Impact of External Factors on HR Practices

1: Introduction

Strategic human resource management is an outcome of globalisation (Hassija, 2014). HRM 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 HRM practices. This study has been designed to critically analyse the “External factors are uncontrollable and dynamics in HRM” statement. To critically evaluate the above statement, the researcher has analysed the impact of external factors on HRM practices. 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 analysed with the help of examples. At the end of this study, the researcher has put a coherent, comprehensive and logical conclusion.

2: Impact of External Factors on HRM Practices: Scope and Nature

“External factors are uncontrollable and dynamics in HRM”, the statement proclaims the inevitable importance of influence of external factors on HRM practices. That is the reason why HRM practices vary from organisation to organisation at national and international level. Human resource management is being considered one of the vital factors affecting organisational 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 HR practices within the organisations. Internationally, the most important factors which can affect HR practices within the organisations are international economic conditions and technological advancement. At national level; economic, legal and political circumstances, cultural and demographic factors are the factors which affect HRM 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 HRM practices with effect of globalization (Torrington et al., 2008). So, it can be concluding that external factors are uncontrollable and dynamics in HRM.

2.1: Impact of Economic factors on HRM Practices

Economic factor is one of the biggest external factors which have altered the HRM 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 HRM 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 HRM 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.

2.2: Impact of Legal factors on HRM Practices

Political and legal environment of a country actually gave birth to the standard HRM practices within the public and private sector organisations. Legal factors which affect the HRM 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 HRM practices through labour and employment laws. Researchers have found that legal framework of a country (labour laws) has direct impact on HRM 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.

2.3: Impact of Demographic factors on HRM 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 HRM 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 HRM 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.

2.4: Impact of Cultural Factors on HR 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.

2.5: Impact of Political Factors on HR 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.

Figure 1: Factors Affecting HR Practices (Source: Noe et al., 2012)

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.

Figure 2: Impact of Political System on HR Practices (Source: Tayeb, 2005)

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.

2.6: Impact of Technological Factors on HR 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.

3: Conclusion

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 HR 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 HR 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, the researcher has concluded that the statement given in the start of this study is true because all external factors are affecting HR practices around the globe and these factors cannot be controlled as well.

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