CHAPTER 3

The Evolution and Environment of Human Resource Management

CHAPTER OBJECTIVES

After reading this chapter, you should be able to:

1. List the stages of evolution in human resource management
2. Enumerate the environmental influences on human resource management
3. Differentiate between the various kinds of HR environment perspectives
4. Understand the environmental scanning process

Mazda Motor Corporation is a Japanese multinational company engaged in the automobile business. The company has a workforce of around 22,000 people around the world. It strongly believes in creating an HR environment that facilitates self-directed activity and ensures employee independence and success. Similarly, it has the opinion that assisting employee growth contributes immensely to its own progress. For instance, its motto, “developing the people that make the products”, reflects its priority for human resources.

In 2003, Mazda launched a novel programme called the Tobiuo (Flying Fish) Human Resources Management System. This programme focuses on offering suitable jobs and environment where each employee can prove their potential and productivity. Again, it would provide all the required assistance to employees in achieving their desired career development and performance. This system consists of three sub-systems. These are transfer and career-formation support system to assist the employees in self-realization and working conditions, a vacations-support system to balance work and personal life, and an evaluation system to properly link people, performance, and rewards.

Besides, Mazda conducts cross-cultural training sessions for all its employees to promote a congenial global HR environment. Its other training programmes for fostering a dynamic work environment include a Olympics skill-training programme for young engineers and an advanced technical skills training course for apprentices through experienced employees and a mentoring system. Further, it has a compensation and grading system that recognizes only the ability and work levels of the employees for determining their salaries and incentives.

This illustration exemplifies how a multinational systematically works to create a dynamic HR environment. We shall now see the evolution and environment of human resource management.

Introduction

Human resource management (HRM) is a field that is gradually gaining in status and value. Today, it has a full-fledged management theory with a lot of practical implications. Several changes within and outside the business have decisively influenced the top managers to give due importance to HRM and to recognize it as a distinct area of operation within an organization. These changes include, among others, the increasing size of the organizations and the workforce, growing specialization of labour, rising tensions and conflicts in the labour–management relations, the declining role of technology as a differentiator, and the introduction of several labour-related laws. Besides these changes, the rising awareness among the managers about the growing importance of human resources in the changing context of business has also created a receptive environment for HRM to develop rapidly. These developments in the field of HRM are so remarkable that many organizations view it as a direct and efficient way of achieving competitive advantage in the market.

A Brief Outline of HRM

Human resource management was at its worst when people were treated like slaves in factories and made to struggle in an inhuman work environment. In the contemporary period, it is at its best so far. Today, people are viewed as an invaluable asset and a definite source of competitive advantage to an organization. Labour welfare laws, labour market conditions, labour awareness, strengths of the unions, and the employers’ attitude towards the employees and their union are among the several factors that join together to shape the HR environment of organizations in different periods of history. Certainly, every era in the history of HRM demonstrates the thinking and attitude of the employers and their workforce at that point of time. We shall now go on a brief journey through these eras to see the progress made by HRM over a period of time. Figure 3.1 traces the evolution of HRM over the years.

Figure 3.1
Evolution of Human Resource Management

The Industrial Revolution Era (1780–1830)

Prior to the Industrial Revolution, the first recorded HRM initiative occurred in England when carpenters, masons, leather workers, and other craftsmen formed guilds and used their unity to improve their work conditions and enhance their bargaining power.¹ In the next phase, when the Industrial Revolution arrived, it brought with it factories. Now, a factory was an organization that created centralized workplaces and brought unrelated people together. During the Industrial Revolution, working conditions and social patterns of behaviour of employees became the major HR issues. However, nations and organizations responded differently in addressing those problems. For instance, an HR policy in the form of a code of discipline was introduced in Britain just to bring about a standard behaviour among the untrained workers of that time.

Later on, in the 1890s, employers in the United States voluntarily introduced labour welfare measures out of self-interest and humanity. During the same period, companies like Cadbury and Rowntree employed industrial welfare workers to look after the welfare of the employees and constructed model villages for their workforces.² Thus, the growth of HRM was not uniform for all times and all nations.

The First World War Era (1914–1918)

The First World War brought in several changes in the way HR was managed. During this period, women were recruited in large numbers in factories to meet the increased demand for war material and also to replace the male workforce that was either engaged or killed or disabled in the war. Apparently, organizations felt a need to refine their HR policies to suit these women. This period also saw a drastic increase in the number of welfare officers appointed in the factories of Europe to deal with the employees’ welfare issues. Again, around this time, organizations brought in HR policies on matters including time-keeping and attendance.

Meanwhile, the labour shortage that occurred after the war forced many organizations to adopt a more rational and responsive HR policy in order to achieve better employee cooperation and retention. Further, industrial relations gained prominence during this period and several nations granted recognition to trade unions and involved them in wage negotiations. Finally, the intervening period between the First and Second World War witnessed large-scale appointments of labour officers in organizations to deal with employment aspects like recruitment, training, and health and safety of the workers in the factories.

The Hawthorne Studies Era (1927–1932)

The famous Hawthorne studies were another milestone in the history of HRM. These studies were conducted by a team led by Elton Mayo, a Harvard Business School professor, at the Western Electric Hawthorne Works in Chicago. The primary purpose of the studies was to examine the impact of lighting on productivity. However, these studies conducted at different phases revealed several interesting findings in course of time. One such finding was the presence of informal groups in the organization and their influence on the employees’ behaviour and productivity.

The researchers finally concluded that the workers were relatively more influenced by the collective decisions of the members of the informal groups than just by the pay and perks offered by a formal organization. This ground-breaking disclosure compelled organizations to take a closer look at the social factors that influenced the employees’ behaviour. In fact, this finding greatly influenced the attitude and approach of the HRM thinkers and practitioners towards the workers. Shortly after this finding, firms began to realize the importance of informal groups in the organizations and thus recognized unions as the employees’ representatives.

The Second World War Era (1939–1945)

The Second World War forced organizations to establish full-time personnel departments to undertake all the necessary activities to achieve high productivity and optimum efficiency. During this period, organizations engaged unions in talks more seriously to maintain harmonious labour–management relations. Just about this time, the jobs of both the welfare officers and the labour officers were unified and brought under the personnel department. This department came under the direct administration of the personnel officers. Since then, the personnel officers play the dual role of line managers of the personnel department and staff advisors to other line managers on labour-related issues.

The introduction of shift-based working in factories and the training requirements for a large number of new employees further increased the importance of personnel departments during this period. In fact, the biggest contribution of this period to HRM was the recognition of the importance of personnel officers in organizations. Box 3.1 traces the HR initiatives of an automobile giant during different phases.

The Industrial and Human Relations Movement Era (1950–1960)

Human relations movement and employee motivation gained momentum during this period. Several theories highlighting the importance of human relations movement were developed during this period. For instance, Theory X and Theory Y of Douglas McGregor taught the managers about the significance of a participative approach in decision-making. Similarly, Abraham Maslow’s Hierarchy of Needs theory enriched the process of employees’ need identification and motivation.

During this period, behavioural scientists and management practitioners worked on concepts like job enrichment and job enlargement to improve workers’ commitment and reduce job boredom. Besides, organizations evinced more interest in conducting organizational-level collective bargaining with unions and gradually discouraged the practice of participating at national-level collective bargaining negotiations through employer federations. These developments really enhanced the importance of the personnel department for an organization. In fact, firms began to count on personnel managers for developing industrial relations policies and also for successfully conducting and concluding collective bargaining negotiations.

The Formalized HRM Era (1960–1980)

During this period, many organizations developed their own rules and regulations to govern the personnel management and industrial relations activities. For instance, several policies and procedures concerning promotion, grievance handling and disciplinary actions were introduced. Similarly, organizations began to make specific HR policies for diverse HR functions like recruitment and selection, employee training and managerial development, performance management, industrial relations, wages and salary administration, and employee benefits. Around the early 1970s and late 1980s, organizations began to view skilled employees as human resources and strived hard to retain them in organizations. Subsequently, organizations introduced the term human resource management to denote the activities concerning the management of employees. In fact, the advent of HRM was viewed as a new era of caring and a gentle way of people management.³ Gradually, the term human resource management became popular and began to replace terms like personnel management and industrial relations.

The Contemporary HRM Era (1980–onward)

Contemporary human resource management focuses on gaining a competitive advantage in the market through human resources. To overcome the challenges arising out of increased competition, organizations undertook radical changes in their HR policies and procedures with the intention of increasing their employees’ efficiency and loyalty. The focus of contemporary HR management is on developing HR strategies, aligning them with corporate strategy and then achieving organizational goals effectively.

Modern organizations tend to keep few hierarchies and more dynamic HR policies. They constantly carry out organizational changes by adopting measures like total quality management, business process reengineering, performance management, development of learning organization, and constantly revamping their work culture.⁴ In addition, organizations are adding global dimensions to HR management. They are now focused more on fine-tuning their HR policies and practices to effectively supervise and control employees working across national boundaries. Due to the increased globalization of business, international human resource management is gradually gaining importance in organizations.

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.

As illustrated in Figure 3.2, the factors that shape the environment are usually classified into two categories. 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. We shall now discuss these factors in detail.

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.

Figure 3.2
A Model of the Environment Scanning Process

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.

In India, many organizations have a diversified workforce since employees in these firms typically reflect the characteristics of the Indian population. These employees represent different regions, ethnic groups and ideologies. Certainly, these culturally and ethnically diverse workforces pose direct challenges for organizations and decisively influence their HR environment. Thus, the social environment factor is a major phenomenon in Indian industrial organizations. Let us now briefly discuss the factors that influence the social environment of business organizations.

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.

It is, therefore, very important for HR managers to clearly understand the environmental influence of different demographics on the organization and its HR activities. For instance, the problems faced by women or the physically challenged may be different in an organization and may require different HR policies and approach. Thus, demographic factors often create workforce diversity and lead the organizations to develop requisite HR plans to manage this diversity effectively.

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.

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.⁵

Whenever new HR technologies are developed, it makes an impact on the functioning of the HR department and the HR personnel.⁶ For instance, developments in IT have affected HR processes like recruitment, training, and grievance handling, since these activities are now being conducted largely through the Internet.

In fact, recent studies have shown a significant relationship between the design of HRM policies and the use of advanced manufacturing technologies.⁷ For instance, technological developments produced several high-tech jobs in organizations. As a result, the composition of the workforce in the organizations changed drastically with the increasing presence of knowledge workers. Moreover, these high-tech jobs usually demand continuous training and competitive compensation packages. Certainly, the impact of technology on HR environment was substantial.

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. We shall discuss them briefly.

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.

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.

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.

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 and, (iii) Constitutional laws, which include the fundamental rights of the citizens enshrined in the constitutions.

As far as India is concerned, there is a plethora of laws covering different spheres of employment and thus having implications for HRM. The country has several acts to protect the rights and conditions of employees and to govern the employer–employee relations. Similarly, it has specific legal provisions for payment of wages, working conditions, terms and conditions of employment, welfare facilities, and dispute settlement. We shall now see the list of the pertinent labour laws in a chronological order.

• The Workmen’s Compensation Act, 1923
• The Trade Union Act, 1926
• The Children (Pledging of Labour) Act, 1933
• The Payment of Wages Act, 1936
• The Employer’s Liability Act, 1938
• The Weekly Holidays Act, 1942
• The Industrial Employment (Standing Orders) Act, 1946
• The Industrial Disputes Act, 1947
• The Employees State Insurance Act, 1948
• The Minimum Wages Act, 1948
• The Factories Act, 1948
• The Mines Act, 1952
• The Employees Provident Funds and Miscellaneous Provisions Act, 1952
• The Shops and Establishments Act, 1953
• The Employment Exchange (Compulsory Notification of Vacancies) Act, 1959
• The Maternity Benefit Act, 1961
• The Apprentices Act, 1961
• The Payment of Bonus Act, 1965
• The Contract Labour (Regulation & Abolition) Act, 1970
• The Payment of Gratuity Act, 1972
• The Bonded Labour System (Abolition) Act, 1976
• The Equal Remuneration Act, 1976
• The Sales Promotion Employees (Conditions of Service) Act, 1976
• The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
• The Child Labour (Prohibition & Regulation) Act, 1986
• The Labour Laws (Exemption from Furnishing Returns & Maintaining Registers by Certain Establishments) Act, 1988 and
• The Information Technology Act, 2000

In addition to these laws, some of the articles in the Indian Constitution also guarantee a few rights as fundamental to all the citizens. These are:

• Article 14: Guarantees equality before law. It prohibits any form of discrimination on the grounds of religion, race, caste, sex and place of birth.
• Article 16: Provides the basis for the provisions of the special classes. This article ensures the Right of Equality of Opportunity in matters of public employment.
• Article 23: Prohibits trafficking in human beings and forced labour.
• Article 24: Prevents the employment of children in factories.
• Article 39(d): Strives to ensure that there is equal pay for equal work for both men and women for equal jobs.
• Article 39(e): Ensures that the health and strength of workers, men and women, and the tender age of children are not harmed by economic necessity to enter avocations (auxiliary or spare time activities) inappropriate to their age or strength.
• Article 42: Deals with the essentiality of providing just and humane conditions of work for all employees and maternity relief for women employees.
• Article 43: Guarantees a living wage, necessary conditions of work that assure workers a decent standard of life, full enjoyment of leisure, and social and cultural opportunities.
• Article 44: Provides for the participation of workers in the management of undertakings, establishments or any other organization involved in any industrial activities.
• Article 46: Strives to promote the educational and economic interests of the scheduled castes, scheduled tribes and other weaker sections.

These laws and provisions create a definite legal environment. Organizations have to plan and execute their HR actions without violating the existing legal provisions. HR policies and practices should be strictly in compliance with these statutory requirements. Thus, legal factors have a far-reaching implication for HRM.

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. 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.

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.⁸ We shall now see a brief description of each of these categories.

• The self-employed earn their income directly from their own business or trade. They hardly have any contact with the labour market.
• Salaried employees have a relatively stable employment and remain with the same employers and in the same job for reasonably longer durations. Their contact with the labour market is not routine.
• Casual labourers are those who work on a day-to-day basis for daily wages. They maintain an intimate contact with the labour market.
• The unemployed are those who have no rewarding occupation at present. They too keep a close contact with the labour market.

According to a national sample survey, the self-employed form more than 50 per cent of the labour force in India while 32.44 per cent constitute the casual labour segment of the labour force. Around 14 per cent constitute salaried employees and the rest, i.e., just above two per cent remain idle in the unemployed category.⁹ The trends in the labour market have a profound influence on the HR decisions relating to recruitment, training and development, and compensation. In fact, it is imperative for HR managers to scan the labour market conditions continuously and then to devise plans to exploit such conditions to their advantage.

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. 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.

There have been other influences of globalization as well. It has sharply increased the skill requirements of the employees. Further, global operations of organizations have brought in workforce diversity, and international recruitment and training practices. Apparently, globalization has changed the approaches and role of the HR managers by creating a profound influence on the HR environment.

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. 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.

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, 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.

However, in recent times, a declining trend has been observed in the membership of the unions across many countries. In several such cases, this trend is attributed to effective HR practices that create high commitment, high performance, and high involvement among employees.¹⁰ Employee-centred HR practices make the unions redundant for the employees. To minimize and, if possible, eliminate the influence of the unions as an external environmental factor, HR managers are following union-substitution efforts. Union substitution means employing those HR practices that offer good remuneration, excellent work conditions and all other relevant measures that result in the reduction of employee dissatisfaction.¹¹ Since HR practices usually differ between unionized and non-unionized environments, it is essential for the HR managers to realize the extent of the influence of unions on the activities of the employees of the organization.

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.

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.¹² Hence, the HR environment of a firm is influenced by the expectations of its shareholders.

Michael Porter¹³ has developed a famous five-force model to understand the influence of external factors on the HR environment. This model has a lot of relevance for industry environment analysis. It recognises five competitive forces that have a crucial influence on the profitability of the industry, particularly from a long-term perspective. These forces are: (i) the bargaining power of suppliers, (ii) the threat of new entrants, (iii) the threat of product substitutes, (iv) the bargaining power of buyers, and (v) the intensity of rivalry among established organizations within an industry. Box 3.2 shows the human resource environment in select countries.

Having discussed the influence of external environmental factors on HRM, we shall now see the internal factors that influence the working of the HR department.

Box 3.2
Human Resource Environment in Select Countries

Source: Political and Economic Risk Consultancy; www.asiarisk.com. Reproduced with permission.

Notes:

1. The grades are on a 0-to-10 scale, with 0 representing the best grade possible and 10 the worst.
2. The grades are based on the survey responses of expatriates living in each country, except for Australia and the United States, where the grades are based on the surveys of the nationals of each country living in Asia.
3. Seven categories, from a total of 18 assessed in the survey, have been presented in the table. The average is based on these seven categories. The survey grades should not be taken too literally for cross-country comparative purposes. Respondents in one country, for example, China, were assessing the situation there for a particular category, whereas respondents in Malaysia were focusing only on Malaysia. There is no reason to expect respondents to have given a grade while keeping other countries in mind.

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.

The Vision and Mission of the Organization The vision and mission statements 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.

When the mission and vision statements are prepared in close consultation with the employees, it definitely helps the organization in achieving a better involvement of and cooperation from the employees in accomplishing its mission and realizing its vision. They may also extend their cooperation for those HR activities that are based on such a mission and vision. Finally, a periodic review of the mission and vision in the light of the developments in the external environment is also important for improving the effectiveness and relevance of HR practices on a sustained basis. In contrast, the absence of specific and contemporary mission and vision statements can cause difficulties in the coordination of various HR practices and effective utilization of the human resources of the organization. Box 3.3 depicts the diversity management efforts of an IT company.

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. For instance, the over-all corporate strategy is developed on the basis of the strength of the functional strategies like production strategies, marketing strategies and HR strategies. In return, specific HR activities are developed on the basis of the corporate strategy.

Thus, it is important to ensure that HR activities are a perfect fit with the mission of the organization and its strategic plans in particular. To achieve an optimum integration between business strategy and HRM, it is essential to ensure an effective cooperation and communication between the top management and the human resource department. However, many studies have shown that is difficult to achieve a complete integration between business strategy and HRM.¹⁴

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.

Certainly, organizational culture creates an internal environment within which HR activities are developed and performed. Many studies have shown that the strength of the corporate culture has a definite impact on the corporate policies such as HR policies, the management structure, and the financial structure.¹⁵ Therefore, human resources strategies need to be closely aligned to the culture of the organization. Moreover, the organizational culture should be continuously improved by reinforcing those factors that form the culture of an organization. Box 3.4 exhibits the elements of a culture formation exercise.

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. 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.¹⁶ In many organizations, the structure is usually hierarchical in nature. In fact, a hierarchical structure ensures consistency and the quality of decision making.

HR System HRM as a system signifies interconnected but separate elements (called sub-systems) functioning together to realize the over-all 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.

Environment Perspectives

Environment perspectives facilitate the understanding of the relationships between an organization, its strategies and the environment. In fact, the primary purpose of an organization in scanning the environment is creating a proper fit between the external environment and its business strategies. On the basis of strategy and environment-fit perspective, an environment can be classified into three categories. These are the objective environment perspective, perceived environment perspective, and enacted environment perspective. We shall now see these perspectives briefly.

The Objective Environment Perspective

The objective environment is based on the assumption that the environment is a real phenomenon but functions independently of an organization.¹⁷ This environment is complete but has all sorts of uncertainties. Therefore, it is necessary for an organization to analyse the environment with the objective of ascertaining the emerging opportunities and threats associated with it. After that, these opportunities and threats must be correlated with the strengths and weaknesses of the organization to evolve appropriate strategies. Such an analysis usually forms the basis for developing or revising the objectives and strategies of the organization.

The Perceived Environment Perspective

This is based on the perspective that the environment is real and material. The uncertainty in environment is caused mostly by an analyst’s wrong perception of the realities of the environment. The differences between the reality of the environment and the perception of such a reality might lead to the designing of flawed strategies. The environment can not be blamed for those flawed strategies; rather, the analysts’ inaccurate perception arising out of their incomplete knowledge of the environment might be the problem.¹⁸ Thus, uncertainty is more of an internal problem than an external one. To achieve a good fit between the strategies and the environment, according to this method, it is highly essential for an organization to control and eventually eliminate those factors that cause an imprecise assessment of the environment and an inaccurate perception.

The Enacted Environment Perspective

This is based on the perspective that the environment is not real or concrete but merely a creation of the participants of the environment. Based on its information, knowledge and perception, each organization creates or enacts an external environment. Thus, an environment is simply enacted through the interaction of all those who are associated with it. Each organization can create its own environment based purely on its own knowledge of the environment. Thus, an environment is enacted by an organization through a repeated defining, revising, and narrowing of its information or knowledge of the external environment. In this case, the term environment is merely a name provided to the various related activities performed in a social context. In the words of Smircich, “From the standpoint of strategic management, strategists’ social knowledge constitutes their environment.”¹⁹

Environmental Scanning—An Overview

Environmental scanning means defining and measuring the environment in terms of the opportunities and threats. Environmental scanning is absolutely essential for the success of an organization, especially in a changing business environment. It provides a crucial input for business strategy formulation.²⁰ The aim of environmental scanning is to identify the emerging issues that may have a bearing on the future of the organization. These issues may originate from the changes in the social, political, legal or economic environment of the company. There are different sources available for an organization to collect information about the trends and issues emerging in its external environment. Some of them have been listed as follows:

1. A careful analysis of the relevant trade journals, magazines, newspapers and Internet articles to know the trends in the external environment.
2. Gathering information from the stakeholders like customers, distributors, stockists, sales personnel, suppliers and investors.
3. Continuously interacting with the select group of people (other than stakeholders) associated with the external environment.
4. Employing professional business analysts to detect the changes in the environment.
5. Attending trade conferences, symposia, and workshops to find out the trends in the environment.
6. Securing membership in trade bodies and associations to gather information on a sustained basis.

Organizations, depending upon their nature and size of the business, may employ appropriate tools to gather relevant information from one or more of these sources. In this, the large organizations usually employ an extensive range of tools to gather the necessary and accurate environmental information for analysis and interpretation. The smaller organizations may employ simple and easy-to-use tools for sourcing information about the external environment. Some of the important ways of gathering data from different sources are:

1. Structured interviews with select respondents
2. Surveys like mail and phone survey
3. Forming focus committees or response teams
4. Online information gathering through dedicated Web sites or Internet surveys

Once the necessary information is gathered and processed, the response of the organization to the emerging trend in the environment is determined. In fact, the nature, level and time of the response will depend on the conditions prevailing in the environment and their implication for the organization. For the purpose of determining the nature and kind of response, the external environment is generally classified into four categories. These are stable environment,reactive environment, anticipatory environment and an initiative environment based on the characteristics defining such an environment.²¹

The Environmental Scanning Process

Environmental scanning process comprises three major phases. As shown in Figure 3.3, these phases are environmental scanning, perceived environment changes, and strategic changes. However, these processes are interdependent and interact among themselves. We shall now see each of these processes briefly.

Environmental Scanning Stages

This is the first stage in the process of environmental scanning. This stage involves gathering information about the changes in the factors influencing the environment. The collected information would be used as a basis for determining the future course of the action of the organization. There are three factors that typically influence the environmental scanning stage. These are:

External Environmental Factors These factors operate outside the purview of the organization and yet influence its HR environment. These may include, among others, social, economic, political, technological and legal factors. In precise terms, the organization should gather information relating to the competitors’ present and future strategies, market conditions, impending technological changes, relevant legal provisions, and financial issues.

Internal Environmental Factors The information concerning the factors that are internal to the organization should also be collected. As part of this process, specific information about the vision and mission of the organization, business strategy, organizational culture and structure, and research and development is collected. However, an effective flow of communication among different authorities is essential for gathering comprehensive information about the individuals and the organization.

Figure 3.3
A Model of the Environmental Scanning Process

Source: Zita Correia and T. D. Wilson, “Scanning the Business Environment for Information: A Grounded Theory Approach,” Information Research, 2, no. 4 (1997); available at http://informationr.net/ir/2-4/paper21.html. Reproduced with permission.

Scanning Strategies

The organization should develop its own strategies for information gathering and management. The strategies thus developed should be systematic and scientific in nature. Such strategies can ensure the accuracy and timeliness of the information. As part of the scanning strategies, an organization should prioritize the sources and the information. For instance, the organization should decide about the extent of using formal versus informal source or personal versus impersonal source, before embarking on data gathering.

Perceived Environmental Change

The managers’ perceptions of changes in the environment and their likely effects on the organization greatly influence the strategy formulation process. In fact, it is the perception of managers that carries more weightage in determining the response of the organization to the environmental changes than the reality of the environment. Thus, the accurate perception of the environment and its changes become all the more important for decisions relating to strategic responses.

As part of this process, managers generally classify the changes in the environment as serious, important, unimportant, and so on. Such classification helps them in determining the timing and intensity of the response of the organization to the changes. The basis of this classification lies in the perceptions of the managers. However, when the managers gather more information about the environment, their perception about the environment is bound to change. Such changes in their perception may bring them closer to the reality. The process of scanning the environmental changes and the perception of the relevance of such changes for the organization reinforce each other mutually.

Strategic Change

This is the final stage in the environmental scanning process. In this stage, organizations make required changes in their HR strategies based on those in the environment. For instance, an organization may change its employees’ training programmes, compensation packages, safety measures, and recruitment practices as part of its response to a changing environment. Nonetheless, the ultimate purpose in choosing a specific response would be the exploitation of the prevailing environment to the advantage of the organization. Indeed, the presence of dynamic HR policies could help the organization in managing the changes promptly and effectively.

Summary

1. The different phases in the evolution of human resource management are Industrial Revolution, First World War, Hawthorne Studies, Second World War, industrial and human relations movement, formalized human resource management and contemporary human resource management.
2. The external environmental factors are social, technological, political and economic.
3. Social environment factors include demographics and educational status. Political environment factors include the nature of political organization and system, the prevailing political stability, and political ideologies. Economic environment factors include labour market, globalization, competitors, trade unions, customers and shareholders.
4. Internal environmental factors include the vision and mission of the organization, business strategy, organizational culture, organizational structure, and HR system.
5. Various environment perspectives are objective environment perspective, perceived environment perspective, and enacted environment perspective.
6. The steps in environmental scanning process are environmental scanning, perceived environmental change, and strategic changes.

Review Questions

Essay-type questions

1. Evaluate critically the growth of human resource management over a period of time.
2. Discuss in detail the external environmental factors influencing human resource management.
3. Enumerate the internal factors shaping the HR environment of an organization.
4. Examine the various HR environment perspectives critically with relevant examples.
5. ‘Environmental scanning is absolutely essential for the success of a firm, especially in a changing business environment.’ In the light of this statement, discuss the importance of environmental scanning.
6. Describe the steps involved in the environmental scanning process with suitable examples.
7. Examine critically the impact of socio–political, legal and technological factors on the HR environment of an organization.
8. As an HR manager, how would you scan the external environment to gather the necessary information for deciding the strategic response of the organization?

Skill-development Exercise

Objective – The objective of this exercise is to show you how to scan an external environment in order to identify the opportunities and threats emerging in that environment.

Procedure Note – The class is divided into groups. Each group has: (1) an HR manager, (2) two HR team members, (3) a marketing manager, (4) a production manager, and (5) two observers of the meetings. The role of the observer is to observe and report on the various aspects of the role-playing sessions.

Situation

Carmart Limited is a major two-wheeler manufacturer in the country. It has a decent market share in the industry. It also enjoyed relatively stable sales and profit for quite some time. However, the recent entry of a few multinational companies into the industry and the announcement of a few industry-specific policy measures like lowering tariffs and other incentives by the government have completely changed the over-all prospect of the industry. In addition to these, the government also amended the bonus act by removing the ceiling on the maximum bonus amount payable to employees. All these developments have immensely influenced the external environment by throwing new opportunities and challenges before Carmart.

Understandably, the management felt an acute need to scan the external environment in depth. In this regard, a committee comprising the production, marketing and HR managers was formed with a mandate to study the environment and present a report on the implications of these changes for the future prospects of the company. The HR manager was appointed the convener of that committee. The committee finalized its modus operandi in such a way that the individual members would first prepare reports from the perspective of their own respective departments and then they would sit together to consolidate these reports before presenting the final report to the management.

Steps in the exercise

There are four steps in the exercise:

Step 1: The HR manager convenes a departmental meeting to decide the manner of gathering information about the external environment. The meeting is attended by two HR team members.

Step 2: After gathering the relevant information about the external environment, the HR manager once again convenes the departmental meeting to prepare his report on the external environment from the HR perspective.

Step 3: The HR manager holds a committee meeting attended by all its members—both the production manager and the marketing manager are present—to prepare a consolidated report of the committee to be forwarded to the management.

Step 4: The observers analyse the role-playing session and give their feedback on the performance of the members.

Case Study

Amity Brakes Limited produces automobile spare parts on a large scale and supplies them to several major automobile producers in the world. This Hyderabad- based multinational has a commendable sales and profit performance. It is also a market leader in its area of operation. The company has a staff strength of 9,500 on its roll. As part of its platinum jubilee celebrations, the management recently did self-introspection of its functioning by analysing the relevance of its mission, vision, policies and programmes covering all aspects of the organization. As far as HRM was concerned, the management concluded that the workforce composition of the organization was not reflecting the reality of the diversified nature of the labour market. In fact, the HR policy of the company was not offering equal opportunity to all segments of the labour market. The number of women employees in the workforce was insignificant while the number of physically challenged persons was trivial. Thus, the company took an administrative decision to change its recruitment policy in a way that would reflect the labour market conditions. Also, its management decided to implement these changes with immediate effect.

The proposal of the management received a mixed response from the employees. A section of the employees viewed the proposal favourably and supported it on the ground that it would do social justice, reflect the reality of the market, make optimum utilization of the talents available in the market, and prepare the organization for an inclusive growth. However, another section of the workforce viewed the proposal with doubt and disbelief as they felt that a well-performing organization like Amity should not take any unwarranted risk. They also feared the cost of training would go up substantially. Besides, they were afraid that gender-related issues could crop up in the organization. Further, they foresaw an additional investment commitment by the management to improve the infrastructure facilities, especially for the physically challenged.

Finally, however, the company went ahead with its revised policy and implemented it. It also directed the HR department to do what was necessary for the successful implementation of the diversity-based HR policy initiatives. The HR department prepared the ground for the implementation of new ideologies and of the policies of the company. Soon after, the proportion of the employees belonging to these categories began to pick up.

Questions for discussion

1. How do you view the new proposal of the company in the light of the current performance of the company?
2. Do you foresee any problem for the company in the execution stage of the proposal?
3. Do you have any better suggestions and strategy for the company to adapt itself to the emerging labour market environment?

Notes

1. Paul Evans, Vladimir Pucik, and Jean-Louis Barsoux, The Global Challenge: Frameworks for International Human Resource Management (Burr Ridge, IL: Irwin/McGraw-Hill, 2002).
2. John Bratton and Jeffrey Gold, Human Resource Management: Theory and Practice, 4th ed. (Basingstoke, England: Palgrave Macmillan, May 2007), pp. 4–14.
3. T. Keenoy, “HRM: Rhetoric, Reality and Contradiction,” International Journal of Human Resource Management, 1, no. 3 (1990): 363–84.
4. Tom Redman and Adrian Wilkinson, Contemporary Human Resource Management: Text and Cases, 2nd ed. (Prenctice-Hall, 2004) pp. 4–8.
5. Peter Drucker, “The Coming of the New Organization,” Harvard Business Review, (January–February 1998): 45.
6. Jennifer Schramm, “HR Technology Competencies: New Roles for HR Professionals,” HR Magazine, 51 (April 2006): 1–10.
7. Mariele G. Heijltjes, “Advanced Manufacturing Technologies and HRM Policies: Findings from Chemical and Food and Drink Companies in the Netherlands and Great Britain,” Organization Studies, 21, no. 4, (2000): 775–805.
8. Suresh D. Tendulkar, “Organised Labour Market in India Pre- and Post-Reform,” December 2003; available at www.globetrotter.berkeley.edu/macarthur/inequality/papers/TendulkarLabor.pdf.
9. National Sample Survey Organization, “Employment and Unemployment Situation in India, 1999–2000”, NSS 55th Round, Report No. 458 (55/10/2), Part I, May 20, 2000.
10. Anil Verma, Thomas A. Kochan and Stephen J. Wood, “Union Decline and Prospects for Revival: Editors’ Introduction,” British Journal of Industrial Relations, 40, no. 3 (September 2002): 373–84.
11. Stephen Machin and Stephen Wood, “Human Resource Management as a Substitute for Trade Unions in British Workplaces,” Industrial and Labor Relations Review, 58, no. 2 (January 2005).
12. Watson Wyatt’s “North American and Asia–Pacific HCI Studies” referred by HRM Delivers Shareholder Value; available at http://www.hrmguide.co.uk/human_resource/human_capital_index.htm.
13. M. E. Porter, Competitive Strategy (New York: Free Press, 1980).
14. C. Brewster, “The Integration of Human Resource Management and Corporate Strategy” in C. Brewster and A. Hegewisch (eds.), Policy and Practice in European Human Resource Management (London: Routledge, 1994), pp. 23–35.
15. Edgar H. Schein, “Organizational Culture and Leadership”; available at http://www.themanager.org/knowledgebase/hr/corporate_culture.htm.
16. Pat Joynt and Bob Morton (eds.), The Global HR Manager: Creating the Seamless Organization, The Chartered Institute of Personnel and Development, (1999), pp. 130–135.
17. J. Child, “Organizational Structure, Environment, and Performance: The Role of Strategy Choice,” Sociology, 6 (1972): 1–22.
18. R. B. Duncan, “Multiple Decision-Making Structures in Adapting to Environmental Uncertainty: The Impact on Organizational Effectiveness,” Human Relations, 26 (1973): 273–291.
19. L. Smircich and C. Stubbart, “Strategic Management in an Enacted World;” Academy of Management Review, 10, no. 4, (1985): 724–736.
20. R. Beale, “Competing Effectively: Environmental Scanning, Competitive Strategy and Organizational Performance in Small Manufacturing Firms,” Journal of Small Business Management, 38, no. 1 (2000): 27–48.
21. H. Igor Ansoff, Corporate Strategy, revised ed. (London: Penguin, 1987).