Strategic Business Choices Using Pestel and Ahp
By Navneet Bhushan and Zohra Banu
This article provides a comprehensive framework for analysis and evaluation of various factors required for starting an information technology (IT) services business in a new country. The study was conducted in 11 European countries including Austria, Belgium, Finland, France, Germany, Ireland, Italy, Norway, Poland, Spain and Sweden on various parameters in order to identify suitable countries for an IT company to provide IT services. The initial part of the study is conducted by identifying the macroeconomic factors through a PESTEL (political, economical, social, technological, environmental and legal) analysis on all mentioned countries. Later a comprehensive analysis using the analytic hierarchy process (AHP) for relative rankings based on the selected factors gives a selection of the top five countries for IT investments.1
In a highly globalized world large companies have their presence across several countries in the form of a subsidy, a sales office or by taking over companies in the host country. In a quest to grow and expand business several small, medium and large sized organizations are looking to set up business in new geographical boundaries and exploit the business opportunities available. Choosing the right market for offering your products and services, however, is a challenging task as an individual needs to consider and effectively analyze a variety of factors.
The main objective of this article is to highlight the framework developed (and adopted) in ranking various countries for market entry in the European region in order to provide IT services. The study uses secondary research. It was conducted using data from multiple open sources and rankings given by the World Bank based on various factors. The study begins with the identification of macroeconomic factors required for conducting the analysis. This is followed by collecting data from various sources and collating it. The next step includes data analysis including:
Grouping together related factors.
- Using the AHP for assigning weights to each of the identified factors.
- Ranking the countries based on the data available.
- Calculating the weighted average score for each country.
- Selecting the top countries where a detailed study is to be conducted.
The scope of the study is limited to the following list of countries:
Step 1: Identify Macroeconomic Factors
In order to identify the macroeconomic factors a PESTEL (political, economic, social, technological, environmental and legal) analysis is done. The analysis includes a study based on the following factors:2
- Political factors involve how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs and political stability. Political factors may also include goods and services, which the government wants to provide or might be provided (merit goods) and those that the government does not want to provide (demerit goods or merit bads). Furthermore, governments have great influence on the health, education and infrastructure of a nation.
- Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.
- Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).
- Technological factors include ecological and environmental aspects such as research and development activities, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Technological shifts can affect costs, quality and lead to innovation.
- Environmental factors include weather, climate and climate change, which may affect industries such as tourism, farming and insurance. Growing awareness to climate change is affecting how companies operate and the products they offer. It creates new markets and diminishes or destroys existing ones.
- Legal factors include discrimination law, consumer law, antitrust law, employment law and health and safety law. These factors can affect how a company operates, its costs and the demand for its products.
Based on the PESTEL analysis done for all 11 countries, the following factors are identified as crucial in selecting a country for setting up an IT business:
- Current gross domestic product (GDP) of the country in billion U.S. dollars.
- Contribution of the agriculture industry and service sectors to the GDP.
- Compound annual growth rate of the GDP for the period 2006 – 2010.
- Major industries and service sectors in the country.
- Total number of companies in the country.
- Research and development expense(s) as a percentage of the GDP.
- The number of telephone, mobile and Internet users in the country.
- Total information and communication technology (ICT) spending of the country.
- Number of ICT / IT companies in the country.
- The total revenue of the IT sector in the country.
- The ease of hiring, firing and managing labor.
- The labor laws and unions of the country.
- The number of days required in obtaining permits, setting and closing business.
- The political stability, effectiveness, control of corruption of the government.
- Role of government in private sectors.
- Corporate tax rates and incentives.
- The amount of foreign direct investment (FDI) inflows in the country.
- Existing competition in the IT service sector in the country.
- The number of English speaking population in the country.
- The foreign languages commonly used in the country.
- The work culture and environment of the country.
Step 2: Data Collection
Data is collected for all the previously mentioned factors from various sources like the International Monetary Fund (IMF), World Bank, Central Intelligence Agency (CIA), etc.
Step 3: Data Analysis
Data analysis involves understanding each of the factors thoroughly and grouping them into top level and sub parameters for organizing the data and assigning weight to each parameter. All the factors mentioned are grouped into seven top level parameters and each parameter offers fewer sub parameters. The top level and sub parameters include:
Top Level Parameter 1: GDP and Growth Rate
The sub parameters for GDP and the growth rate include:
- Current GDP in billion dollars.
- Compound annual growth rate (CAGR) of GDP for the period 2006 – 2009.
- Average contribution by a company to the GDP of the country in dollars, which is given by the ratio: Total GDP / Number of registered companies.
- The sub parameter helps in estimating the average size of a company.
Top Level Parameter 2: Technology Penetration
The sub parameters for technology penetration include the total number of telephone, mobile and Internet users in the country, expense on research and development as a percentage of GDP, total expenditure on ICT and the average revenue per IT company.
Top Level Parameter 3: Industrial and Service Sector
Includes the following sub parameters:
- Contribution of the industrial sector to the GDP.
- Contribution of the service sectors to the GDP.
- A qualitative analysis of the major industries and service sectors of the economy.
Top Level Parameter 4: Ease of Doing Business
Includes various sub parameters, which help in starting, managing and growing a business in a new country. It includes the following sub parameters:
Setting up processes – Time, cost and procedures involved in starting a business, obtaining permits, registering property, recovery rate in bankruptcy and closing down business.
- Managing workforce – Difficulty in hiring and firing workforce.
- Tax and incentives – Corporate tax rates and total tax rates, time needed to comply with tax payments and number of tax payments.
- Language and culture – The percentage of English speaking population, the official language, business and commonly spoken foreign languages.
Top Level Parameter 5: Political Environment
It consists of four sub parameters:
- Political stability – Perceptions of the likelihood that the government will be de-stabilized.
- Government effectiveness – Quality of public services, civil services and the degree of its independence from political pressures.
- Regulatory quality- Government’s ability to formulate and implement sound policies and regulations that permit and promote private sector development.
- Control of corruption – Extent of public power that is exercised for private gain.
Top Level Parameter 6: Competition
Analysis of the competition is done based on two sub parameters:
- Number of IT companies in the country.
- Presence of Indian IT service providers.
Top Level Parameter 7
Foreign direct investment (FDI) – Inflows that take into account the amount of the FDI inflow in the country.
Assigning Weights Using the AHP
Once the factors are grouped into top level and sub parameters, the next step is to assign weights to each of the parameters for which the AHP is used.
The AHP is based on the experience gained by its developer, T.L. Saaty, while directing research projects in the U.S. Arms Control and Disarmament Agency.3 It was developed as a reaction to the findings that there is a miserable lack of common, easily understood and easy-to-implement methodology to enable making complex decisions.
The AHP provides a means of decomposing a problem into a hierarchy of sub-problems, which can be easily comprehended and subjectively evaluated. The subjective evaluations are converted into numerical values and processed to evaluate each alternative on a numerical scale. The detailed methodology of the AHP is as follows:
- Problem is decomposed into a hierarchy of categories and parameters.
- Data is collected from experts corresponding to the hierarchical structure, in comparison (pair-wise) of alternatives on a qualitative scale. Experts can rate the comparison as equal, marginally strong, strong, very strong or extremely strong. The comparisons are made for each criterion and converted into quantitative numbers on a nine-point scale.
- The pair-wise comparisons of various criteria generated are organized into a square matrix. The diagonal elements of the matrix include: The criteria in the ith row is better than criteria in the jth column if the value of element (i,j) is more than one; otherwise criteria in the jth column is better than criteria in the ith row. The (j,i) element of the matrix is reciprocal of the (i,j) element.
- The principal eigenvalue and the corresponding right eigenvector of the comparison matrix gives the relative importance of various compared criteria. The elements of the normalized eigenvector are termed weights with respect to the criteria or sub-criteria.
- The consistency of the matrix is then evaluated. Comparisons made by this method are subjective and the AHP tolerates an inconsistency through the amount of redundancy in the approach. If this consistency index fails to reach a required level, the answers to the comparisons may be re-examined. The consistency index (CI) is calculated as: CI = (max – n) / (n – 1) (1) Where, “max” is the maximum eigenvalue of the judgment matrix and “n” is the order of the matrix. This CI is compared to that of a random matrix (RI). The ratio derived, (CI / RI) is termed the consistency ratio (CR). It is suggested that the value of the CR should be less than 0.1.
- The ratings of each alternative are multiplied by the weights of the sub-criteria and aggregated to get local ratings with respect to each criterion. The local ratings are then multiplied by weights of the criteria and aggregated to get global ratings.
Based on the methodology, the weighted score for all of the seven top level parameters as well as the low level parameters is obtained from three expert opinions. The geometric means of the weighted score is then considered for the final rating. The data from three expert opinions is as follows:
|Table 1: Top Level Parameters|
|Top Level Parameters||Parameter Weight
|Geo Mean||Normalized Geo Mean|
|GDP & Growth Rate||0.097||0.143||0.197||0.140||0.152|
|Industrial & Service Sector||0.180||0.285||0.044||0.132||0.143|
|Ease of Doing Business||0.354||0.285||0.443||0.355||0.385|
|Table 2: All Parameters|
|All Parameters||Final Weight||Final Weight||Final Weight||Geo Mean||Normalized Geo Mean|
|GDP CAGR 2006 – 2009||0.010||0.091||0.048||0.035||0.046|
|Average Contribution to GDP per Company||0.025||0.015||0.017||0.019||0.024|
|TotalNumber of Users – Mobile,Telephone, Internet||0.020||0.006||0.050||0.018||0.023|
|Expense on R&D and Percent of GDP||0.036||0.015||0.012||0.019||0.024|
|Average Revenue / IT Company||0.076||0.038||0.024||0.041||0.053|
|Contribution by Industry Sectors||0.026||0.180||0.005||0.028||0.036|
|Contribution by Service Sectors||0.077||0.030||0.028||0.040||0.052|
|Major Industry & Service Sectors||0.077||0.074||0.012||0.040||0.052|
|Setting Up Process||0.021||0.057||0.127||0.054||0.069|
|Language & Culture||0.159||0.148||0.031||0.090||0.116|
|Tax & Incentives||0.045||0.022||0.031||0.031||0.041|
|Employing Workers – Hiring, Firing||0.129||0.057||0.254||0.123||0.159|
|Total Number of IT Companies||0.064||0.022||0.007||0.022||0.028|
|Number of Indian IT Service Providers||0.021||0.022||0.036||0.026||0.033|
Rating the Countries
All the countries are rated on a scale of zero to one, using the linear curve fit formula. The formula is 0.25 + 0.75* (current value – minimum value) / (maximum value – minimum value). Applying this formula to the first set of values of the top level parameter and its sub parameters – GDP and growth rate for the 11 countries yields the following ratings:
|Table 3: Sub Parameters – GDP Growth Rate|
|GDP||GDP CAGR||GDP / CPY||GDP||GDP CAGR||GDP / CPY||GDP||GDP CAGR||GDP / CPY|
Top Level Parameter 2: Technological Penetration
The following table shows the data values, ratings and weighted ratings for all the sub parameters of the 11 countries. The ratings are obtained by applying the linear curve formula.
|Table 4: Data Values, Ratings and Weighted Ratings for all the Sub Parameters of the 11 Countries|
Mob, Internet Users (Mn)
|R&D Expense (Percent of GDP)||ICT Expense
|Average Revenue / IT Comp (Mn$)||Mob, Internet Users (Mn)||R&D Expense (Percent of GDP)||ICT Expense
|Average Revenue / IT Comp (Mn$)||Mob, Internet users (Mn)||R&D Expense (Percent of GDP)||ICT Expense
|Average Revenue / IT Comp (Mn$)|
Top Level Parameter 3 – Industrial and Service Sector
The following table shows the data values, ratings and weighted ratings for all the sub parameters of the industrial and service sector of the 11 countries. The ratings are obtained by applying the linear curve formula.
|Table 5: Data Values, Ratings and Weighted Ratings for all the Sub Parameters of the Industrial and Service Sector of the 11 Countries|
O / P (Bn $)
O / P (Bn $)
O / P (Bn $)
O / P (Bn $)
O / P (Bn $)
O / P (Bn $)
Several countries have fishing, mining and forestry as their major industries where as some countries have banking, insurance, automotive, aerospace, retail, telecom, manufacturing and financial service sectors as major industries and service sectors. A qualitative analysis of the industries is done by giving higher rankings to relevant industries and service sectors.
|Table 6: Rankings of Industries and Service Sectors|
(0 – 1)
|Weighted Scores* /Rankings|
|Austria||Automotive, ICT, insurance, banking, mechanical, chemical||0.6||0.031|
|Belgium||Aerospace, automotive, ICT, biotechnology, agro food, pharmaceuticals, insurance, financial services||0.8||0.042|
|Finland||Cleantech, ICT, healthcare & well being, mining, retail, real estate, business services, logistics||0.4||0.021|
|France||Aerospace, automotive, ICT, biotechnology, agro food, insurance, finance, banking||1||0.052|
|Germany||Aerospace, automotive, ICT, biotechnology, agro food, insurance, finance, banking, consumer goods industry, contact center industry||1||0.052|
|Ireland||Business services, consumer products, clean technology, entertainment & media, industrial products & services||
|Italy||Precision machinery, motor vehicles, chemicals, pharmaceuticals, electric goods, fashion and clothing, tourism, retail, financial services, ICT||0.7||0.036|
|Norway||Petroleum and natural gas production, shipping and trading, insurance, banking||0.4||0.021|
|Poland||Energy, mining and manufacturing||0.4||0.021|
|Spain||Automotive, fertilizers and chemicals, retailing, tourism, banking and telecommunications||0.7||0.036|
|Sweden||Manufacturing, automotive, food processing, business services, technology consultancy services||0.9||0.047|
Top Level Parameter 4 – Ease of Doing Business
|Table 7: World Bank Rankings, Ratings and Weighted Ratings|
|Ease of Setting
|Ease of Setting
|Ease of Setting
|Table 8: Language and Culture Ratings|
|Country||Official Language||Foreign Languages||Ratings||Weighted Scores /Rating*|
|Belgium||Dutch, French, German||English, Turkish, Italian, French||0.85||0.0986|
|Finland||Finnish and Swedish||English||0.8||0.0928|
|France||French||English, Spanish, German||0.65||0.0754|
|Germany||German||English, French, Russian||0.9||0.1044|
|Norway||Norwegian||English, German, French||0.6||0.0696|
|Spain||Spanish||English, French, German||6.5||0.754|
|Sweden||Swedish||English, French, German||0.9||0.1044|
Top Level Parameter 6 – Political Environment
The percentile scores of each of the factors given by the World Bank are combined to obtain a ranking for the political environment.
|Table 9: Political Rankings and Environment|
Values (in Percentile)
Ratings (0 -1)
|Goverment Effectiveness||Regulatory Quality||Control of Corporation||Political Stability||Goverment Effectiveness||Regulatory Quality||Control of Corporation||Political Stability||Goverment Effectiveness||Regulatory Quality||Control of Corporation|
Top Level Parameter 6 – Competition
|Table 10: Ratings of Competition|
|Number of IT Companies||Number of Indian IT Companies||Number of IT Companies||Number of Indian IT Companies||Number of IT Companies||Number of Indian IT Companies|
Top Level Parameter 7- FDI Inflows
|Table 11: FDI Inflows|
|Country||FDI Inflows in Bn $||Ratings||Weighted Ratings|
Once all the parameters and sub parameters are rated, the overall weighted rating is calculated by adding up the weighted ratings of sub parameters and multiplying the sum with the respective weighted score of its respective top level parameters. Total ratings for all the countries are found by independently calculating the sum of all the parameters for each country.
|Table 12: Total Ratings for All Countries|
|GDP & Growth Rate||0.0123||0.0105||0.0094||0.0182||0.0210||0.0066||0.0162||0.0097||0.0119||0.0139||0.0070|
|Industry & Service Sector||0.0082||0.0099||0.0062||0.0176||0.0200||0.0070||0.0141||0.0068||0.0068||0.0120||0.0104|
|Ease of Doing Business||0.1029||0.1211||0.0944||0.0699||0.0725||0.1393||0.0793||0.1038||0.0842||0.0571||0.1077|
|Total Weighted Ratings||0.1562||0.1928||0.1365||0.1657||0.1636||0.1714||0.1525||0.1481||0.1340||0.1417||0.1742|
The top five countries include:
The framework suggested is an attempt to offer an end-to-end model that takes into account the complexity of choosing a business location, various factors to be considered before entering new geographical boundaries and laying the groundwork for a comprehensive and strategic methodology. While the framework integrates PESTEL and the AHP, its simple and essential contribution is its holistic examination of the country and the IT industry.
The goal is for organizations to use the framework as a mainstay to define, analyze and assess factors in order to select and evaluate countries for providing IT services. In its current form, the framework is a flexible tool for analysis that can be used to analyze the relative importance assigned by one expert for all the factors vis-à-vis other experts and it can also be incorporated into strategic planning exercises. The authors fully expect that this framework provides adequate common ground around challenges and eliminates inconsistencies in choosing the relative importance of various factors to help in selecting the right destination to provide IT services.
- Bhushan N. and Rai K., Strategic Decision Making – Applying the Analytic Hierarchy Process, Decision Engineering Series, Springer, UK, Jan. 2004.
- PESTEL Reports by Data Monitor- Ebsco Database.
- T.L. Saaty, Analytic Hierarchy Process, McGraw-Hill, New York, 1980.
About the Authors:
Navneet Bhushan is the founder / director of an innovation co-creating firm, Crafitti Consulting Pvt Ltd. He has worked close to two decades in managing and developing IT, innovation and productivity solutions and has worked in large commercial and government organizations. He is the principal author of Strategic Decision Making – Applying the Analytic Hierarchy Process published by Springer, UK, 2004. His current research interests include complexity, open innovation and globalization. He is a visiting faculty member at Welingkar School of Business Management. Contact Navneet Bhushan at navneet.bhushan (at) crafitti.com or visit http://www.crafitti.com.
Zohra Banu is a management student specializing in marketing at Prin. L.N Welingkar Institute of Management Development and Research. She has completed her BE in electronics and communication and has worked as a software engineer for four years at Mahindra Satyam (formerly Satyam Computer Services). Her areas of interest include marketing, business development, digital marketing and business analysis. Contact Zohra Banu at zohra.banu83 (at) gmail.com.