Cap 4-Structural Equation Models

4 –Structural Equation Models
NOVA IMS GSLC-2016-2017

Index
4.1 - Latent and measurement variables
4.2 - Structural and Measurement Model
4.3 - Model Equations
4.4 - Model Estimation
4.5 - Measures of Model Fit
4.6 - Case Study

4.1- Latent and measurement variables
Although they have not exactly the same meaning the following
terms are quite often interchangeable:
Path Analysis
Causal models
Structural Equation Models (SEM)
Structural Models With latent Variables
Simultaneous Equation Models
We will adopt the term of Structural Equation Models or more often

only SEM.

The Structural Equation Models have two kinds of variables:

:
1. Latent variables. These variables are not directly observed.
They are indirectly observed through manifestations or
dimensions of these variables. Included in this group of
variables, we have examples like the company's image, the
quality of the products and services or even customer
satisfaction and customer loyalty. These variables can be
divided into endogenous and exogenous as they are or not
explained by the model.

2. measurement variables. These variables are precisely the

indicators or dimensions used to indirectly" measure" the
latent variables. In general, each latent variable is associated
to a question from the questionnaire adopted to measure
customer satisfaction. Also the measurement variables can be
divided into endogenous and exogenous.

SEM integrate two kinds of models:
1. Structural Model, consisting of equations that define the

relationships between the latent variables;
2. Measurement Model, consisting of the equations that relate the

latent to the measurement variables.
GSLC-2016-2017
Structural Model
Figure 4.1-structural model with two endogenous latent variables
Perceived g12
Value
v2
(x1 ) g11

Customer Customer
CV12 Perceived quality
1
Customer
satisfaction b12 loyalty
g 21 satisfaction (h)
(x2 ) h(h1
2
g 31
Company’s g 32
2
image
(x3 )

Structural Model
1. The direction of causality is from left to right;
2. Each exogenous variable can influence one or even two

endogenous variables as it is the case of the quality/price ratio
or perceived value and of the ___company’s image). Even
endogenous variables may influence other endogenous
variables (it is the case of h1 (customer satisfaction ) that
influences h2 ( customer loyalty ).

Structural Model
3. The straight lines represent direct impacts that is coefficients

which measure the impact on a endogenous variable due to a unit
change in an exogenous variable (being represented by the letter
g ) or in another exogenous variable (being represented by the letter
b ). Thus, for example,b12 measures the impact on h2 resulting from
a unit change on h1 . The variable g 32 measures the impact on
the variable h2 as a result of a unit change on x 3 .

Structural Model
4. In addition to direct impacts, one can also calculate total

impacts, which are equal to direct impacts plus indirect impacts;
5. The curved lines represent the covariances between exogenous

variables, represented by CVij. Except in the case where there is
information that enables argue otherwise, it is assumed that these
covariances are different from zero.

Structural Model
6. SEM and regression analysis show important differences from

a conceptual point of view, from which we will highlight two :

Structural Model
Differences between SEM and Regression Analysis
• The first difference respects to the influence of exogenous

variables. While in SEM, the same exogenous variable may
influence more than one endogenous variable (it is the case of the
company’s image x 3 ), in the regression model each exogenous or
explanatory variable is only associated with a single endogenous
variable

Structural Model
Differences between SEM and Regression Analysis
• The second difference relates to the methodology used in the

model selection. While in the regression analysis, we face an
exploratory approach, in the case of SEM ,we opt for a
confirmatory approach .

Structural Model
Exploratory approach and confirmatory approach
• In a confirmatory approach, the model is first specified

assuming a set of hypotheses to be tested later. In contrast, the
exploratory approach, followed in the regression analysis
typically involves specifying and estimating a model with a set of
explanatory variables. The respective coefficients are then
subjected to the tests that allow to keep only the significant ones,
the other being discarded.

Structural Model
Exploratory approach and confirmatory approach
However, in most cases, this distinction is not strictly adopted.

Indeed, the specification of a structural equation model, follows in
general, an approach that could be classified as almost
confirmatory. When the assumed model is not supported by the
data, i.e., is rejected by the model fit tests, then the whole model
and its assumptions are not completely rejected. Rather, the model
is modified (based on theoretical and/or empirical arguments) and
restarts the estimation and testing processes.

Figure 4.2Almost confirmatory approach

specification

Measurement Model
Three types of models can be specified :

• Reflective model;
• Formative model;
• Mixed model .
Each of these models corresponds to a way of relating the latent

variables with measurement variables.

Measurement Model
Figure 4.3-Reflective Model
x h
x1 x2 y1 y2

Measurement Model
Figure 4.4-Formative Model
x h
x1 x2 y1 y2

Measurement Model
Figure 4.5 Mixed Model
x h
x1 x2 y1 y2

Measurement Model
The decision about the model to be adopted

depends on three kinds of considerations:
1. The objectives of the research;

2. The theory;
3. The empirical contingencies.

Measurement Model
The objectives of the research are the

first determinant

So if our goal is to explain the variation of the

measurement indicators, the reflective model is the
most suitable. In fact, these models are adopted on the
assumption that all indicators measure the same
underlying phenomenon, i.e. the same latent variable.
But if our goal is to analyze the variation of
latent/unobserved variables, then it is preferable to
use the formative model.

Measurement Model
The choice of the model is also based on the theory

that underlies and, in particular, in how the latent
variables are conceptualized. Thus variables such as "
personality," "attitude " or " intelligence " are typically
viewed as underlying factors that give rise to some
indicators that are observed which are correlated and
interpreted as reflections of the latent variables. In such
a case, we should adopt the reflective model

Measurement Model
Conversely to the reflective case, in the formative

model, the indicators need neither to be correlated
nor to measure the same latent variable. In the
formative model, the indicators are seen as the
causes that explain the behavior of the latent
variable. Chin example.

Measurement Model
Finally, the choice of model also involves empirical data. In

the formative model, sample size and multicollinearity
problems affect the stability of the measurement model
coefficients, which are obtained in this case by multiple
regression. In the reflective model coefficients of the
measurement model are obtained by simple regression and
are therefore not affected by multicollinearity problems.

Measurement Model
Because of this advantage, the reflective model is the most

frequently used in customer and employee satisfaction
studies .

Structural Model
The structural model of Figure 3.1 is written on the

form:
h1  g 11x1  g 21x 2  g 31x 3  v1
h 2  b12h1  g 12x1  g 33x 3  v 2
Or even, in matrix form:
  x1 
h1  0 0 h1  g 11g 21g 31    v1 
h         x2    
 2   b12 0  h2  g 12 0 32  x  v2 
 3

Structural Model
What can be written in concentrated form:
h  bh  gx  v

Measurement Model
Reflective model
The equations corresponding to Figure 4.3 (reflective model)
are: y   h  
1 y1 1
y 2   y 2h   2
That, written on matrix form gives:
 y1   y1   1   x1   x1  x1 
 y    h     x    x  x 
 2   y 2   2   2   x2   2 

Measurement Model
Reflective model
Or, on concentrated form:
y   yh   x   xx  
E( )  E( )  E( | h )  E( | x )  0

Measurement Model
Formative model
The equations of the formative model shown in Figure 4.4 are:
 y1 
h  ( h1 h 2 ) 
 y2 
 x1 
x  (  1  2 ) 
 x2 

The model to estimate consists of the set of equations of the

structural model and of the measurement model.
The purpose of the estimation is to obtain estimates for the:
Latent variables indexes;

 Structural model coefficients( impact coefficients);
 Measurement model coefficients (weights);
Model fit measures

The estimation of the model presents a number of difficulties
 The presence of latent variables that are not observed;

 The values of the measurement variables correspond to the
answers to a questionnaire that adopts for many questions
an interval measurement scale with a finite number of points;
 The measurement variables (indicators) do not follow a
normal distribution;
 The existence of multicollinearity across the indicators.

Estimation Methods
To estimate these models two types of methods have been

proposed:
1. Methods based on covariances, or more specifically in

minimizing the difference between the sample covariance
matrix and the corresponding matrix of the theoretical model;
2. Methods based on the minimization of the variance of

residuals of the dependent or endogenous variables (either
they are latent or observed variables).

Estimation Methods
In the first group of methods, the best known is

LISREL (Linear Structural Relations). The
assumptions underlying the use of these methods are
not generally observed in customer satisfaction models
( cf. estimation difficulties ).

Estimation Methods
In the second group of methods, the best known

is PLS (Partial Least Squares) that is also the
most widely used in customer satisfaction
models.

PLS Methodology
 PLS methodology consists of iterating between two approximations to

latent variables : the external and internal approximation;
 The external approximation seeks to obtain an estimate of the latent
variables from a linear combination of its indicators or measurement
variables;
 The internal approximation represents another estimate of the same
latent variable, calculated as a combination of latent variables ( or more
specifically of its external approximation ) that are “neighbors", i.e. that
are directly linked;
 The two estimates are iterated until convergence, i.e. until the external
approach is equal to the internal approach.

PLS methodology
External Approximation Internal Approximation
Z j   e jiYi
Yh = Xhwh Centroid scheme
ehi = sign (corr(Yi,Yh))
Mode A (Reflective model): Factorial scheme

whj = corr(Xhj , Zh) ehi = corr(Yi,Yh)
Structural scheme
Mode B (formative model): ehi = coef. regression in Yh
regression on Yi’s
wh = (Xh’Xh)-1Xh’Zh
Yh
The analysis of the adequacy of the model

measures the extent to which the model fits the
reality we want to study as well as the stability of
the estimates for the model parameters. There are
several model fit measures, all based on the
differences between observed and
estimated/predicted values by the model.

The measures used depend on the estimation methods adopted.
1. LISREL methodology (methods based on covariance)
The most frequently adopted model fit measures are in this case:
The Chi –Squared  2

The Root Mean Square Error of Approximation, RMSEA;
The Comparative Adjustment Index

2. PLS methodology (methods based on the variance of the

dependent variables)
As in the estimation of the parameters, PLS methodology does not use

assumptions about the probability distribution of the observations and
of the errors of the adopted model, the traditional tests presented
earlier (based on statistic  2 ) can not be used in this case.

The measures and techniques used are nonparametric (they do not

assume probability distributions for parameter estimators) and can be
divided into two groups:
Measures to analyze the quality of the fit and the ability of the
model prediction. Included in this group, are the Coefficient of
2
Determination ( R ) and the Average Variance Extracted (AVE);
Techniques to test the stability and significance of estimated

parameters. Included in this group are Jacknifing and Bootstrapping
techniques

Goodness of fit and predictive capability

2
The determination coefficient R
The interpretation of the determination coefficient of each structural

model equation, estimated by PLS is identical to the case of
traditional classical regression. A change in the value R 2 of the
determination coefficient can also be used, in this case, to analyze the
impact of a latent variable in explaining another latent variable

2
The determination coefficient R
If we designate by:
R 2
 R 2
f  i
2 e
1  Re2

The determination coefficient R 2
2
R
Where i and Re2 respectively represent values R 2 as the latent
variable is included or excluded from the estimating equation. In
2
general, values f near 0.02, 0.15 and 0.35 respectively are
interpreted as indicators that the variable has a low, medium and
significant impact in explaining the dependent variable

Average Variance Extracted (AVE)
This measure, proposed by Fornell and Lacker (1981)

seeks to measure the proportion of the total variance
of a set of indicators or measurement variables that is
explained by the latent variable associated with them.


is defined as:
AVE 
 i
 2
 i   i var ( i )
 2
Wherei is the coefficient of the measurement model equation and isi

the residue of that equation i

To interpret the meaning of AVE, it is important to remember that the

equation i of the measurement model (in reflective mode) can be
written (see 4.5) on the form:
xi  i x   i

If we calculate the variance we have:
var (xi )  2i var (x )  var ( i )

If we add the variances of the variables which belong to the same

block (that is are reflection of the latent variable), we have:
 i  i var (x )   var ( i )
var ( x )  2

If x standardized (mean zero and variance one) then simplifies to:
 i  i   var ( i )
var ( x )   2


Therefore AVE indicates the proportion of all variances of the
indicators used in a given block that is explained by latent variable
associated with this block . It is recommended that AVE is at least
equal to 0.5, ensuring that at least 50% of the variance of the
indicators is explained by the latent variable associated to these
indicators. By the very way it is defined, AVE can only be calculated
when the measurement model is reflective.

Assessment of stability and significance of the parameters

Jacknifing and Bootstraping
These techniques are based more on the variability of the sample
than in the formulation of hypotheses about the distribution of
parameter estimators . They consist in dividing the sample into sub
samples and then in the estimation of the model for all sub samples
selected . The results obtained in these estimations allow us to
analyze the significance and stability of the parameters .

4.6 - Case Study
Let us illustrate the use of Structural Equation

Models(SEM) through a case study. The sample
and data are of course hypothetical.
The questionnaires as well as the models are, by

necessity of presentation, very simplified

4.6 - Case Study
In this context we consider a hypothetical bank that we designate

by Bank X with seven Regional Directorates ( corresponding to
Nuts II of Portugal: North, Centre, Lisboa and Vale do Tejo,
Alentejo, Algarve, Açores and Madeira). Annually, this bank
estimates the evolution of its customer and employee satisfaction
and loyalty, using appropriate questionnaires.
The samples are 250 customers and 250 employees by each

Regional Directorate. The Bank now intends to adopt a model that
allows to associate these variables to the profitability of the seven
Regional Directorates

4.6 - Case Study
Structural model
This model consists of seven latent variables (represented by
circles) with:
four endogenous
1. Customer Satisfaction;
2. Customer Loyalty:
3. Employee Loyalty;
4. Profitability and;
three exogenous
1. Bank’s Image;
2. Quality of Products and Services and;
3. Employee Satisfaction

4.6 - Case Study
Figure 4.6 Profitability Model of Bank X
x1 x2 x3
 11  21  31
g 21
Bank
image
x1
g 11
Customer
Customer Loyalty
satisfaction
b 21
h1 h2
b 42
g 12  45  55
Quality of  14  24  34
y8 y9
product
and x2 y4 y5
services y1 y2 y3  87  98
 42  52  62
-
Profitability
x4 x5 x6 b 23 h4
b 43
Employee
Loyalty
Employee
g 33
h3
Satisfaction
x3  66  76
 73  83  93 y6 y7
x7 x8 x9

4.6 - Case Study
Let’s :
• Explain the structural model;
• Write the equations of the structural model;
• Associate the measurement model to the questionnaires;
• Write the equations of the measurement model;
• Estimate the model and interpret the results;
• Identify the strengths and weaknesses of the Organization;
• Analyze the model fit.

4.6 - Case Study
Structural model
According to the model:

a) Bank's image affects customer loyalty in two ways, directly and
indirectly, by way of customer satisfaction:
1. The direct impact is equal to g 21 ;
2. the indirect impact is equal to g 11 b 21 and the overall effect is
equal to the sum of both.
b) Perceived quality of products and services only affects directly

customer satisfaction. The effects on the other variables (customer
loyalty and profitability) are indirect, being exercised by way of
customer satisfaction.

4.6 - Case Study
Structural model
According to the model:

c) Employee satisfaction also influences directly only one
variable that is employee loyalty, and by means of this
variable are the effects on the other variables (Customer
loyalty and profitability);
d) Customer and employee loyalty have direct impacts on

the profitability of Bank X. According to the model,
employee loyalty affects customer loyalty.

4.6 - Case Study
2. Structural model equations
The structural model written in matrix language is:
h1  0 0 0 0 h1  g 11g 12 0  V1 

h   b 0 b 0  h  g 0 0  x1  V 
 2    21 23   2    21  x    2 
h3  0 0 0 0 h3  0 0 g 33   2  V3 
       x 3   
h 4  0 b 42 b 43 0  h 4  0 0 0  V4 

4.6 - Case Study
3-The measurement model and the questionnaire
The measurement model associates each of the seven

latent variables (not observed) with two or more
indicators (measured by the questionnaire ). Table 4.1
presents, in summary form, the indicators associated with
each latent variable, and the code of the question of the
survey that measures each of these indicators. We have a
total of 18 measurement variables or indicators : Nine are
associated with exogenous latent variables (represented
by the letter x) and nine are associated with endogenous
latent variables (represented by the letter y).

h
xxy1385297642389567))
4.6 - Case Study

Latent Question
Indicators associated N
variable
: Bank is confident in what it says and it does . (1.a)
:
Image ( ) (1.b)
:Bank that cares about its customers
Bank is innovative and forward looking (1.c)

Table 4.1 : Overall quality (2.a)
Quality of
Indicators associated Products and
: Reliability of products and services offered
(2.b)
services
with each latent : Attendance and advisory capacity
(2.c)
variable : Overall satisfaction with the bank (1.1)
Employee : Fulfilment of expectations

(1.2)
satisfaction(
: Comparison with ihe ideal bank to work
(1.3)
: Overall satisfaction with the bank (3.a)
Customer : Fulfilment of expectations

(3.b)
Satisfaction (
: Comparison with the ideal bank
(3.c)
:Likelihood to go on as customer (4.a)
Customer Loyalty
() :likelihood to recommend Bank X to colleagues and
(4.b)
friends
:Likelihood to keep working to Bank X (2.1)
Employee loyalty
() Likelihood to recommend Bank X as a company to
(2.2)
work
: Market share
Profitability ( )
: Global profitability

4.6-Case Study
3- Measurement model and the questionnaire

Table 4.2 Response average rates in Bank X customer surveys
Regional Directorates x1 x2 x3 x4 x5 x6 y1 y2 y3 y4 y5
Norte 7,7 7,5 7,8 7,7 7,5 7,9 7,4 7,5 8,0 7,6 7,4
Centro 7,3 7,1 7,4 7,1 7,2 7,5 7,8 7,6 8,0 7,2 6,7
LVT 8,0 7,8 8,0 7,6 7,7 7,9 7,4 7,4 7,7 7,2 6,7
Alentejo 7,7 7,6 7,7 7,2 7,3 7,4 7,5 7,4 7,7 7,5 7,6
Algarve 7,4 7,3 7,7 7,3 7,3 7,7 7,4 7,3 7,8 6,8 7,1
Madeira 7,5 7,5 7,7 7,4 7,4 7,5 7,6 7,4 7,6 6,8 7,0
Açores 7,6 7,6 7,9 7,5 7,4 7,7 7,5 7,4 7,5 7,8 7,7
Portu1gal 7,7 7,2 7,9 7,1 7,1 7,7 7,5 7,4 7,3 7,2 7,9

4.6-Case Study
3- Measurement Model and the questionnaire

Table 4.3 Response average rates in Bank X employee surveys
Direcções Regionais x7 x8 x9 y6 y7
Norte 7,6 7,5 7,8 7,7 7,8

Centro 7,8 7,9 7,8 7,6 7,5
LVT 7,3 7,3 7,5 7,8 7,8
Alentejo 7,7 7,6 7,8 7,4 7,7
Algarve 7,8 7,4 7,9 7,5 7,8
Madeira 7,4 7,5 7,5 7,9 7,7
Açores 7,2 7,5 7,7 7,6 7,7
Portugal 7,2 7,5 7,5

4.6 - Case Study
4-Measurement model and the equations
The measurement model shown in Figure 4.8 is of the

reflective type in which each indicator is interpreted as a
reflection of the associated latent variable

4.6 - Case Study

The equations of this measurement model take the form:
xi  i1x 1   i i  1,2,3
x i   i 2x 2   i i  4,5,6
xi  i 3x 3   i i  7,8,9
in the case of exogenous variables

4.6 - Case Study
And the form:

y i  i1h1   i i  1,2,3
y i  i 2h 2   i i  4,5
y i  i 3h 3   i i  6,7
y i  i 4h 4   i i  8,9
in the case of the endogenous variables

4.6 - Case Study
The measurement model ,written in matrix language, gives in the
case of exogenous variables:
 x1   11 00   1 
 x    00   
  
2 21   2
 x3   31 00   3 
     

 4   42  1
x 0 0 x   4 
 x   0 0  x    
 5   52   2   5 
 x6  0 62 0  x 3   6 
 x   00   
  
7 73   7
 x8   0083   8 
     
 9 
x 00  93   9 

4.6 - Case Study
In the case of the endogenous variables, we have:

 y1   14 000   1 
 y   000   
  
2 24   2
 y 3  34 000   3 
    h1   
y 0 
 4   45  h   4 
00
 y   0 00   2    
 5   55  h 3   5 
 y 6  00 66 0     6 
 y  00 0  h 4   
 7  76   7
 y8   00087   8 
     
 y 9   00097   9 

4.6 - Case Study
5- Results
The estimation of the model gives:
Indexes for the latent variables (in our example there are seven)
that are generally given on a scale of 0 to 100, or on a scale of 1
to 10;
Estimates of the structural model parameters (i.e. of the g and
b), also called impact coefficients;
Estimates of the measurement model parameters, also called
weights. In our example, we have nine parameters associated
with endogenous variables and the same number associated with
the exogenous variables;
Measures of the goodness of fit.

4.6 - Case Study
5- Results
• Suppose that the model was estimated for each of the seven
Regional Directorates of the Bank X, yielding to one (the
Directorate North) the results listed in Figure 4.9 and in Tables
4.4-4.8. Let us proceed to the interpretation of the results,
separating each one of the four types:
 indexes;
 impact coefficients;
 weights and;
 measures of the goodness of fit.

xy8976
4.6 - Case Study

Figure 4.7 - Results of applying the model to Directorate Norte of Bank X
x1 x2 x3
0,4 0,25 0,35

0,32
Bank
image 73
0,45
Customer customer
satisfaction 1,12 loyalty
72,3 71,3
0,63
0,76 0,6 0,4
Quality of 0,36 0,32 0,32
Products and y8 y9
Serv. 76,2 y4 y5
y1 y2 y3 0,49
0,38 0,3 0,32 0,5
1
Profitability
x4 x5 x6 0,3 70
0,25
Employee
1,35 loyalty.
Employee 69,4
satisfaction
70,3 0,45
0,55
0,39 0,29 0,32 y6 y7
x7 x8 x9

4.6 - Case Study
5- Results
Indices
The indices are measured on a scale from 0 to 100, settling in
general, in terms of interpreting the following subdivision:
•Negative perception (indices less than 40 );

•Positive perception (indices between 60 and 80);
•Very positive perception (indices greater than 80 ).

4.6 - Case Study
5- Results
Indices
The indices shown in Figure 4.9 correspond to mean values. In
our example the perceived quality of products and services has
the highest rate (76.2). Meanwhile, employee loyalty has the
lowest rate (69.4).
In addition to the average values, the frequency distributions

of these indices are also made available

4.6 - Case Study
5- Results
Indices
Table4.4 Frequence Distribuition of Bank X -Norte
Negative Positive Very positive Average

Perception Perception Perception Indices
(0-40) (60-80) (80-100)
Image 4,0 36,8 49,6 73
Qualidade apercebida 3,0 50,2 51,2 76,2
Satisfação do cliente 4,6 48,4 47,4 72,3
Lealdade do cliente 6,7 39,0 4,5 71,3
Satisfação do empregado 8,2 36,3 45,4 70,3
69,4
Lealdade do empregado 9,0 35,4 43,2
79
Nível de desempenho 8,6 36,0 45,1

4.6 - Case Study
Indices
Table 4.5 Indices of the Seven Regional Directorates
Norte Centro LVT Alentejo Algarve Madeira Açores
Image 73 70,9 74,8 69,3 67,5 71,4 72
Perceived quality 76,2 77 75,8 76,6 76,7 79,5 78,5
Customer satisfaction 72,3 72,5 71,7 70,9 70,8 73,6 73,6
Customer Loyalty 71,3 72 68,5 71,2 67,3 69,9 71,2
Employee satisfaction 72,3 71,5 74,6 69,8 69,4 71,3 70,3
Employee Loyalty 69,4 69,6 70,2 63,3 62,7 66,3 67,2
Profitability 70 71 70,9 70,9 69,2 70,5 70,1

4.6 - Case Study
5- Results
Impact coefficients
The impact coefficients, also known as multipliers, measure the

impact on a latent variable due to a unit change in another variable.
These impacts may be of two types:
• Direct impacts. These impacts are, as the name suggests,
provided directly by the impact coefficients;
• Total impacts. These impacts are, by definition, equal to the sum
of direct and indirect effects.

4.6 - Case Study
5- Results
Impact coefficients
Table 4.6 Estimates of total impacts on the latent variables of
Norte Regional Directorate
Satisfação Lealdade do Lealdade do Nível de
do Cliente Cliente empregado Desempenho
Image 0,450 0,824 0,519
Perceived quality 0,760 0,851 0,584
Customer satisfaction 1,120 0,706
Customer Loyalty 0,630
Employee satisfaction 0,405 1,350 0,593
Employee Loyalty 0,300 0,439

xy798615324
4.6 - Case Study

Weights
Table 4.7 Weights Associated to Latent Variable Indicators
Exogenous variables Endogenous variables
Image Customer satisfaction

0,32 0,43
0,24 0,30
0,44 0,27
Quality of products/services Customer loyalty
0,35 0,55
0,25 0,45
0,40 Employee loyalty
Employee satisfaction 0,47
0,40 0,53
0,32 Profitability
0,28 0,50
0,50

Performance
4.6 - Case Study

6- Strengths and Weaknesses
High importance
Low importance High High performance

Performance
Performance
Secondary Main strong
Strong points points
Low performance High importance
lLow importance Low performance
Secondary Main weak
Weak points Points
Importance

4.6 - Case Study
6-Strengths and Weaknesses
North Direction vs Center Direction
Image
Perceived
Performance
quality
Customer
Satisfaction
Customer
loyalty
Employee
satisfaction
Employee
Loyalty
Importance

4.6 - Case Study
7-Model Fit (Quality of results)

Table 4.8 Measures of the goodness of structural model fit
Error
Latent variables R2 (%)
margin
AVE
Image - 1,9 0,53
Perceived quality - 1,8 0,60

Customer
52,5 1,7 0,65
satisfaction
Customer loyalty 58,5 1,6 0,75
Employee
- 1,8 0,63
satisfaction
Employee loyalty 35,0 1,9 0,62
Profitability 41,5 1,5 0,70

Cap 4-Structural Equation Models

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4 –Structural Equation Models

NOVA IMS GSLC-2016-2017

NOVA IMS GSLC-2016-2017

We will adopt the term of Structural Equation Models or more often

NOVA IMS GSLC-2016-2017

The Structural Equation Models have two kinds of variables:

NOVA IMS GSLC-2016-2017

2. measurement variables. These variables are precisely the

NOVA IMS GSLC-2016-2017

SEM integrate two kinds of models:

1. Structural Model, consisting of equations that define the

2. Measurement Model, consisting of the equations that relate the

Figure 4.1-structural model with two endogenous latent variables

NOVA IMS GSLC-2016-2017

1. The direction of causality is from left to right;

2. Each exogenous variable can influence one or even two

NOVA IMS GSLC-2016-2017

3. The straight lines represent direct impacts that is coefficients

NOVA IMS GSLC-2016-2017

4. In addition to direct impacts, one can also calculate total

5. The curved lines represent the covariances between exogenous

NOVA IMS GSLC-2016-2017

6. SEM and regression analysis show important differences from

NOVA IMS GSLC-2016-2017

• The first difference respects to the influence of exogenous

NOVA IMS GSLC-2016-2017

• The second difference relates to the methodology used in the

NOVA IMS GSLC-2016-2017

Exploratory approach and confirmatory approach

• In a confirmatory approach, the model is first specified

NOVA IMS GSLC-2016-2017

Exploratory approach and confirmatory approach

However, in most cases, this distinction is not strictly adopted.

NOVA IMS GSLC-2016-2017

Figure 4.2Almost confirmatory approach

NOVA IMS GSLC-2016-2017

Three types of models can be specified :

Each of these models corresponds to a way of relating the latent

NOVA IMS GSLC-2016-2017

Figure 4.3-Reflective Model

NOVA IMS GSLC-2016-2017

Figure 4.4-Formative Model

NOVA IMS GSLC-2016-2017

Figure 4.5 Mixed Model

NOVA IMS GSLC-2016-2017

The decision about the model to be adopted

1. The objectives of the research;

NOVA IMS GSLC-2016-2017

The objectives of the research are the

NOVA IMS GSLC-2016-2017

So if our goal is to explain the variation of the

NOVA IMS GSLC-2016-2017

The choice of the model is also based on the theory

NOVA IMS GSLC-2016-2017

Conversely to the reflective case, in the formative

NOVA IMS GSLC-2016-2017

Finally, the choice of model also involves empirical data. In

NOVA IMS GSLC-2016-2017

Because of this advantage, the reflective model is the most

NOVA IMS GSLC-2016-2017

The structural model of Figure 3.1 is written on the

Or even, in matrix form:

NOVA IMS GSLC-2016-2017