Background In Ethiopia, public hospitals deal with a persistent human resource crisis, even by SSA standards. Policy and hospital reforms, however, have so far resulted in limited progress towards addressing the resulting strategic human resource management (SHRM) challenges Ethiopia’s public hospital face. Methods To explore the contextual factors influencing these SHRM challenges of Ethiopian public hospitals, we conducted a qualitative study based on the SHRM framework of Paauwe. A total of 19 semi-structured interviews were conducted with a purposive sample of hospital CEOs and HR managers from 15 hospitals across Ethiopia. An additional 4 focus group discussions were held with professionals and their line managers. Results The study found that hospitals compete on the supply side for scarce resources among which the human resources of skilled professionals. There was little reporting on demand side competition on health services provided, service quality, and service innovation. Governmental regulations were the main institutional mechanism in place. These regulations also emphasized human resources and were perceived to tightly regulate employee numbers, salaries and arrangements at detailed levels. These regulations were perceived to restrict the SHRM autonomy of the hospitals. Regulation induced differences in allowances and external employment arrangements were among the concerns that decreased motivation and job satisfaction and caused employees to leave their jobs. The mismatch between regulation and workforce needs posed challenges for leadership and caused leaders to be perceived as incompetent and unable when not successfully addressing workforce needs. Conclusions Bottom-up involvement in SHRM may help resolve the aforementioned persistent problems. The Ethiopian government might better loosen regulations, providing more autonomy to hospitals for SHRM and implement mechanisms that emphasize the quality of health services demanded rather than the quantity of human resources supplied.