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Application in MR
Finding underlying perceptual Finding perceptual dimensions of consumers
Effect of these dimensions on consumer
dimensions, finding independent decision making
Using these dimension in product positioning
constructs Deriving independent dimensions for further
multivariate analysis helpful in marketing
Exploratory Factor Analysis: Recap research

Application of Factor Analysis to a Fast-Food Restaurant

Exploratory Factor Analysis
Variables Factors
. . . analyzes the relationships among a large number Waiting Time
of variables (questions) to determine a set of common
underlying dimensions (factors). Cleanliness Service Quality

Friendly Employees
Interdependence Method

Taste

Temperature Food Quality

Freshness

Correlation Matrix of Variables After Grouping Rotated Component Matrix

Using Factor Analysis McDonalds Customer Survey
Components/Factors
Variables 1 2 3 4
V3 V8 V9 V2 V6 V7 V4 V1 V5 X4 Excellent Food Taste .912
V3 Return Policy 1.00 X9 Wide Variety of Menu Items .901
V8 In-store Service .733 1.00 X1 Excellent Food Quality .883
X6 Friendly employees .892
V9 Store Atmosphere .774 .710 1.00
X11 Courteous Employees .850
V2 Store Personnel .741 .719 .787 1.00 X12 Competent Employees .800
V6 Assortment Depth .423 .311 .429 .445 1.00 X8 Fun Place to Go .869
V7 Assortment Width .471 .435 .468 .490 .724 1.00
X2 Attractive Interior .854
X7 Appears Clean and Neat .751
V4 Product Availability .427 .428 .479 .497 .713 .719 1.00 X3 Generous Portions .896
V1 Price Level .302 .242 .372 .427 .281 .354 .470 1. 00 X5 Good Value for the Money .775
V5 Product Quality .307 .240 .326 .406 .325 .378 .472 .765 1.00 X10 Reasonable Prices .754

Note: Loadings sorted by size and smaller loadings (<.3) removed.

Shaded areas represent variables likely to be grouped together by factor analysis.

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Types of Factor Analysis Brief Aside in Path Analysis

1. Exploratory Factor Analysis (EFA) = Is used to discover Local (i.e. conditional independence): Given the factor,
the factor structure of a construct and examine its observed variables are independent of one another.
reliability. It is data driven. Cov( Xj ,Xk | F ) = 0

2. Confirmatory Factor Analysis (CFA) = Is used to confirm

X1 e1 Xs are only
the fit of the hypothesized factor structure to the 1 related to each
observed (sample) data. It is theory driven. 2 other through their
F X2 e2 common
3
relationship with F.
X3 e3

Orthogonal One Factor Model

Total variance of any indicator variable can be
X1 = 1F + e1 decomposed into two components:
X2 = 2F + e2 Variance that is common with general intelligence, F and is
given by square of pattern loading Commonality of the

indicator with the common factor
Xm = mF + em
The variance that is with the specific factor e which the
difference between the variance of the variable and the
Coefficients () are pattern loadings
commonality Unique/specific/error variance
The variable is called the indicator or measure of F. F is responsible for
correlation between the indicators. It is also referred as common or latent
factor or an unobservable construct.

Key Concepts m factors orthogonal model

F is latent (i.e.unobserved, underlying) variable

m factors, n observed variables
Xs are observed (i.e. manifest) variables X1 = 11F1 + 12F2 ++ 1mFm + e1
X2 = 21F1 + 22F2 ++ 2mFm + e2
ej is measurement error for Xj. .
Xn = n1F1 + n2F2 ++ nmFm + en
j is the loading for Xj.

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Picture an eigenvector cutting through some Now lets single out two
data points

This distance is the

residual.

This observation is right on the line.

So it is predicted perfectly!

x - axis
x - axis

This also works for three dimensional space But observations may still cluster
Variable A
Variable A
Some are far
Each participant gets
three scores
One for each variable
Variable
B Variable
Each observation is B
based on these three
coordinates
Variable C Some
are near

Variable C

But two eigenvectors seem to work Factor Matrix 11 12 1m

22 2 m
Variable A 21

Columns represent derived factors
Rows represent input variables n1
n1 nm nxm
Loadings represent degree to which each of the variables
correlates with each of the factors
Variable
B Loadings range from -1 to 1
Inspection of factor loadings reveals extent to which each of
the variables contributes to the meaning of each of the
factors.
High loadings provide meaning and interpretation of factors.

Variable C

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Communalities Communality of Xj
The communality of Xj is the proportion of the variance of Xj Common part of variance
explained by the m common factors: covariance between Xj and the part of Xj due to the underlying
factors
m var(Xj) = communality +uniqueness
Comm( X j ) 2
ij For standardized Xj: 1 = communality +uniqueness
i1
When using correlation matrices:
uniqueness = 1 communality
Recall one factor model: What was the interpretation of j2? Can think of uniqueness = var(ej)
Comm( X j ) 2j If Xj is informative, communality is high
In other words, it can be thought of as the sum of squared multiple- If Xj is not informative, uniqueness is high
correlation coefficients between the Xj and the factors.
Intuitively: variables with high communality share more
in common with the rest of the variables.
Uniqueness(Xj) = 1 - Comm(Xj)

Assumptions of EFA Orthogonal Factor Rotation

Multicollinearity
Unrotated Factor II

Assessed using MSA (measure of sampling adequacy). +1.0

Rotated Factor II

The MSA is measured by the Kaiser-Meyer-Olkin (KMO) statistics. As V1

a measure of sampling adequacy, the KMO predicts if data are likely to +.50

factor well based on correlation and partial correlation. KMO can be V2

used to identify which variables to drop from the factor analysis because
they lack multicollinearity.
There is a KMO statistic for each individual variable, and their sum is
Unrotated Factor I
the KMO overall statistic. KMO varies from 0 to 1.0. Overall KMO
should be .50 or higher to proceed with factor analysis. If it is not, -1.0 -.50 0 +.50 +1.0
remove the variable with the lowest individual KMO statistic value one V3
at a time until KMO overall rises above .50, and each individual variable V4

KMO is above .50. -.50

Rotated Factor I

Homogeneity of sample factor solutions V5

-1.0

Oblique Factor Rotation

Unrotated Factor II
Number of Factors?
Orthogonal Rotation: Factor II

+1.0
A Priori Criterion Select the number of factors
+.50
V1
Oblique Rotation: Factor II based on prior knowledge
V2
Latent Root Criterion (eigenvalue) Amount of
variance represented by a single factor. Rule of
Unrotated Factor I Thumb = eigenvalue >= 1.0
-1.0 -.50 0 +.50 +1.0 Percentage of Variance Amount of variance
V4
V3

Oblique Rotation:
represented by all factors combined. Rule of
-.50 Factor I
Thumb = Minimum of 60 percent
Scree test Plot of eigenvalues.]
V5

Orthogonal Rotation: Factor I

-1.0

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Description of Employee Survey Variables

Which Factor Loadings Are Significant?
Variable Description Variable Type
Work Environment Measures
X1 I am paid fairly for the work I do. Metric
X2 I am doing the kind of work I want. Metric
X3 My supervisor gives credit an praise for work well done. Metric
X4 There is a lot of cooperation among the members of my work group. Metric
X5 My job allows me to learn new skills. Metric

Traditional criteria: >= 0.30 (higher = better)

X6
X7
X8
My supervisor recognizes my potential.
My work gives me a sense of accomplishment.
My immediate work group functions as a team.
Metric
Metric
Metric

X9 My pay reflects the effort I put into doing my work. Metric

Sample size: larger sample sizes = lower X10

X11
My supervisor is friendly and helpful.
The members of my work group have the skills and/or training
Metric

to do their job well. Metric

X12 The benefits I receive are reasonable. Metric
loadings but nothing below 0.30 Relationship Measures
X13 Loyalty I have a sense of loyalty to McDonald's restaurant. Metric
X14 Effort I am willing to put in a great deal of effort beyond that
expected to help McDonald's restaurant to be successful. Metric
X15 Proud I am proud to tell others that I work for McDonald's restaurant. Metric
Classification Variables
X16 Intention to Search Metric
X17 Length of Time an Employee Nonmetric
X18 Work Type = Part-Time vs. Full-Time Nonmetric
X19 Gender Nonmetric
X20 Age Metric
X21 Performance Metric
All rights reserved; Prentice-
Hall, McGraw-Hill/Irwin, & Wiley,

Description of Customer Survey Variables

Variable Description Variable Type
Restaurant Perceptions
X1 Excellent Food Quality Metric
X2 Attractive Interior Metric
X3 Generous Portions Metric
X4 Excellent Food Taste Metric
X5 Good Value for the Money Metric
X6 Friendly Employees Metric
X7 Appears Clean & Neat Metric
X8 Fun Place to Go Metric
X9 Wide Variety of menu Items Metric
X10 Reasonable Prices Metric
X11 Courteous Employees Metric
X12 Competent Employees Metric
Selection Factor Rankings
X13 Food Quality Nonmetric
X14 Atmosphere Nonmetric
X15 Prices Nonmetric
X16 Employees Nonmetric
Relationship & Classification Variables
X17 Satisfaction Metric
X18 Likely to Return in Future Metric
X19 Recommend to Friend Metric
X20 Frequency of Eating at . . . Nonmetric
X21 Who Saw Ad Nonmetric
X22 Which Ad Viewed Nonmetric
X23 Ad Rating Metric
X24 Length of Time a Customer Metric
X25 Gender Nonmetric
X26 Age Metric
X27 Income Metric
X28 Competitor Nonmetric