Factor Analysis

© 2007 Prentice Hall

 Chapter Outline

1) Overview

2) Basic Concept

3) Factor Analysis Model

4) Statistics Associated with Factor Analysis

 Chapter Outline
5) Conducting Factor Analysis
i. Problem Formulation
ii. Construction of the Correlation Matrix
iii. Method of Factor Analysis
iv. Number of of Factors
v. Rotation of Factors
vi. Interpretation of Factors
vii. Factor Scores
viii. Model Fit
 Factor Analysis
• Factor analysis is a class of procedures used for data
reduction and summarization.
• It is an interdependence technique: no distinction
between dependent and independent variables.

• Factor analysis is used:

– To identify underlying dimensions, or factors, that
explain the correlations among a set of variables.
– To identify a new, smaller, set of uncorrelated variables
to replace the original set of correlated variables.
 Factors Underlying Selected
Psychographics and Lifestyles

Fig. 19.1
Factor 2

Football Baseball

Evening at home
Factor 1
Go to a party
Home is best place

Plays
Movies
 Factor Analysis Model
Each variable is expressed as a linear combination of factors.
The factors are some common factors plus a unique factor. The
factor model is represented as:

Xi = Ai 1F1 + Ai 2F2 + Ai 3F3 + . . . + AimFm + ViUi

 
where
 
Xi = i th standardized variable
Aij = standardized mult reg coeff of var i on common factor j
Fj = common factor j
Vi = standardized reg coeff of var i on unique factor i
Ui = the unique factor for variable i
m = number of common factors
 Factor Analysis Model
• The first set of weights (factor score coefficients)
are chosen so that the first factor explains the
largest portion of the total variance.

• Then a second set of weights can be selected, so

that the second factor explains most of the residual
variance, subject to being uncorrelated with the
first factor.

• This same principle applies for selecting additional

weights for the additional factors.
 Factor Analysis Model
The common factors themselves can be
expressed as linear combinations of the
observed variables.

Fi = Wi1X1 + Wi2X2 + Wi3X3 + . . . + WikXk

 
Where:
  Fi = estimate of i th factor
Wi= weight or factor score coefficient
k = number of variables
Statistics Associated with Factor Analysis
• Bartlett's test of sphericity. Bartlett's test of
sphericity is used to test the hypothesis that the
variables are uncorrelated in the population (i.e.,
the population corr matrix is an identity matrix)

• Correlation matrix. A correlation matrix is a lower

triangle matrix showing the simple correlations, r,
between all possible pairs of variables included in
the analysis. The diagonal elements are all 1.
Statistics Associated with Factor Analysis
• Communality. Amount of variance a variable
shares with all the other variables. This is the
proportion of variance explained by the common
factors.
• Eigenvalue. Represents the total variance
explained by each factor.
• Factor loadings. Correlations between the
variables and the factors.
• Factor matrix. A factor matrix contains the factor
loadings of all the variables on all the factors
 Statistics Associated with Factor Analysis

• Factor scores. Factor scores are composite scores

estimated for each respondent on the derived factors.
• Kaiser-Meyer-Olkin (KMO) measure of sampling
adequacy. Used to examine the appropriateness of factor
analysis. High values (between 0.5 and 1.0) indicate
appropriateness. Values below 0.5 imply not.
• Percentage of variance. The percentage of the total
variance attributed to each factor.
• Scree plot. A scree plot is a plot of the Eigenvalues against
the number of factors in order of extraction.
 Example: Factor Analysis
• HATCO is a large industrial supplier
• A marketing research firm surveyed 100
HATCO customers, to investigate the
customers’ perceptions of HATCO
• The marketing research firm obtained data on
7 different variables from HATCO’s customers
• Before doing further analysis, the mkt res firm
ran a Factor Analysis to see if the data could
be reduced
 Example: Factor Analysis
• In a B2B situation, HATCO wanted to know the
perceptions that its customers had about it

• The mktg res firm gathered data on 7 variables

1. Delivery speed
2. Price level
3. Price flexibility
4. Manufacturer’s image
5. Overall service
6. Salesforce image
7. Product quality
• Each var was measured on a 10 cm graphic rating scale

Poor Excellent
 Conducting Factor Analysis
Fig. 19.2
Problem formulation

Construction of the Correlation Matrix

Method of Factor Analysis

Determination of Number of Factors

Rotation of Factors

Interpretation of Factors

Calculation of
Factor Scores

Determination of Model Fit

 Formulate the Problem
• The objectives of factor analysis should be identified.

• The variables to be included in the factor analysis

should be specified. The variables should be
measured on an interval or ratio scale.

• An appropriate sample size should be used. As a

rough guideline, there should be at least four or five
times as many observations (sample size) as there
are variables.
 Construct the Correlation Matrix

• The analytical process is based on a matrix of correlations

between the variables.

• If the Bartlett's test of sphericity is not rejected, then factor

analysis is not appropriate.

• If the Kaiser-Meyer-Olkin (KMO) measure of sampling

adequacy is small, then the correlations between pairs of
variables cannot be explained by other variables and factor
analysis may not be appropriate.
Determine the Method of Factor Analysis
• In Principal components analysis, the total variance in
the data is considered.
-Used to determine the min number of factors that will
account for max variance in the data.

• In Common factor analysis, the factors are estimated

based only on the common variance.
-Communalities are inserted in the diagonal of the
correlation matrix.
-Used to identify the underlying dimensions and when the
common variance is of interest.
 Determine the Number of Factors

• A Priori Determination. Use prior knowledge.

 
• Determination Based on Eigenvalues. Only factors with
Eigenvalues greater than 1.0 are retained.

• Determination Based on Scree Plot. A scree plot is a plot

of the Eigenvalues against the number of factors in order of
extraction. The point at which the scree begins denotes the
true number of factors.

• Determination Based on Percentage of Variance.

 Rotation of Factors

• Through rotation the factor matrix is transformed into a

simpler one that is easier to interpret.

• After rotation each factor should have nonzero, or

significant, loadings for only some of the variables. Each
variable should have nonzero or significant loadings with
only a few factors, if possible with only one.

• The rotation is called orthogonal rotation if the axes are

maintained at right angles.
 Rotation of Factors
• Varimax procedure. Axes maintained at right angles

-Most common method for rotation.

-An orthogonal method of rotation that minimizes the

number of variables with high loadings on a factor.

-Orthogonal rotation results in uncorrelated factors.

• Oblique rotation. Axes not maintained at right angles

-Factors are correlated.

-Oblique rotation should be used when factors in the

population are likely to be strongly correlated.
 Interpret Factors

• A factor can be interpreted in terms of the

variables that load high on it.

• Another useful aid in interpretation is to plot

the variables, using the factor loadings as
coordinates. Variables at the end of an
axis are those that have high loadings on
only that factor, and hence describe the
factor.
 Calculate Factor Scores

The factor scores for the i th factor may be

estimated as follows:
 
Fi = Wi1 X1 + Wi2 X2 + Wi3 X3 + . . . + Wik Xk
 Determine the Model Fit

• The correlations between the variables can be

deduced from the estimated correlations between
the variables and the factors.

• The differences between the observed

correlations (in the input correlation matrix) and
the reproduced correlations (estimated from the
factor matrix) can be examined to determine
model fit. These differences are called residuals.
 Another Example of Factor Analysis
• To determine benefits from toothpaste
• Responses were obtained on 6 variables:
V1: It is imp to buy toothpaste to prevent cavities
V2: I like a toothpaste that gives shiny teeth
V3: A toothpaste should strengthen your gums
V4: I prefer a toothpaste that freshens breath
V5: Prevention of tooth decay is not imp
V6: The most imp consideration is attractive teeth
• Responses on a 7-pt scale (1=strongly
disagree; 7=strongly agree)
 Another Example of Factor Analysis
Table 19.1 RESPONDENT
NUMBER V1 V2 V3 V4 V5 V6
1 7.00 3.00 6.00 4.00 2.00 4.00
2 1.00 3.00 2.00 4.00 5.00 4.00
3 6.00 2.00 7.00 4.00 1.00 3.00
4 4.00 5.00 4.00 6.00 2.00 5.00
5 1.00 2.00 2.00 3.00 6.00 2.00
6 6.00 3.00 6.00 4.00 2.00 4.00
7 5.00 3.00 6.00 3.00 4.00 3.00
8 6.00 4.00 7.00 4.00 1.00 4.00
9 3.00 4.00 2.00 3.00 6.00 3.00
10 2.00 6.00 2.00 6.00 7.00 6.00
11 6.00 4.00 7.00 3.00 2.00 3.00
12 2.00 3.00 1.00 4.00 5.00 4.00
13 7.00 2.00 6.00 4.00 1.00 3.00
14 4.00 6.00 4.00 5.00 3.00 6.00
15 1.00 3.00 2.00 2.00 6.00 4.00
16 6.00 4.00 6.00 3.00 3.00 4.00
17 5.00 3.00 6.00 3.00 3.00 4.00
18 7.00 3.00 7.00 4.00 1.00 4.00
19 2.00 4.00 3.00 3.00 6.00 3.00
20 3.00 5.00 3.00 6.00 4.00 6.00
21 1.00 3.00 2.00 3.00 5.00 3.00
22 5.00 4.00 5.00 4.00 2.00 4.00
23 2.00 2.00 1.00 5.00 4.00 4.00
24 4.00 6.00 4.00 6.00 4.00 7.00
25 6.00 5.00 4.00 2.00 1.00 4.00
26 3.00 5.00 4.00 6.00 4.00 7.00
27 4.00 4.00 7.00 2.00 2.00 5.00
28 3.00 7.00 2.00 6.00 4.00 3.00
29 4.00 6.00 3.00 7.00 2.00 7.00
30 2.00 3.00 2.00 4.00 7.00 2.00
Correlation Matrix
Table 19.2
Results of Principal Components Analysis
Table 19.3

Bartlett’s Test
Apprx. chi-square=111.3, df=15, significance=0.00
Kaiser-Meyer-Olkin msa=0.660
Communalities
Variables Initial Extraction
V1 1.000 0.926
V2 1.000 0.723
V3 1.000 0.894
V4 1.000 0.739
V5 1.000 0.878
V6 1.000 0.790

Initial Eigen values

Factor Eigen value % of variance Cumulat. %
1 2.731 45.520 45.520
2 2.218 36.969 82.488
3 0.442 7.360 89.848
4 0.341 5.688 95.536
5 0.183 3.044 98.580
6 0.085 1.420 100.000
Results of Principal Components Analysis

Table 19.3, cont.

Results of Principal Components Analysis

Table 19.3, cont.

Results of Principal Components Analysis

Table 19.3, cont.

-The lower-left triangle is correlation matrix;

-The diagonal has the communalities;
-The upper-right triangle has the residuals between the
observed correlations and the reproduced correlations.
 Scree Plot
Fig. 19.3
3.0

2.5

2.0
Eigenvalue

1.5

1.0

0.5

0.0
1 2 3 4 5 6
Component Number
Factor Matrix Before and After Rotation
Fig. 19.4

Factors Factors
Variables 1 2 Variables 1 2
1 X 1 X
2 X X 2 X
3 X 3 X
4 X X 4 X
5 X X 5 X
6 X 6 X
(a) (b)
High Loadings High Loadings
Before Rotation After Rotation
 Factor Loading Plot
Fig. 19.5
Rotated Component Matrix

Component Plot in Component

Rotated Space 1 2
1.0 V4
  V6
V2
V1 0.962 -2.66E-02
0.5
V2 -5.72E-02 0.848
Component 2

V1
0.0  V3 0.934 -0.146
 V5 V3
 V4 -9.83E-02 0.854
-0.5
V5 -0.933 -8.40E-02
V6 8.337E-02 0.885
-1.0
-1.0 -0.5 0.0 0.5 1.0
Component 1