Chapter 3

Factor Analysis

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 Chapter 3 Factor Analysis
LEARNING OBJECTIVES
Upon completing this chapter, you should be able to do
the following:
1. Differentiate factor analysis techniques from other
multivariate techniques.
2. Distinguish between exploratory and confirmatory
uses of factor analytic techniques.
3. Understand the seven stages of applying factor
analysis.
4. Distinguish between R and Q factor analysis.
5. Identify the differences between component
analysis and common factor analysis models.
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 Chapter 3 Factor Analysis

LEARNING OBJECTIVES continued . . .

Upon completing this chapter, you should be able to do
the following:
6. Tell how to determine the number of factors to
extract.
7. Explain the concept of rotation of factors.
8. Describe how to name a factor.
9. Explain the additional uses of factor analysis.
10. State the major limitations of factor analytic
techniques.

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 Factor Analysis Defined

Exploratory factor analysis . . . is an

interdependence technique whose primary
purpose is to define the underlying structure
among the variables in the analysis.

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 What is Exploratory Factor Analysis?

Exploratory Factor Analysis . . .

• Examines the interrelationships among a large

number of variables and then attempts to explain
them in terms of their common underlying
dimensions.
• These common underlying dimensions are referred
to as factors.
• A summarization and data reduction technique that
does not have independent and dependent
variables, but is an interdependence technique in
which all variables are considered simultaneously.
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 Correlation Matrix for Store Image Elements

V1 V2 V3 V4 V5 V6 V7 V8 V9
V1 Price Level 1.00
V2 Store Personnel .427 1.00
V3 Return Policy .302 .771 1.00
V4 Product Availability .470 .497 .427 1.00
V5 Product Quality .765 .406 .307 .472 1.00
V6 Assortment Depth .281 .445 .423 .713 .325 1.00
V7 Assortment Width .354 .490 .471 .719 .378 .724 1.00
V8 In-Store Service .242 .719 .733 .428 .240 .311 .435 1.00
V9 Store Atmosphere .372 .737 .774 .479 .326 .429 .466 .710 1.00

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 Correlation Matrix of Variables After
Grouping Using Factor Analysis

V3 V8 V9 V2 V6 V7 V4 V1 V5
V3 Return Policy 1.00
V8 In-store Service .733 1.00
V9 Store Atmosphere .774 .710 1.00
V2 Store Personnel .741 .719 .787 1.00
V6 Assortment Depth .423 .311 .429 .445 1.00
V7 Assortment Width .471 .435 .468 .490 .724 1.00
V4 Product Availability .427 .428 .479 .497 .713 .719 1.00
V1 Price Level .302 .242 .372 .427 .281 .354 .470 1. 00
V5 Product Quality .307 .240 .326 .406 .325 .378 .472 .765 1.00

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

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 Application of Factor Analysis
to a Fast-Food Restaurant

Variables Factors
Waiting Time

Cleanliness Service Quality

Friendly Employees

Taste

Temperature Food Quality

Freshness

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 Factor Analysis Decision Process

Stage 1: Objectives of Factor Analysis

Stage 2: Designing a Factor Analysis
Stage 3: Assumptions in Factor Analysis
Stage 4: Deriving Factors and Assessing Overall Fit
Stage 5: Interpreting the Factors
Stage 6: Validation of Factor Analysis
Stage 7: Additional uses of Factor Analysis Results

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 Stage 1: Objectives of Factor Analysis

1. Is the objective exploratory or confirmatory?

2. Specify the unit of analysis.
3. Data summarization and/or reduction?
4. Using factor analysis with other techniques.

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 Factor Analysis Outcomes

1. Data summarization = derives underlying

dimensions that, when interpreted and
understood, describe the data in a much
smaller number of concepts than the original
individual variables.
2. Data reduction = extends the process of
data summarization by deriving an empirical
value (factor score or summated scale) for
each dimension (factor) and then substituting
this value for the original values.

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 Types of Factor Analysis

1. Exploratory Factor Analysis (EFA) = is

used to discover the factor structure of a
construct and examine its reliability. It is
data driven.

2. Confirmatory Factor Analysis (CFA) = is

used to confirm the fit of the hypothesized
factor structure to the observed (sample)
data. It is theory driven.

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 Stage 2: Designing a Factor Analysis

Three Basic Decisions:

1. Calculation of input data – R vs. Q
analysis.
2. Design of study in terms of number of
variables, measurement properties of
variables, and the type of variables.
3. Sample size necessary.

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 Rules of Thumb 3–1
Factor Analysis Design
o Factor analysis is performed most often only on metric variables,
although specialized methods exist for the use of dummy
variables. A small number of “dummy variables” can be included
in a set of metric variables that are factor analyzed.
o If a study is being designed to reveal factor structure, strive to
have at least five variables for each proposed factor.
o For sample size:
• the sample must have more observations than variables.
• the minimum absolute sample size should be 50
observations.
o Maximize the number of observations per variable, with a
minimum of five and hopefully at least ten observations per
variable. 3-14
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 Stage 3: Assumptions in Factor Analysis

Three Basic Decisions . . .

1. Calculation of input data – R vs. Q
analysis.
2. Design of study in terms of number of
variables, measurement properties of
variables, and the type of variables.
3. Sample size required.

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 Assumptions
• Multicollinearity
 Assessed using MSA (measure of sampling
adequacy).
The MSA is measured by the Kaiser-Meyer-Olkin (KMO)
statistic. As a measure of sampling adequacy, the KMO predicts if
data are likely to factor well based on correlation and partial
correlation. KMO can be 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 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, remove the variable with the lowest individual
KMO statistic value one at a time until KMO overall rises above .
50, and each individual variable KMO is above .50.

• Homogeneity of sample factor solutions

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 Rules of Thumb 3–2
Testing Assumptions of Factor Analysis
• There must be a strong conceptual foundation to
support the assumption that a structure does exist
before the factor analysis is performed.
• A statistically significant Bartlett’s test of sphericity
(sig. < .05) indicates that sufficient correlations exist
among the variables to proceed.
• Measure of Sampling Adequacy (MSA) values must
exceed .50 for both the overall test and each
individual variable. Variables with values less than .
50 should be omitted from the factor analysis one at a
time, with the smallest one being omitted each time.
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 Stage 4: Deriving Factors and Assessing
Overall Fit

• Selecting the factor extraction method

– common vs. component analysis.
• Determining the number of factors to
represent the data.

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 Extraction Decisions

o Which method?
• Principal Components Analysis
• Common Factor Analysis
o How to rotate?
• Orthogonal or Oblique rotation

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 Extraction Method Determines the
Types of Variance Carried into the Factor Matrix

Diagonal Value Variance

Unity (1) Total Variance

Common Specific and Error

Communality

Variance extracted

Variance not used

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 Principal Components vs. Common?

Two Criteria . . .
• Objectives of the factor analysis.
• Amount of prior knowledge about
the variance in the variables.

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 Number of Factors?

• A Priori Criterion
• Latent Root Criterion
• Percentage of Variance
• Scree Test Criterion

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 Eigenvalue Plot for Scree Test Criterion

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 Rules of Thumb 3–3
Choosing Factor Models and Number of Factors
• Although both component and common factor analysis models yield similar
results in common research settings (30 or more variables or communalities
of .60 for most variables):
 the component analysis model is most appropriate when data reduction is
paramount.
 the common factor model is best in well-specified theoretical applications.
• Any decision on the number of factors to be retained should be based on
several considerations:
 use of several stopping criteria to determine the initial number of factors
to retain.
 Factors With Eigenvalues greater than 1.0.
 A pre-determined number of factors based on research objectives and/or
prior research.
 Enough factors to meet a specified percentage of variance explained,
usually 60% or higher.
 Factors shown by the scree test to have substantial amounts of common
variance (i.e., factors before inflection point).
 More factors when there is heterogeneity among sample subgroups.
• Consideration of several alternative solutions (one more and one less factor3-24
than the
Copyright initial
© 2010 solution)
Pearson Education,to ensure
Inc., publishingthe best structure is identified.
as Prentice-Hall.
 Processes of Factor Interpretation

• Estimate the Factor Matrix

• Factor Rotation
• Factor Interpretation
• Respecification of factor model, if needed, may
involve . . .
o Deletion of variables from analysis
o Desire to use a different rotational approach
o Need to extract a different number of factors
o Desire to change method of extraction

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 Rotation of Factors

Factor rotation = the reference axes of the factors

are turned about the origin until some other position
has been reached. Since unrotated factor solutions
extract factors based on how much variance they
account for, with each subsequent factor accounting
for less variance. The ultimate effect of rotating the
factor matrix is to redistribute the variance from earlier
factors to later ones to achieve a simpler, theoretically
more meaningful factor pattern.

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 Two Rotational Approaches

1. Orthogonal = axes are maintained

at 90 degrees.

2. Oblique = axes are not maintained

at 90 degrees.

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 Orthogonal Factor Rotation
Unrotated
Factor II
+1.0 Rotated Factor II
V1

V2
+.50

Unrotated
Factor I
-1.0 -.50 0 +.50 +1.0
V3
V4
-.50
Rotated
V5
Factor I

-1.0 3-28
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 Oblique Factor Rotation
Unrotated
Factor II Orthogonal Rotation:
+1.0 Factor II

V1 Oblique Rotation:
Factor II
+.50 V2

Unrotated
Factor I
-1.0 -.50 0 +.50 +1.0
V3
V4 Oblique
-.50 Rotation:
V5 Factor I
Orthogonal
Rotation: Factor I
-1.0 3-29
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 Orthogonal Rotation Methods

• Quartimax (simplify rows)

• Varimax (simplify columns)

• Equimax (combination)

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 Rules of Thumb 3–4
Choosing Factor Rotation Methods
• Orthogonal rotation methods ...
o are the most widely used rotational methods.
o are The preferred method when the research
goal is data reduction to either a smaller number
of variables or a set of uncorrelated measures for
subsequent use in other multivariate techniques.
• Oblique rotation methods ...
o best suited to the goal of obtaining several
theoretically meaningful factors or constructs
because, realistically, very few constructs in the
“real world” are uncorrelated. 3-31
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 Which Factor Loadings Are Significant?

• Customary Criteria = Practical Significance.

• Sample Size & Statistical Significance.
• Number of Factors ( = >) and/or Variables ( = <) .

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 Guidelines for Identifying Significant
Factor Loadings Based on Sample Size
Factor Loading Sample Size Needed
for Significance*

.30 350
.35 250
.40 200
.45 150
.50 120
.55 100
.60 85
.65 70
.70 60
.75 50

Significance is based on a .05 significance level (a), a power level of 80 percent, and
*

standard errors assumed to be twice those of conventional correlation coefficients.

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 Rules of Thumb 3–5
Assessing Factor Loadings

• While factor loadings of +.30 to +.40 are minimally acceptable,

values greater than + .50 are considered necessary for
practical significance.

• To be considered significant:
o A smaller loading is needed given either a larger sample size,
or a larger number of variables being analyzed.
o A larger loading is needed given a factor solution with a larger
number of factors, especially in evaluating the loadings on
later factors.

• Statistical tests of significance for factor loadings are generally

very conservative and should be considered only as starting
points needed for including a variable for further consideration.

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 Stage 5: Interpreting the Factors

• Selecting the factor extraction method

– common vs. component analysis.
• Determining the number of factors to
represent the data.

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 Interpreting a Factor Matrix:

1. Examine the factor matrix of

loadings.
2. Identify the highest loading across
all factors for each variable.
3. Assess communalities of the
variables.
4. Label the factors.

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 Rules of Thumb 3–6
Interpreting The Factors
 An optimal structure exists when all variables have high loadings
only on a single factor.

 Variables that cross-load (load highly on two or more factors) are

usually deleted unless theoretically justified or the objective is
strictly data reduction.

 Variables should generally have communalities of greater than .

50 to be retained in the analysis.

 Respecification of a factor analysis can include options such as:

o deleting a variable(s),
o changing rotation methods, and/or
o increasing or decreasing the number of factors.

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 Stage 6: Validation of Factor Analysis

• Confirmatory Perspective.
• Assessing Factor Structure Stability.
• Detecting Influential Observations.

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 Stage 7: Additional Uses of Factor
Analysis Results

• Selecting Surrogate Variables

• Creating Summated Scales
• Computing Factor Scores

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 Rules of Thumb 3–7
Summated Scales
• Aconstruct.
summated scale is only as good as the items used to represent the
While it may pass all empirical tests, it is useless without
theoretical justification.
• Never create a summated scale without first assessing its
unidimensionality with exploratory or confirmatory factor analysis.
• Once a scale is deemed unidimensional, its reliability score, as
measured by Cronbach’s alpha:
o should exceed a threshold of .70, although a .60 level can be used
in exploratory research.
o the threshold should be raised as the number of items increases,
especially as the number of items approaches 10 or more.
• With reliability established, validity should be assessed in terms of:
o convergent validity = scale correlates with other like scales.
o discriminant validity = scale is sufficiently different from other
related scales.
o nomological validity = scale “predicts” as theoretically suggested.

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 Rules of Thumb 3–8
Representing Factor Analysis In Other Analyses
• The single surrogate variable:
 Advantages: simple to administer and interpret.
 Disadvantages:
1) does not represent all “facets” of a factor
2) prone to measurement error.
• Factor scores:
 Advantages:
1) represents all variables loading on the factor,
2) best method for complete data reduction.
3) Are by default orthogonal and can avoid complications caused
by multicollinearity.
 Disadvantages:
1) interpretation more difficult since all variables contribute through
loadings
2) Difficult to replicate across studies.

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 Rules of Thumb 3–8 Continued . . .

Representing Factor Analysis In Other Analyses

• Summated scales:
 Advantages:
1) compromise between the surrogate variable and factor
score options.
2) reduces measurement error.
3) represents multiple facets of a concept.
4) easily replicated across studies.
 Disadvantages:
1) includes only the variables that load highly on the factor
and excludes those having little or marginal impact.
2) not necessarily orthogonal.
3) Require extensive analysis of reliability and validity issues.

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 Description of HBAT Primary Database Variables
Variable Description Variable Type
Data Warehouse Classification Variables
X1 Customer Type nonmetric
X2 Industry Type nonmetric
X3 Firm Size nonmetric
X4 Region nonmetric
X5 Distribution System nonmetric
Performance Perceptions Variables
X6 Product Quality metric
X7 E-Commerce Activities/Website metric
X8 Technical Support metric
X9 Complaint Resolution metric
X10 Advertising metric
X11 Product Line metric
X12 Salesforce Image metric
X13 Competitive Pricing metric
X14 Warranty & Claims metric
X15 New Products metric
X16 Ordering & Billing metric
X17 Price Flexibility metric
X18 Delivery Speed metric
Outcome/Relationship Measures
X19 Satisfaction metric
X20 Likelihood of Recommendation metric
X21 Likelihood of Future Purchase metric
X22 Current Purchase/Usage Level metric
X23 Consider Strategic Alliance/Partnership in Future nonmetric 1-43
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 Rotated Component Matrix
“Reduced Set” of HBAT Perceptions Variables

Component Communality
1 2 3 4
X9 – Complaint Resolution .933 .890
X18 – Delivery Speed .931 .894
X16 – Order & Billing .886 .806
X12 – Salesforce Image .898 .860
X7 – E-Commerce Activities .868 .780
X10 – Advertising .743 .585
X8 – Technical Support .940 .894
X14 – Warranty & Claims .933 .891
X6 – Product Quality .892 .798
X13 – Competitive Pricing -.730 .661

Sum of Squares 2.589 2.216 1.846 1.406 8.057

Percentage of Trace 25.893 22.161 18.457 14.061 80.572
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax.
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 Scree Test for HBAT Component Analysis

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 Factor Analysis Learning Checkpoint

1. What are the major uses of factor analysis?

2. What is the difference between component
analysis and common factor analysis?
3. Is rotation of factors necessary?
4. How do you decide how many factors to extract?
5. What is a significant factor loading?
6. How and why do you name a factor?
7. Should you use factor scores or summated ratings
in follow-up analyses?

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