Partial Least Squares - Structural Equation Modeling (PLS - SEM)

Using SmartPLS 3.0

Associate Professor Dr. S. Mostafa Rasoolimanesh

School of Hospitality, Tourism, and Events
Taylor’s University
11th June – 2nd July, 2020
 Outline of Course

• Why we prefer SEM • Criteria to

as a second assess
generation analysis • Higher-order
measurement construct

Structural model
Assessment of measurement model and

Assessment of higher-order, mediator

and moderator
technique to first
Description of PLS-SEM
generation? model (outer assessment
• What are the model)
characteristics of • Assessment of • Assessment
SEM? of mediator
reflective ,
• What are the
components of formative and
SEM? composite • Assessment
• Inner model and measurement of moderator
outer model model
• Reflective vs. • Assessment of
Formative
structural
• CB-SEM vs. PLS-SEM
• Reasons to choose
model
PLS
 WHY SEM
• Structural Equation Modeling (SEM) called as the second generation data
analysis techniques (Bagozzi & Fornell, 1982).

• Contrary to first generation statistical tools such as regression, SEM enables

researchers to answer a set of interrelated research questions in by
modeling the relationships among multiple independent and dependent
constructs simultaneously (Gerbing & Anderson, 1988).

• This capability for simultaneous analysis differs greatly from most first
generation regression models such as linear regression, LOGIT, ANOVA, and
MANOVA, which can analyze only one layer of linkages between
independent and dependent variables at a time (Gefen et al., 2000, p.3&4)
 WHY SEM

• SEM has potential advantages over linear regression models that

make SEM a priori the methods of choice in analyzing path
diagrams when these involve latent variables with multiple
indicators (Gefen et al., 2011).

• Latent variables are theoretical constructs that cannot be

measured directly (such as beliefs, intentions, and feelings); they
could only be measured indirectly through those characteristics
we attribute to them. (Gefen et al., 2011).
 WHY SEM
• Even when the constructs of interest can be
measured with limited ambiguity (such as price or
weight),there are unique advantages to SEM over
linear regression in that SEM allows the creation
and estimation of models with multiple dependent
variables and their interconnections at the same
time (Gefen et al., 2011)
 WHAT IS SEM
 Structural Equations Modeling . . . is a family of statistical models
that seek to explain the relationships among multiple variables
simultaneously.
 It examines the “structure” of interrelationships expressed in a
series of equations, similar to a series of multiple regression
equations.
 These equations depict all of the relationships among constructs
(the dependent and independent variables) involved in the analysis.
 Constructs are unobservable or latent factors that are represented
by multiple variables.
 Exogenous vs. Endogenous LV
• Exogenous constructs are the latent, multi-item equivalent of
independent variables. They use a linear combination of
measures to represent the construct, which acts as an
independent variable in the model. The term exogenous is
used to describe latent constructs that do not have any
structural path relationships pointing at them.
• Endogenous constructs are the latent, multi-item equivalent
to dependent variables. These constructs are theoretically
determined by factors within the model. The term
endogenous describes latent target constructs in the
structural model that are explained by other constructs via
structural model relationships.
 Inner model vs. Outer model

• A structural equation model consists of different sub-models. The structural

model (or inner model) comprises the relationships between the LVs, which
has to be derived from theoretical considerations. (Structural theory)
• For each of the LVs within the structural equation model, a measurement
model (or outer model) has to be defined. These models embody the
relationship between the empirically observable indicator variables and the
LVs. The measurement model itself needs to be grounded on an auxiliary
theory. (Measurement theory)
• The combination of structural model and measurement models leads to a
complete structural equation model.
 Inner model vs. Outer model

• In the structural model— typically referred to as the inner model in the

PLS-SEM only permits recursive relationships in the structural model (i.e., no
causal loops). Therefore, the structural paths between the latent constructs
can only head in a single direction. (Hair et al., 2011, p.141)

• The measurement models include the unidirectional predictive relationships

between each latent construct and its associated observed indicators.
Multiple relations are not permitted, therefore indicator variables are
associated with only a single latent construct. (Hair et al., 2011, p.141)
 Inner Model

Outer Model Outer Model

Exogenous Endogenous
 Reflective vs. Formative

• Reflective indicators are seen as functions of the latent

construct, and changes in the latent construct are
reflected in changes in the indicator (manifest) variables.
• Reflectiveindicators are represented as single headed
arrows pointing from the latent construct outward to the
indicator variables; the associated coefficients for these
relationships are called outer loadings in PLS-SEM.
 Reflective vs. Formative
• Reflective indicators are considered “effects” of the LVs. In other words, the LVs
cause or form the indicators(Chin 1998b). All reflective indicators measure the
same underlying phenomenon, namely the LV. Whenever the LV changes, all
reflective indicators should change accordingly, which refers to internal
consistency (Bollen1984). Consequently, all reflective indicators should
correlate positively. (Urbach & Ahlemann, 2010, p. 11)

• Direction of causality is from construct to measure

• Indicators expected to be correlated
• Dropping an indicator from the measurement model does not alter the
meaning of the construct
• Takes measurement error into account at the item level
• Similar to factor analysis
• Typical for management and social science researches
 Reflective vs. Formative

• In contrast, formative indicators are assumed to cause a latent

construct, and changes in the indicators determine changes in the
value of the latent construct (Diamantopoulos & Winklhofer 2001;
Diamantopoulos, Riefler & Roth 2008).
• Formative indicators are represented by single-headed arrows
pointing toward the latent construct inward from the indicator
variables; the associated coefficients for these formative
relationships are called outer weights in PLS-SEM.
 Reflective vs. Formative
• Formative indicators cause or form the LV by definition (Chin
1998b). These indicators are viewed as the cause variables that
reflect the conditions under which the LV is realized. Since there is
no direct causal relationship between the LV and the indicators (but
vice versa), formative indicators may even be inversely related to
each other. In other words, formative indicators of the same LV do
not necessarily have to correlate (Bollen 1984; Rossiter 2002).
Direction of causality is from measure to construct (Urbach &
Alemann, 2010, p. 11)
• Indicators are not expected to be correlated
• Dropping an indicator from the measurement model may alter the
meaning of the construct
• No such thing as internal consistency reliability
• Based on multiple regression
• Need to take care of multicollinearity
 Reflective vs. Formative
• For example, let us assume that the latent variable “Satisf” (“satisfaction with
a meal”) is measured using the two following question-statements:
o “I am satisfied with the main course” and
o “I am satisfied with the dessert”.
• Here, the meal comprises the main course, say, filet mignon; and a dessert, a
fruit salad. Both main course and dessert make up the meal (i.e., they are
part of the same meal) but their satisfaction indicators are not expected to
be highly correlated with each other. The reason is that some people may like
the main course very much, and not like the dessert. Conversely, other
people may be vegetarians and hate the main course, but may like the
dessert very much.
 Reflective vs. Formative
Albers, 2010

• Reflective • Formative
I feel well in this The service is good
hotel

I’m always happy to The personnel are

Satisfaction Satisfaction
stay in this hotel friendly

I recommend this The room is well

hotel to others equipped
 Reflective vs. Formative

• Researchers using PLS-SEM often refer to reflective measurement

models (i.e., scales) as Mode A, and formative measurement
models (i.e., indices) are labeled Mode B (e.g., Rigdon, Ringle, and
Sarstedt 2010). (Hair et al., 2011, p.141)

• PLS-SEM can handle both formative and reflective measurement

models.
Reflective vs. Formative
Reflective vs. Formative
Reflective vs. Formative
Podsakoff et al., (2006)
Reflective vs. Formative (composite)
Reflective vs. Formative (composite)
Falk & Miller (1992); Sanchez-Franco & Roldan(2014)
Reflective vs. Formative (composite)
Reflective vs. Formative (composite)
Henseler (2017)
Henseler (2017)
 Some points:
(Rasoolimanesh & Ali, 2018)

• In reflective measurement model, each indicator

includes a common variance from the construct and an
error term, which is supposed to be uncorrelated with
the other indicators and the errors in the model
(Henseler et al., 2017).
• The measurement error in formative constructs is taken
into consideration on the construct level, and represents
the missing indicators, which can cause to form the
construct, but are not included in the model by the
researcher (Diamantopoulos, 2006).
 Some points:
(Rasoolimanesh & Ali, 2018)

• Composite constructs are not portraying cause and effect, rather the indicators
represent the ingredients/composition of the construct (Henseler, 2017). Hence,
composite constructs are artifacts and error free constructs.
• Composite constructs do not necessarily represent a conceptual unity, and only
can be a combination of some indicators to design or represent a new entity in the
model (Bollen & Bauldry, 2011; Henseler et al., 2016), and that this entity can be
changed from one study to another (Sarstedt et al., 2016). For instance, socio-
economic characteristics of respondent in one study can be defined by age,
income, and education level, but in another study more indicators can be involved.
Therefore, socio-economic characteristics is a composite construct with a different
conceptualisation in different studies (Henseler et al., 2016; Sarstedt et al., 2016).
• However, in some circumstances, the indicators of a composite construct can also
represent a conceptual unity, in particular, when a higher order construct with a
few number of dimensions have to be established. For instance, the concepts of
residents’ perceptions toward tourism development consists of economic, social,
cultural, and environmental perceptions, and these dimensions make up the
perception construct (Rasoolimanesh et al., 2018).
 PLS-SEM vs. CB-SEM
(Rasoolimanesh & Ali, 2018)

• Structural models as applied in the social sciences only began appearing in the
1970s (Bollen 1989; Jöreskog 1973) with their increasing application paralleling the
availability of software (Arbuckle 2010; Bentler 1995; Jöreskog and Sörbom 1996),
all of which executed Covariance Based-SEM (CB-SEM).
• While Herman Wold—who was also the academic advisor of Karl Jöreskog, one of
the LISREL CB-SEM software package developers—originated variance-based SEM or
PLS-SEM in the 1970s (Wold 1973, 1975), software packages executing PLS-SEM
were developed much later (e.g., PLS Graph, Chin, 1990s, SmartPLS; Ringle, Wende,
and Will, 2005, and WarpPLS; Kock, 2009).
• Jöreskog and Wold (1982) viewed CB-SEM and PLS-SEM as complementary rather
than competitive statistical methods. More specifically, Wold (1982) recognized
CB-SEM’s potential for the social sciences but was concerned about the
informational and distributional requirements that he regarded as unrealistic for
empirical research. He also believed that estimation and description were
emphasized too much and prediction too little (Dijkstra 2010). (Hair et al., 2011, p.
140)
 PLS-SEM vs. CB-SEM
(Rasoolimanesh & Ali, 2018)

• Partial least squares is a composite-based form of SEM contrary to CB-SEM

that is known as the factor-based SEM approach (Rigdon et al., 2017).
• Both PLS-SEM and CB-SEM are applied when unobserved variables are
involved in the model, but they employ different algorithms and have
different objectives (Richter et al., 2016).
• PLS-SEM focuses on maximization of explained variance of endogenous
constructs (Rigdon et al., 2017), and is more a prediction-oriented approach
(Cepeda et al., 2016; Shmueli, 2016), however, CB-SEM represents a
construct as a common factor and focuses on minimizing the discrepancy
between the model-implied covariance matrix and the empirical covariance
matrix (Rigdon et al., 2017).
 PLS-SEM vs. CB-SEM
• PLS focuses on maximizing the variance explained for all
endogenous constructs in the model, whereas CBSEM determines
the model parameters to reproduce an empirically observed
covariance matrix.
• PLS is therefore better suited for situations in which the
researcher wants to predict the latent variables in the model or
identify relationships between them (e.g., in the early stages of
theory development), while CBSEM should be the method of
choice when the focus lies on confirming theoretically assumed
relationships. (Reinartz et al., 2009, p.333)
 PLS-SEM vs. CB-SEM
(Rasoolimanesh & Ali, 2018)

• The CB-SEM is called common factor based approach and it only focuses on
the covariance between the indicators of each construct, and the score of
constructs are not considered or needed in the estimation of parameters
(Rigdon et al., 2017). The score of constructs (score for each respondents)
can be an infinite set of values to create common variance, which is called
factor indeterminacy in CB-SEM (Rigdon, 2012, 2016).
• The application of PLS-SEM is particularly increasing, due to the proven
limitations of CB-SEM in instances where 1) the objective of research is
prediction or theory development, 2) the proposed relationships are not
sufficiently explored, and 3) the model includes different types of constructs
such as formative, composite, and reflective measurement models (e.g., Hair
et al., 2017a; Rigdon, 2016; Sarstedt et al., 2017).
 PLS-SEM vs. CB-SEM
• Overall, PLS can be an adequate alternative to CB-SEM if the problem
has the following characteristics (Chin 1998; Chin & Newsted 1999):
• The phenomenon to be investigated is relatively new and measurement
models need to be newly developed,
• Prediction is more important than parameter estimation.
• The structural equation model is complex with a large number of LVs
and indicator variables, (more than 6 constructs or 50 items)
• Relationships between the indicators and LVs have to be modelled in
different modes (i.e., formative and reflective measurement models),
• The conditions relating to sample size, independence, or normal
distribution are not met.
 PLS-SEM vs. CB-SEM
• Researchers’ arguments for choosing PLS as the statistical means
for testing structural equation models (Urbach & Ahlemann, 2010)
are as follows:
• PLS makes fewer demands regarding sample size than other methods.
(ten times rule, at least 100 )
• PLS does not require normal-distributed input data.
• PLS can be applied to complex structural equation models with a large
number of constructs. (more than 6 constructs and 50 items)
• PLS is able to handle both reflective and formative constructs.
• PLS is better suited for theory development than for theory testing.
• PLS is especially useful for prediction
• PLS can be applied in various number of associated indicators for LVs( 1 to
20 and more)
PLS-SEM vs. CB-SEM
 PLS-SEM vs. CB-SEM

• Covariance based
• AMOS, http://www-
01.ibm.com/software/analytics/spss/products/statistics/amos/
• LISREL, http://www.ssicentral.com/
• MPLUS, http://www.statmodel.com/
• EQS, http://www.mvsoft.com/
• SEPATH, http://www.statsoft.com/textbook/structural-
equation-modeling/
 PLS-SEM vs. CB-SEM
• Variance Based SEM
• Smart PLS, http://www.smartpls.de/
• WarpPLS, http://www.scriptwarp.com/warppls/
• ADANCO, http://www.composite-modeling.com/
• XLSTAT, https://www.xlstat.com/en/
• PLS Graph, http://www.plsgraph.com/
• Visual PLS, http://fs.mis.kuas.edu.tw/~fred/vpls/start.htm
• PLS-GUI, http://www.rotman-
baycrest.on.ca/index.php?section=84
• SPAD-PLS, http://spadsoft.com/content/blogcategory/15/34/
• GeSCA, http://www.sem-gesca.org/
Assessment of Measurement Model
Ali, F., Rasoolimanesh, S.M., Sarstedt, M., Ringle, C.M. and Ryu, K. (2018), "An assessment of the use of partial least
squares structural equation modeling (PLS-SEM) in hospitality research", International Journal of Contemporary
Hospitality Management, Vol. 30 No. 1, pp. 514-538. https://doi.org/10.1108/IJCHM-10-2016-0568
Hair, J.F., Risher, J.J., Sarstedt, M. and Ringle, C.M. (2019), "When to use and how to report the results of
PLS-SEM", European Business Review, Vol. 31 No. 1, pp. 2-24. https://doi.org/10.1108/EBR-11-2018-0203
 Assessing of Model in PLS
• Elements of the model are separately evaluated
based on certain quality criteria's:
• Reflective measurement models
• Formative / Composite measurement models
• Structural model
Measurement Model Structural Model
 Reliability  Assessment of effects
 Validity  Assessment of prediction quality

Validation of the measurement models is a requirement

for assessing the structural model
 Reflective Measurement Models

• Indicator reliability
• Squared loadings
• Internal Consistency
• Composite reliability
• Cronbach’s alpha
• rho_A
• Convergent validity
• Average Variance Extracted (AVE)
• Discriminant Validity
• Fornell-Larcker Criterion
• Cross loadings
• HTMT ratio
 Indicator Reliability

• The indicator reliability denotes the indicator variance that is

explained by the latent variable
• The value is between 0 and 1.
• When indicator and latent variables are standardized, the
indicator reliability equals the squared indicator loading
• Normally should be at least 0.25 to 0.5
• However, reflective indicators should be eliminated from
measurement models if their loadings within the PLS model are
smaller than 0.4 (Hulland 1999, p. 198).
Indicator Reliability
 Internal Consistency (Cronbach’s α)

N = number of indicators assigned to the factor

2i = variance of indicator i
2t = variance of the sum of all assigned indicators’ scores

• Measures the reliability of indicators

• The value is between 0 and 1
• In early phase 0.7 acceptable, but in later phases
values of 0.8 or 0.9 is more desirable (Nunnally, 1978)
 Internal Consistency (Dhillon-Goldstein Rho)

i = loadings of indicator i of a latent variable

i = measurement error of indicator i
j = flow index across all reflective measurement model

• Measures the reliability of indicators

• The value is between 0 and 1
• Composite reliability should be 0.7 or higher to indicate
adequate convergence or internal consistency (Gefen et
al., 2000).
Average Variance Extracted (AVE)

2i = squared loadings of indicator i of a latent variable

var(i ) = squared measurement error of indicator i

• Comparable to the proportion of variance explained

in factor analysis
• Value ranges from 0 and 1.
• AVE should exceed 0.5 to suggest adequate
convergent validity (Bagozzi & Yi, 1988; Fornell &
Larcker, 1981).
 Discriminant Validity
• Fornell & Larcker (1981) criterion
• A latent variable should explain better the variance of its own
indicators than the variance of other latent variables
• The AVE of a latent variable should be higher than the squared
correlations between the latent variable and all other variables.
(Chin, 2010; Chin 1998; Fornell & Larcker, 1981).
• Cross loadings
• The loadings of an indicator on its assigned latent variable should be higher
than its loadings on all other latent variables.
• Heterotrait-Monotrait ratio
• The value should be lower than 0.9 or more conservative lower than 0.85.
• Or the value should be significant. (compare to 1)
Discriminant Validity
 External Validity
Assess the formative construct's convergent validity by examining its
correlation with an alternative measure of the construct, using reflective
measures or a global single item (redundancy analysis). The correlation
between the constructs should be 0.80 or higher.

Formative Reflective

Strong and Significant

 External Validity

I appreciate this hotel The service is good

I’m looking forward to Reflective Formative The personnel are

staying in this hotel Satisfaction Satisfaction friendly

The rooms are

I recommended this clean
hotel to others
 Formative Measurement Models
• Collinearity of indicators: Each indicator’s collinearity (VIF) value should be lower than 5.
Otherwise, consider eliminating indicators, merging indicators into a single index, or creating
higher order constructs to treat collinearity problems.
• Examine each indicator’s outer weight (relative importance) and outer loading (absolute
importance) and use bootstrapping to assess their significance.
• When an indicator’s weight is significant, there is empirical support to retain the
indicator.
• When an indicator's weight is not significant but the corresponding item loading is
relatively high (i.e., >0.50), the indicator should generally be retained.
• If both the outer weight and outer loading are non-significant, there is no empirical
support to retain the indicator and it should be remove Indicator relevance
Formative Measurement Models
Formative Measurement Models
 Composite Measurement Models
(Rasoolimanesh & Ali, 2018)

• In order to assess composite constructs, recent literature

proposed three criteria: Collinearity VIF, Weight, and
Nomological validity, weights (Henseler, 2017; Van Reil et
al., 2017).
• Nomological validity; Confirmatory composite analysis
should be conducted which means that the overall
model fit indices should not be worsen with composite
construct than without it (Henseler et al., 2017).
Assessment of Structural Model
 Assessment of Structural Model

• Coefficients of determination (R²)

• Size and significance of path coefficients
• f² effect sizes
• Predictive relevance (Q²)
• Assess the model’s out-of-sample prediction using
PLSpredict
 Assessment of R²

• The goal of the prediction-oriented PLS-SEM approach is to explain the endogenous latent variables’
variance, the key target constructs’ level of R² should be high.

• The judgment of what R² level is high depends, however, on the specific research discipline. Whereas R²
results of 0.20 are considered high in disciplines such as consumer behavior, R² values of 0.75 would be
perceived as high in success driver studies.

• In marketing research studies, R² values of 0.75, 0.50, or 0.25 for endogenous latent variables in the
structural model can, as a rule of thumb, be described as substantial, moderate, or weak, respectively. (Hair
et al., 2011, 2013)
 Assessment of R²

• Accordingto Chin (1998), R2 values for

endogenous latent variables are assessed as
follows:

•0.67 substantial
•0.33 moderate
•0.19 weak
 Assessment of R²

• Accordingto Cohen (1988), R2 values for

endogenous latent variables are assessed as
follows:

•0.26 substantial
•0.13 moderate
•0.02 weak
 Size and significance of path coefficients

• The individual path coefficients of the PLS structural model can be

interpreted as standardized beta coefficients of ordinary least squares
regressions.
• Standardized path coefficients should be at least 0.20 (about 5%
variance)and above 0.30 (10% variance) in order to be considered (Chin,
1998).
• Each path coefficient’s significance can be assessed by means of a
bootstrapping procedure. (resampling)
• Paths that are non-significant or show signs contrary to the hypothesized
direction do not support a prior hypothesis, whereas significant paths
showing the hypothesized direction empirically support the proposed
causal relationship.
 Effect Size (f2)
• Effect size f is the change in R-squares which can be explored to see whether
2

the impact of a particular independent LV on a dependent LV has substantive

impact. f2 is automatically given in WarpPLS, and we have to do manual calculation
using the formula:

• According to Cohen (1988), f2 is assessed as:

• 0.02 small
• 0.15 medium
• 0.35 large
 Stone–Geisser’s Q ² (Predictive Relevance)

• Another assessment of the structural model involves the model’s

capability to predict. The predominant measure of predictive
relevance is the Stone–Geisser’s Q² (Geisser 1974; Stone 1974), which
postulates that the model must be able to adequately predict each
endogenous latent construct’s indicators.
• The Q ² value is obtained by using a blindfolding procedure, a sample
reuse technique that omits every dth data (distance omission) point
part and uses the resulting estimates to predict the omitted part.
 Stone–Geisser’s Q ² (Predictive Relevance)

If a endogenous construct’s Q ² for a certain reflective endogenous latent

variable is larger than zero, its explanatory latent constructs exhibit predictive
relevance (Chin, 2010; Hair et al., 2011).
Report of Hypothesis Testing
Report of Hypothesis Testing
Thank you for your attention
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