
employees. Thus, the organizations with a large proportion of knowledge
workers-a term used for well-educated workers-may require dynamic HR
policies to meet the high expectations of these employees.

7. Technological Environment Factors
A technological environment is created when the knowledge of science is
applied effectively for practical use. The technological environment is
often affected by the rate and direction of technological changes. In India,
the technological environment is undergoing changes at such a rapid pace
that the organizations are finding it very difficult to cope with such
changes. Of course, employment at the global level too is changing rapidly
from manual and clerical workers to knowledge workers.

8. Political Environment Factors
The primary issues concerning the political environment of a nation are
the nature of the political organization and system, political stability. and
the prevailing political ideologies.
Nature of political organization and system
A political organization may mean the government organizations while a
political system refers to the process of decision-making within the
political organization and the extent of concentration of power. The extent
of democratization of the decision-making authority and the efficiency of
political institutions can determine the political environment.

9. Political stability
Organizations normally get better attention from the government during
periods of political stability. Consequently, the chances of industrial peace
are better during stable periods. On the other hand, any long spell of
political instability would negatively impact the economy and the industry.

10. Prevailing political ideologies
The philosophies of the political parties are called political ideologies.
They guide the approach of the political institutions towards industrial
activities, particularly those involving the rights of the employees.
Ideologies may also determine the government policies and intervention
strategies, the attitude towards trade unions, labour legislations, and the
attitude towards foreign organizations. The prevailing political
environment usually influences the functioning of the HR management
in many ways. For instance, HR managers have to consider the likely
response of the government and/or political parties in case of
retrenchment of employees. Similarly, they should be wary of the
political ideologies of the ruling parties on issues like collective
bargaining, social security benefits, and recruitment.

11. Legal Environment Factors
The legal environment greatly influences the operations of HRM. This
environment is normally shaped up by the prevailing laws. These laws are
generally classified into three categories:
(i) administrative laws, which includes the regulations issued by the
government.
(ii) Case laws, which comprise court decisions.
(iii) Constitutional laws, which include the fundamental rights of the
citizens enshrined in the constitutions.

12. Economic Environment Factors
The economic environment is created by the combination of economic
factors like national income, population, cyclic fluctuation in economy,
labour market conditions, trade cycle, interest rate, and globalization of
economy. These factors can also influence the behaviour of consumers,
competitors, suppliers and employees. Naturally, the factors that create the
economic environment greatly influence the functioning of HRM. For
instance, when the economy is performing well, say, due to boom
conditions, the demand for labour might increase in the labour market.
Consequently, organizations might face difficulty in getting the requisite
number of labour to accomplish its corporate goals and plans.

13. In such a situation, organizations may be forced to offer increased
compensation to the prospective candidates in the labour market. This
may pose problems for the HR managers in recruitment, retention and
compensation. On the other hand, in recessionary conditions, HR
managers may have to face the problems of lay offs, retrenchment and
related legal problems. Further, sustaining the motivation and morale of
the existing employees might also become a problem for them during
this period. We shall now discuss the important factors that shape up the
economic environment of an organization.

14. Labour Market
Since organizations choose new employees from outside the
organization, the labour market is viewed as an external market. The
demand for and supply of labour in the labour market usually
influences the HR environment. The major players in the labour market
from the supply side are employment exchanges, recruitment agencies,
consulting firms, educational campuses, proffered candidates, and rival
firms. Those from the demand side are the organizations that approach
the market to recruit job aspirants in order to meet their labour
requirements. The workforce in the labour market of India is usually
classified into four categories: the self-employed, wage- or salary-
earning employees, casual workers, and the unemployed.

15. Globalization
Globalization is another factor with a critical influence on the economic
environment of Indian organizations. The new economic policy of 1991
brought in several reformist measures to India in the form of
globalization, liberalization and privatization. As a result of
globalization, many Indian organizations have become truly global with
their operations reaching out to newer markets and countries. Similarly,
many foreign companies began to operate in India without any major
hassles. Thus, globalization led to an intensified competition at both the
national and international levels. Globalization has influenced the HR
environment in several ways.

16. For instance, the globalization of operations enabled many organizations
to achieve a lower cost and better technology. This led to a sharp decline
in the importance of cost and technology as a tool of competitive
advantage. Consequently, organizations were forced to develop and
exploit human resources as a competitive advantage in place of cost and
technology.

17. Competitors
A highly competitive external environment forces organizations to
develop their own strategies to tackle competitors and stay ahead in the
market. In fact, the HR policies of an organization depend greatly on the
nature and level of competition prevailing in the external environment.
For instance, when the competition is intense, the cost factors become
very crucial. In such a situation, HR managers would be expected to
achieve cost- effectiveness in all the HR activities. However, it would
not be sufficient if the HR practices achieve cost reduction alone. They
should also develop a high level of commitment and loyalty among
employees.

18. This is necessary because in a highly competitive labour market
environment, competitors may attempt to attract the organization's best
employees to their organizations with lucrative offers. Besides, HR
managers must develop effective strategies to acquire, develop and retain
competent people to enable the organization to compete in the market
successfully and execute its expansions plans effectively.

19. Trade unions
Trade unions are generally viewed as an external factor to an
organization, because they often enter into negotiations with the
organizations as a third party. Moreover, in countries like India, the
unions are often controlled and influenced by people who have little or
no connection with the organization. In spite of being external to an
organization,

20. These unions exert an enormous influence on its HR activities, In fact,
unions provide a common platform for employees to come together and
to enhance their bargaining power in the collective bargaining process.
Actually, the trade unions in India play a pivotal role in determining the
working conditions, welfare facilities, wages and salary, and health and
safety of employees by powerfully representing the workers in talks
with the managements. Thus, the influence of the labour unions on the
HR environment of an organization is strong and decisive.

21. Customers
The goods or services of an organization are primarily created to fulfil the
wants and needs of the customers. They are the ultimate users of the
products of the organization, and ensuring their satisfaction is critical to
the survival of the firm. Thus, customers are the most important elements
of the external environment of an organization. All the activities of an
organization, including HR activities, are understandably directed towards
the satisfaction of these customers. With intensified competition in the
market, customer satisfaction has become the focal point of the
formulation of HR practices. All HR activities should essentially
contribute to the production of high-quality products, and efficient post-
sales services. Thus, the HR environment should focus on achieving an
increased customer satisfaction and loyalty.

22. Shareholders
Shareholders are the ultimate owners of a business organization. They
lend capital, assume risk, and get a share in its profits. Its major decisions
often require the approval of these shareholders. Though the shareholders
remain external to the organization in terms of the HR environment, it is
pivotal for the organization to ensure the well- being of these
shareholders. Thus, it is paramount for the HR managers to give the
utmost importance to the interests of the shareholders while developing
HR policies. In this regard, studies have shown that the organizations
adopting best HR practices can increase the value of the shareholders by
nearly 90 per cent as compared to their average competitors. On the
contrary, companies with ineffective HR policies usually turn out
negative returns for the equity shareholders.

23. Internal Factors
The factors that are internal to an organization are called the internal
environmental factors These factors can be influenced by the organization
as it remains within the control of the management. We shall now discuss
those internal factors that influence the HR activities of a firm

24. The Vision and Mission of the Organization
The vision and mission statement of an organization strongly influence its
HR environment. An organization with a clear. cut vision and mission has
better chances of developing the best HR practices. It can also accomplish
its corporate goals successfully. In fact, HR policies are usually derived
from the vision and mission statements of an organization. Further,
specific and unambiguous vision and mission statements have the
potential to motivate the employees on a sustained basis. They can also
ensure that all the HR activities are properly coordinated and directed
towards the achievement of common goals. The eventual success of an
organization depends critically on its ability to combine various HR
practices with a focus on the accomplishment of organizational goals and
objectives.

25. Business Strategy
An organization's business strategy helps it to meet the challenges of the
external environment. It also helps the organization determine its
direction, plan its activities and allocate its precious resources to exploit
the opportunities emerging in the external environment. The business
strategy greatly influences the HR environment of an organization. Today,
an important prerequisite for the success of an organization is the
effective alignment of HR practices (strategies) with the business
strategies. In fact, the nature of the relationship between HR strategies
and business strategies is such that they contribute to each other's
improvement.

26. Organizational Culture
The tradition, past practices, languages, values, beliefs, meanings and
norms of an organization together form its culture. Each organization
develops its own culture and the unique nature of its culture provides it a
sense of identity and exclusiveness. The organizational culture creates a
common understanding among its members. It also exerts a tremendous
influence on the behaviour of the members. However, the culture of an
organization as an internal environment factor can not be created
overnight. It requires a great deal of time and effort to develop it.

27. Organizational Structure
The organizational structure is the physical hierarchy of an
organization. It is an important component of the internal environment
of an organization. It deals with the way the firm delegates, controls
and coordinates the authority, responsibilities and accountability among
the members of the organization. The organizational structure has a
critical influence on the HR practices of the organization. For instance,
the structure helps in grading and grouping the jobs in the organization.
This grading, in turn, helps in developing the recruitment process for
each job or category of jobs. Similarly, the structure also helps in
determining the ideal number of subordinates for each manager.

28. Obviously, HR managers rely heavily on the organizational structure
while determining the HR policies and practices. Many of the HR
practices like compensation management, promotions, and training need
to be considered in the context of the associated organizational structure.
In many organizations, the structure is usually hierarchical in nature. In
fact, a hierarchical structure ensures consistency and the quality of
decision making.

29. HR System
HRM as a system signifies interconnected but separate elements (caned
sub-systems) functioning together to realize the overall goal of the
organization. The sub-systems that are inter-related with the HRM
system are production sub-system, marketing sub-system, technical sub-
system, and purchase sub-system. These sub-systems interact with the
HR system and also among themselves to accomplish the predetermined
goals and objectives. The success of HRM depends on how effectively it
is integrated with other systems in the organization. Thus, the HR
system as an internal factor also influences the HR environment of an
organization.