CHAPTER TWO

HUMAN RESOURCE MANAGEMENT ENVIRONMENTS

Many interrelated factors affect human resource management. Such factors are part of either the
firm’s external environment or its internal environment. The firm often has little, if any, control
over how the external environment affects management of its human resources. In addition, there
are certain interrelationships that complicate the management of human resources.

2.1 THE EXTERNAL ENVIRONMENT

External Environmental factors Comprised of those factors that affect a firm’s human resources
from outside the organization’s boundaries.
A. Economic conditions
1. The population and the labor force: The qualification, attitude, career interest and
motivations of people in the available workforce will influence human resource activities and
ultimately the effectiveness of the organization.

First, we need to clarify what we mean by available workforce. Population: includes all the
people those eligible to work + those ineligible to work because of age or institutionalization.
(Below age of 14 and those in prison or hospital)

Eligible to work = labor reserve + total labor force

Labor reserve= those not working for economic gain even though they are eligible to
work. (Home makers, college students, and retirees)
Total labor force = armed forces + civilian
Civilian labor force = Unemployed + Employed
Impact of the labor force on the human resource function of an organization may include:
Percent of minorities and women in the workforce influences equal employment
opportunity decisions.
Qualifications and skills in the workforce influence need of training programs, design of
jobs, etc.
 Availability of various skills and demand for these skills by employers influence salary and
compensation decisions.
The demand of the workforce form full-time or part-time jobs affects decision on work
schedule.
2. Labor market conditions: the labor market involves the job opportunities and
compensation offered by employers and the skills and contributions offered by
employees. The scope of the labor market is influenced by three factors:
 Occupation: the skills and qualification required in an occupation. This refers to required
training, education, or even licensing requirements to perform a given type of job. E.g.
accountant, medical doctors, lawyers, etc. This may limit mobility among occupation.
 Geographic location of the organization: distance employees are willing to relocate or
commute. Supply of labor force could be limited in some geographic area or region. Example,
supply of qualified human resource is very limited in some regions of Ethiopia.
The location of the organization influences the kinds of people it hires and the HRM activities it
conducts. Recruiting and selection in rural areas will be different in that there may be fewer
applicants or larger proportion of hirable workers. An urban location might be advantageous for
recruiting and holding professional workers. Urban locations provide a bigger labor force but
generally call for higher wages. Geographic location, therefore, influences the kinds of workers
available to staff the organization. The employees may speak a different language, practice
different religions, have different work attitudes, and so on.
 Industry: The industry in which the organization competes for labor and sells its
products/services is also important. The more competition an organization faces in the industry,
the more it is expected to offer employees better compensation. This is more important if the
supply of qualified employees is very limited.
3. Product /service market:
Demands for products and services: the quality and quantity of people an organization hires to
pay its employees is affected by the changes that occur in the product/ service market. For
instance, in times of market growth, organizations increase employment levels while in times of
market decline, organizations economize their use of HRs.
Inflation: it is the rate of change in prices we pay for goods and services. A change in inflation
rate affects human resource management especially on cost-of –living adjustments (COLA) to
 salaries and pension plans. It is also has impact on cost of recruiting, interviewing, and training
employees.
Technology: changes in technology will influence the nature of jobs to be performed and
consequently the qualifications of people required to perform them.
B. Government influences:
Government regulations have direct impact on human resource management decisions by
regulating terms and conditions of employment. Involvement and intervention of government in
employee and employer relations is increasing over time. Some areas of legislation and
regulation include:
 Equal employment opportunity: it affects recruiting, selection, evaluation, and promotion
directly and employment planning, orientation, career planning, training and development
indirectly.
 Sex and age discrimination.
 Compensation regulation: specifying the minimum pay for any job, for employees with a certain
educational level, etc.
 Hours of work, national holidays, etc.
 Benefit regulations: affect pension and retirement plans. In some countries government requires
employers to have basic medical insurance plans for their employees.
 Workers’ safety laws: affects health and safety programs in organizations.
 Privacy laws protecting employees’ personal information.
 Labor relations laws and regulations affect the conduct of collective bargaining.
C. Union expectations and power:

Labor unions exist to protect employees’ rights in a more organized and effective way. Union’s
interest, expectation and power differ from one union to another. It depends on the kind of
industry they are in, the number and involvement of its members and the response of
management to the demands and questions of the unions. However the case may be, the presence
of a union directly affects most aspects of HRM- recruiting, selection, performance evaluation,
promotion, compensation, and benefits, among other things. The role of unions becomes
pronounced when a new wage agreement needs to be signed. At last the presence of a union
means many HR decisions must be negotiated with a third party.
2.2 THE INTERNAL ENVIRONMENT

Factors that affect a firm’s human resources from inside its boundaries are termed as internal
environmental factors. The primary internal factors include the firm’s mission, policies,
corporate culture, management style of upper managers, employees, the informal organization,
other units of the organization, and unions.
i) Mission
The organization’s continuing purpose or reason for being. Each management level should
operate with a clear understanding of the firm’s mission. In fact, each organizational unit
(division, plant, and department) should clearly understand objectives that coincide with that
mission.
ii) Policies
A predetermined guide established to provide direction in decision making. As guides, rather
than as hard and- fast rules, policies are somewhat flexible, requiring interpretation and judgment
in their use. They can exert significant influence on how managers accomplish their jobs.
iii) Corporate Culture
The system of shared values, beliefs, and habits within an organization that interacts with the
formal structure to produce behavioral norms.
Internal Forces

1. Strategy, Task and Leadership

Strategy: the direction in which an organization moves. e.g. Firms believing long term success
(rather than short term profits) inverts more on HR (training and development, safety, security,
welfare, and harmonious industrial relations).

Task: a work that an employee is expected to do. Several tasks constitute a job. Task (skills
required, task significance, autonomy, and feedback of results) have implications on employee
motivation and satisfaction. Task/job affects hiring, and then motivation and satisfaction of
employees.

Nature of the task

The nature of the task affects recruitment and selection, since employees will be more satisfied
and productive if their preferences are met.

With jobs that are not attractive (i.e. dirty, smoky, hot, etc.), managers must provide additional
incentives (more pay, shorter hours, or priority in vacations) because few people prefer such
jobs.

Leadership: who matters in any functional area of business. Leader must orchestrate the
distinctive skills, experiences personalities, and motives of employees; facilitate interaction
within work groups; provide direction, encouragement, and authority to evoke desired behavior;
choose right people and motivate them; catalyzing the learning process among followers; as well
as creating the environment that contributes to improving performance. The experience and style
of a leader will influence which HRM programs are selected, implemented, and effective.

Leadership style and experience

Leaders must demonstrate distinctive skills, experiences, personalities and motives of

individuals. They must also facilitate the intragroup interactions that occur within work groups.
In his/her role a leader provides direction, encouragement, and authority to evoke desired
employee behavior. In addition, leaders reinforce desirable behavior so that it is sustained and
enhanced. The experience and operating style of a leader will influence which HRM program are
communicated, implemented and effective.

Unions A trade union is an association of workers or management formed to protect their own
individual interests. All HR activities – recruitment, selection, training, compensation, IR and
separation – are carried out in consultation with union leaders. Many organizations have unions
and some may have multiple unions. The presence of a union directly affects most aspects of HR
activities - recruiting, selection, performance evaluation, promotion, compensation, and benefits,
among others. Thus, most of the HR activities - recruitment, selection, training, compensation
and separation - are carried out in consultation with union leaders. The role of unions becomes
pronounced when a new wage agreement needs to be signed. At last the presence of a union
means many HR decisions must be negotiated with a third party.
Organizational culture every organization has its own culture. It is guided by core values,
norms, beliefs, etc. HR managers have to identify the culture and strive to further those values.
(e.g. “get the best people and set them free” spirit of some organizations)

Bureaucratic approach
In this approach, the organization usually centralizes decision-making, designs specialized jobs,
departmentalizes by function, has standardized policies, uses small spans of control, has clearly
defined objectives, and encourages communication through the chain of command.
On the other hand, the participative approach uses decentralized decision-making. It enlarges
jobs, departmentalizes by product/process, uses few detailed policies, has large spans of control,
and encourages free-flowing multidirectional communication. It seems reasonable to
hypothesize that truly bureaucratic and truly participative organizations would have different
HRM policies.
Characteristics of org. culture – examples

 Short term vs. long term

 Proactive vs. reactive

 Individualism vs. groupies

 Change vs. stability

 Personal goals vs. organizational goals

 Rights vs. duties

2.3. Human resource management model

The matching model of HRM
One of the first explicit statements of the HRM concept was made by the Michigan School
(Fombrun et al, 1984).
They held that HR systems and the organization structure should be managed in a way that is
congruent with organizational strategy (hence the name ‘matching model’). They further
explained that there is a human resource cycle which consists of four generic processes or
functions that are performed in all organizations. These are:
1. Selection – matching available human resources to jobs;
2. Appraisal – performance management;
3. rewards – ‘the reward system is one of the most under-utilized and mishandled managerial
tools for driving organizational performance’; it must reward short as well as long-term
achievements, bearing in mind that ‘business must perform in the present to succeed in the
future’;
4. Development – developing high quality employees.