Factor Analysis

A data reduction technique

It is a technique applicable when there is a systematic
dependence amongst a set of observed or manifest
variables and the researcher is interested in finding
out something more fundamental (or latent) which
creates this commonality.
Expl: Several individuals' income, education,
occupation, dwelling area having close correlation
could indicate that they are from one socio-economic
class.

Thus, the substantive purpose of the

factor analysis is
to search for and test of construct or
dimensions assumed to underlie the
Example
1:
manifest- variable

"Proneness to purchase a brand" may not represent

an observable variable directly. Rather one has to
infer from correlated measures.
Statement :

Strongly Agree
5

1.
2.
3.

Strongly Disagree
1

The factor is the latent variable and

summarizes the manifest variables
Exple - 2: We have several variables which
influence the purchase decision of different
commodities in the market or perception.
See Questionnaire A & B
Whether a group of variables or groups of
variables cluster around to explain the buying
behavior? And what is the explanatory power of
these groups.
These questions necessitates a factor analysis.

Example : Buying Behaviour : Refrigerator

(Attributes rated in a 7 point scale
1
Price
Brand Name
Multiple Temperature
zones
Adjustable racks and
shelves
After -sales service
Ease of maintenance
Refrigeration space
Floor space occupied
Computerised cooling
Frost-free
Durability
Ease of cleaning

Perception of Managers towards a product

collected in a 10 point scale
Variables
Product Quality
E-Commerce
Technical Support
Complaint Resolution
Advertising
Product Line
Salesforce Image
Competitive Pricing
Warranty & Claims
Order & Billing
Delivery Speed

10

Characteristics
Factor Analysis seeks to resolve a large set of
measured (manifest) variables in terms of
relatively few categories known as factors.
No criterion or predictor subsets.
Examines the overall association amongst
variables
Based on linear correlation and assumes data
in metric scale( interval or ratio)
It serves the purpose of scientific parsimony.
Subjectivity is involved in naming the factor.

Important Methods for Factor Analysis

There are several methods of factor analysis
The Centroid Method
The Principal Component Method.
Maximum Likelihood Method.
Generalized Least Square Method. Etc
The Principal Component method is widely used in
research studies.
As the name suggests, the factors extracted using this
method are in the order of importance.

A few terms used in Factor Analysis

Factor: It is an underlying dimension that accounts for
several observed variables.
Factor Loadings: Values which explain how closely the
variables are related to each one of the factor discovered.
Also known as factor variable correlation.
Communality (h2): It shows how much each variable is
accounted for by the underlying factor taken into
consideration.
It is the summation of factor loading squares on all
factors extracted in case of a variable.

Few Terms (Contd)

Eigen Value: or latent root.
When we take the sum of the squared
values of factor loadings relating to a
factor, then such sum is referred to as
Eigen Value.
It indicates the relative importance of a
factor when Principal Component Method
is used.
Eigen value divided by the number of
variables gives the percent variation.

Issues Involved in Factor

Analysis
Rotation: There are different types of rotation
which are used in factor analysis.
An un-rotated factor matrix does not give clean
set of factor loading i.e. it may have large cross
loading or large loading on one factor.
A rotated factor matrix changes this structure
and maximizes loading of each variable on one
factor.
Varimax rotation is widely used . Expl>>

Unrotated Component Matrix

Variables

Product Quality

.248

- .501

- .081

.670

E-Commerce

.307

.713

.306

.2884

Technical Support

.292

- .369

.794

- .202

Complaint Resolution

.871

.031

- .274

- .215

Advertising

.340

.581

.115

.331

Product Line

.716

- .455

- .151

.212

Salesforce Image

.377

.752

.314

.232

Competitive Pricing

- .281

.660

- .069

- .348

Warranty & Claims

.394

- .306

.778

- .193

Order & Billing

.809

.042

- .220

- .247

Delivery Speed

.876

.117

- .302

- .206

Rotated Component Matrix

Variables

Complaint Resolution

.933

Delivery Speed

.931

Order & Billing

.886

Salesforce Image

.898

E-Commerce

.868

Advertising

.743

Technical Support

.940

Warranty & Claims

.933

Product Quality

.892

Competitive Pricing

-.730

Issues involved(Contd)
Default Eigen value and changing it.
Selecting a cut off point for factor loading.
Two views: 0.33 or 0.50. It should be same for
all the factors
Subjectivity involved in extracting the factor
and giving name.
Number of observations should be = 5 X No of
Variables used.

Reporting & Analysing the factor

out put
Factor 1( Name..)
Variable 1 ( 0.86)
Variable 4 (0.71)
Variable 7 (0.58)
Factor 2 (Name..)
Variable 2 (0.85)
Variable 3 (0.71) etc
Names of the variables gelling together or having the same
dimension and corresponding factor loadings have to be
given

Exple 1. Summary of Factors

Factor 1 - Post sale Customer Service :
Complaint Resolution, Delivery Speed and Order
and Billing
Factor 2 - Marketing : Salesforce Image, Ecommerce Presence and Advertising
Factor 3 - Technical Support : Technical
Support and Warranty and Claims
Factor 4 - Product Value : Product Quality and
Competitive Bidding

Example 2
Factor 1 (Upmarketness)
Expensive (0.80)
Celebrity endorsement (0.79)
Exclusive show room ( 0.69)

Factor 2 (Loyalty)
Brand Loyalty ( 0.81)
Store Loyalty (0.59)
Factor 3 (Economy)
Discount (0.89)
Special offer (0.81)

Cluster Analysis
A classificatory technique
Cluster Analysis classifies objects e.g.
respondents, products or entities so that each
object is very similar to others within the cluster
with respect to some predetermined selection
criterion or variable specified.
The resulting clusters of objects exhibit high
internal (within the cluster) homogeneity and high
external (between the cluster) heterogeneity.
One can determine how many mutually exclusive
groups or clusters are there in the sample or
population.

Significant Features of Cluster

Analysis
Cluster variate is the set of variables used to
compare objects in the cluster analysis .
It is a multivariate technique that does not
estimate the variate empirically but instead
uses variate specified by the researcher.
CA differs from FA in that it groups objects,
whereas, FA groups variables.
CA is descriptive and non-inferential. It is an
exploratory technique.

Features of CA Contd
The solutions are not unique as the cluster
membership may differ with respect to the
variables used. Addition or deletion of variables
can have substantial impact on resulting solutions.
The Euclidian distance in the Dendogram is used
to find clusters. It is done manually and several
trial & error method is applied.
In general, it is judgmental and devoid of
statistical inference from sample to population
using probability measures. However, the results
of a representative sample may be used for
arriving at conclusions about the population .

Analysing a Cluster Analysis out put.

Dendogram is used to identify clusters
More the distance more the dissimilarities and
vice versa.
Respondents in a particular cluster are taken
out and the characteristics are tabulated.
The cluster characteristics could be different.
However, subjective assessment has to be made
in identifying clusters
The clusters could become target groups for
intervention in the market.

An example using demographic

variables for clustering:
Age,Occupation,Income,Expdr
.
Cluster 1
Students (Post Graduate/Management), Age 20-30
yrs,
Annual spending on clothes Rs 3000/-,H.income 5+
lac
Cluster 2
Service, Age more than 40 yrs, H. Income 2+Lac
Spending on clothes Rs 2000/Cluster 3
Students (graduate), Age 20-30 yrs,H. Income 4+lacs
Annual spending on clothes 2500/-

Presentation of Factor and

Cluster Analysis
The groups are advised to use the data
collected by them for Factor and Cluster
Analysis.
Demographic or other variables may be
taken as clustering variables.
The summary of output will be presented
in the class for discussion.