INFORMATION TECHNOLOGY

MFM II
Assignment 2

Submitted to
Ms. Gulnaaz Banu

Submitted by
Roopas
 Contents
1. Factor Analysis ....................................................................................................................................... 2

1.1. Types of Factor Analysis ............................................................................................................ 2

1.1.1. Exploratory ............................................................................................................................ 3

1.2. Common uses of Factor Analysis ............................................................................................ 3

1.3. Practical Applications of Factor Analysis ............................................................................ 4

1.3.1. Investing .................................................................................................................................. 4

1.3.2. Human Resources ................................................................................................................ 5

1.3.3. Insurance ................................................................................................................................ 5

1.3.4. Restaurants ............................................................................................................................ 5

1.3.5. Education ................................................................................................................................ 5

2. Discriminant analysis.......................................................................................................................... 6

2.1. The Applications of Discriminant Analysis......................................................................... 8

3. Conjoint Analysis .................................................................................................................................. 9

3.1. Understanding Market Preferences ...................................................................................... 9

3.2. Segmenting the Market ............................................................................................................ 10

3.3. Pricing ............................................................................................................................................. 10

3.4. New Product Development ..................................................................................................... 11

3.5. Brand Positioning ....................................................................................................................... 11

1. Factor Analysis
Factor analysis is a useful tool for investigating variable relationships for complex
concepts such as socioeconomic status, dietary patterns, or psychological scales. It allows
researchers to investigate concepts that are not easily measured directly by collapsing a
large number of variables into a few interpretable underlying factors. The Factor Analysis
is an explorative analysis. Much like the cluster analysis grouping similar cases, the factor
analysis groups similar variables into dimensions. This process is also called identifying
latent variables. Since factor analysis is an explorative analysis it does not distinguish
between independent and dependent variables.

The key concept of factor analysis is that multiple observed variables have similar
patterns of responses because they are all associated with a latent (i.e. not directly
measured) variable.
For example, people may respond similarly to questions about income, education, and
occupation, which are all associated with the latent variable socioeconomic status.
In every factor analysis, there are the same number of factors as there are variables. Each
factor captures a certain amount of the overall variance in the observed variables, and
the factors are always listed in order of how much variation they explain.
Factor analysis is a method of data reduction. It does this by seeking underlying
unobservable (latent) variables that are reflected in the observed variables (manifest
variables). There are many different methods that can be used to conduct a factor
analysis.

1.1. Types of Factor Analysis

There are two types of factor analysis:

Exploratory Confirmatory
 1.1.1. Exploratory
Exploratory factor analysis is driven by the data, i.e. the data determines the factors. It is
a statistical approach to determine the correlation among the variables in a dataset. This
type of analysis provides a factor structure (a grouping variables based on strong
correlations).

1.1.2. Confirmatory
Confirmatory factor analysis, used in structural equation modelling, tests and confirms
hypotheses. When researcher has preconceived thoughts about the actual structure of
data based on the theoretical support or prior research. Researcher may wish to test
hypothesis involving issues as which variables should be grouped together on a factor.

1.2. Common uses of Factor Analysis

Data Reduction
Factor analysis is used for reducing a mass of data to a manageable level. For
example, the marketing researcher who has collected data on 40 attributes of a
brand. This analysis and understanding of this data may be aided by reducing 30
attributes and having only 10 attributes. Factor analysis has been employed to
purify original sets of scale items by isolating those items that do not reflect a
common core and to name the dimensions captured by measure. It is also used in
the study of lifestyles and psychographic research problems in which it is used to
develop consumer profiles that reflect peoples attitudes, activities, interests,
opinions, perceptions, and preferences to better predict their consumption and
purchase behaviour.

Scale development
A marketing researcher may develop a scale on a research topic. The elements in
the factors are called unrotated factor loadings. The loadings measure which
variables are involved in which factor pattern, to what degree and in what
direction. They can be interpreted as correlation coefficients. The square of the
loading equals the proportion of the variation that a variable has in common with
an unrotated factor. Another way to conceptualise this relationship is to
remember that a loading is a correlation coefficient between a variable and a
 factor. When we square a loading, we are calculating a coefficient of
determination, between a variable and a factor. Thus, the squared loading
represents the amount of shared variation between a variable and a factor. The L2
measures are called communalities. Communality is the proportion of a variables
total variation that is involved in the factors. Mathematically L2 equals the sum of
the squared loading of a variable on all factors.

Some other uses of Factor Analysis:

The evaluation of the psychometric quality of a measure
The assessment of the dimensionality of a set of variables

Factor analysis in market research is often used in customer satisfaction studies to

identify underlying service dimensions, and in profiling studies to determine core
attitudes.
For example, as part of a national survey on political opinions, respondents may answer
three separate questions regarding environmental policy, reflecting issues at the local,
regional and national level. Factor analysis can be used to establish whether the three
measures do, in fact, measure the same thing.
It can also prove to be useful when a lengthy questionnaire needs to be shortened, but
still retain key questions. Factor analysis indicates which questions can be omitted
without losing too much information.

1.3. Practical Applications of Factor Analysis

Factor analysis is what every business needs to get the most from their operation.
Examining statistics allows you to dissect variables such as demographics and target
consumers. By breaking down the key factors, you can tweak processes to create the most
effective channels and strategies. Put simply, factor analysis takes the guesswork out of
budgeting, advertising and even staffing. It is a practical tool created through successful
market research and analysis in any industry.
1.3.1. Investing
Investing is a field that relies on data analysis to make vital choices. The safest approach
to creating a portfolio is to diversify stocks. A balance of risk levels protects the
investment in case adverse conditions alter one market. Investment professionals use
factor analysis to anticipate movement in a variety of industries. It may provide clues that
would otherwise go unnoticed. If one portfolio holds stocks in both commodities and
technology, a sudden increase in the price of a related variable, oil for example, may not
seem to factor into the equation without proper analysis.

1.3.2. Human Resources

Many factors influence the staffing of a company. Through statistical interpretation,
human resource professionals can create a balanced environment. A staffer might
combine different variables together to determine if a company can benefit from fewer
contractors and more in-house talent. Testing allows proper screening of employees
using factor analysis. Market research and analysis can be the key to getting the best fit
in graduates each year.

1.3.3. Insurance
Insurance companies rely on actuarial tables and statistics to create policies. Florida is
prone to hurricanes. Certain data may show that drivers between the ages of 25-40
handle stress and emergencies better than any other age groups. Based on that fact,
automotive policyholders in Florida who fall within that range may get discounts on
coverage. Studying variables is the only way insurance companies can make decisions
regarding deductibles, rates and available plans.

1.3.4. Restaurants
Even industries that seem less obvious need to focus on market research and analysis to
survive. Restaurants take demographics and target customers into account when
creating menus. The sweet shop next to a university is going to plan differently then the
family restaurant in a tourist area for menu items and advertising. From competitors to
the ethnicity breakdown of a community, data collection allows for cost-effective
planning and a successful restaurant.

1.3.5. Education
Education uses this technique in decision-making processes. A school council looks at
classroom sizes and testing results to set salary and staffing limits for teachers. Data
analysis goes into determining the curriculum each year for education from grade school
to graduate programs. Even industries that require continuing education will look at
different factors in creating options.

Factor analysis plays a role in most industries. Through statistical planning, companies
can make better choices for everything from multi-channel marketing to inventory
control. Data is a powerful tool and factor analysis uses it to get results.

2. Discriminant analysis
Discriminant analysis is a statistical method that is used by researchers to help them
understand the relationship between a "dependent variable" and one or more
"independent variables." A dependent variable is the variable that a researcher is trying
to explain or predict from the values of the independent variables. Discriminant analysis
is similar to regression analysis and analysis of variance (ANOVA). The principal
difference between discriminant analysis and the other two methods is about the nature
of the dependent variable.

Discriminant analysis requires the researcher to have measures of the dependent

variable and all the independent variables for many cases. In regression analysis and
ANOVA, the dependent variable must be a "continuous variable." A numeric variable
indicates the degree to which a subject possesses some characteristic, so that the higher
the value of the variable, the greater the level of the characteristic. A good example of a
continuous variable is a person's income.

In discriminant analysis, the dependent variable must be a "categorical variable." The

values of a categorical variable serve only to name groups and do not necessarily indicate
the degree to which some characteristic is present. An example of a categorical variable
is a measure indicating to which one of several different markets segments a customer
belongs; another example is a measure indicating whether a employee is a "high
potential" worker. The categories must be mutually exclusive; that is, a subject can belong
to one and only one of the groups indicated by the categorical variable. While a categorical
variable must have at least two values (as in the "high potential" case), it may have
numerous values (as in the case of the market segmentation measure). As
the mathematical methods used in discriminant analysis are complex, they are described
here only in general terms. We will do this by providing an example of a simple case in
which the dependent variable has only two categories.

Discriminant analysis is most often used to help a researcher predict the group or
category to which a subject belongs. For example, when individuals are interviewed for a
job, managers will not know for sure how job candidates will perform on the job if hired.
Suppose, however, that a human resource manager has a list of current employees who
have been classified into two groups: "high performers" and "low performers." These
individuals have been working for the company for some time, have been evaluated by
their supervisors, and are known to fall into one of these two mutually exclusive
categories. The manager also has information on the employees' backgrounds:
educational attainment, prior work experience, participation in training programs, work
attitude measures, personality characteristics, and so forth. This information was known
at the time these employees were hired. The manager wants to be able to predict, with
some confidence, which future job candidates are high performers and which are not. A
researcher or consultant can use discriminant analysis, along with existing data, to help
in this task.

There are two basic steps in discriminant analysis. The first involves estimating
coefficients, or weighting factors, that can be applied to the known characteristics of job
candidates (i.e., the independent variables) to calculate some measure of their tendency
or propensity to become high performers. This measure is called a "discriminant
function." Second, this information can then be used to develop a decision rule that
specifies some cut-off value for predicting which job candidates are likely to become high
performers.

Discriminant analysis is often used in marketing research for marketing segmentation

and predicting group membership are used to visualize the differences and similarities
in perceptions and choices between products, brands or customers.
For example, a manufacturer of salon brand hair care items wants to see whether a
lifestyle variables such as being a NASCAR racing fan, education level, ethnicity and
demographic variables such as personal income, sex and several other factors are useful
in distinguishing purchasers of their products from purchasers of other salon hair care
brands. Based on this classification, customer profiles will be developed to plan targeted
advertising campaigns.

Discriminate analysis, a multivariate technique used for market segmentation and

predicting group membership is often used for this type of problem because of its ability
to classify individuals or experimental units into two or more uniquely defined
populations. The discriminant score is the basis for predicting to which group (a
purchaser of the manufacturers brand or a competitive brand) the individual belongs.
The discriminant weights of each predictive variable (age, sex, income, etc) indicate the
relative importance of each variable. For instance, if age has a low discriminant weight
then it is less important than the other variables.
With this information, a classification matrix can be developed that indicates the accuracy
of our model that will be used to construct our map. For instance, if our discriminant
model correctly classified 94.5-percent of users of our brand, then only 5.5-percent were
incorrectly classified. Conversely, if the model correctly classifies 92-percent of the
competitive brand users, then only 8-percent were incorrectly classified. We consider
this a strong model because the number of correct classifications is much higher than
what might be expected by chance.

2.1. The Applications of Discriminant Analysis

While our example illustrated how discriminant analysis helped classify users and
nonusers of salon brand hair care products based on independent variables, other uses
of discriminant analysis include the following:
Product research Distinguish between heavy, medium, and light users of a product in
terms of their consumption habits and lifestyles
Perception/Image research Distinguish between customers who exhibit favourable
perceptions of a store or company and those who do not
Advertising research Identify how market segments differ in media consumption
habits
Direct marketing Identify the characteristics of consumers who will respond to a
direct marketing campaign and those who will not.
3. Conjoint Analysis

Conjoint analysis is a popular marketing research technique that marketers use to determine
what features a new product should have and how it should be priced. Conjoint analysis became
popular because it was a far less expensive and more flexible way to address issues than concept
testing. There are commonly six types of conjoint analysis used. They are as follows:

Choice-
Two Attribute Full-Profile Based/Discrete-
Tradeoff Analysis Conjoint Analysis Choice Conjoint
Analysis

Self-Explicated Max-Diff Conjoint Hierarchicial Bayes

Conjoint Analysis Analysis Conjoint Analysis

Figure 1 Types of Conjoint Analysis

Applications of conjoint analysis are explained as follows

3.1. Understanding Market Preferences

At its core, Conjoint is measuring the preference of the market. One may be looking to
identify which attribute holds the most weight. In other words, a highly-valued option on one
attribute can make up for an unappealing option on another attribute. For example, someone
might be willing to pay more for better quality.

According to Hair et al (1998:392), conjoint analysis is a multivariate technique used

specifically to understand how respondents develop preferences for products and services. It is
based on the simple premise that consumers evaluate a product or service by combining the
separate amounts of value provided by each attribute. The aim of the conjoint analysis is thus
to identify the attribute combination of multi-attribute products or services preferred by
consumers and to measure consumer preferences among competitive products and services. It
is furthermore an important measurement instrument for estimating the relative importance of
the attributes in terms of their share in the total product. The set of product attributes used in a
conjoint analysis is described as product profiles. Every product is defined in terms of attributes
and the various attribute levels.

The information in Table 1 is indicative of a conjoint profile, with various attributes and
attribute levels.

Table 1 Composition of A Single Product Profile (Hu, 1997)

Profile Attributes Attribute Levels

A1 Attribute A Level A1, A2, A3
B3 Attribute B Level B1, B2, B3
C2 Attribute C Level C1, C2, C3

Conjoint analysis is used to calculate the consumer preferences statistically. The data
collected are built up into a full-profile for conjoint analysis, based on the level of each
attribute. This data can be processed with SPSS to find the utility and importance values of
each attribute. The attribute level with the highest utility estimate value is chosen as the
preferred service design. Thus, the conjoint analysis can be used for preference measurement
of the consumers.

3.2. Segmenting the Market

Another application from a conjoint analysis is identification of the segments of

consumers that occur naturally because they are motivated by the same type of communication.
For example one segment may be drawn to an emotional message while another responds to
facts and figures.

3.3. Pricing

Conjoint is also used for pricing research for other products in order to understand the value
(or willingness to pay - WTP) for different features that make up different products. For
instance what is the optimum price for a larger versus a smaller size? In these types of conjoint
design, price is one attribute among several. A specific factor that might be included is brand
and it becomes possible to separate out the direct value of the brand (brand equity) from specific
features of the product. A key measure of feature value is willingness to pay (WTP), or
alternatively par value - the amount extra that could be charged for an additional feature so
overall so the new product is valued the same as a reference lower spec product.

Conjoint used for pricing research is normally choice-based conjoint or discrete choice
modelling, but options such as menu-based (MBC) are also available. This type of data can
also be used to provide base information for yield-management strategies in industries such as
hotels or transportation.

3.4. New Product Development

With Conjoint, one has the ability to see what the optimal/new product might be. A product
may have a list of features or capabilities but one doesnt know which combination is the best
option. By looking at the weight of each attribute and the interaction between attributes, one
can start to paint a picture of the optimal solution.

According to a study, conjoint measurement was undertaken on the traditional casual

market, which composed of Polo, Beanpole, Maru and Giordano brands. Product's attributes,
such as brand name, price, country of origin and style, were selected as choice factors. Twelve
profiles were used for full-profile stimulus cards method. Based on the importance and utility
rates of the product attributes, preferences for the products currently in the market and
simulated products were calculated. The results increased their understanding of the trends in
traditional casual market and assisted in the preparation of marketing strategies for each brand.

3.5. Brand Positioning

Conjoint can also be used for brand positioning. Here the question is more about, Which
messages are best attached to my brand? It is also helpful to know which messages your brand
should stay away from and which messages are already owned by other brands in your
category.

Conjoint analysis breaks a brands positioning down into its component parts in order to
allow us to go on to build them back up into the optimum statement with the widest appeal.
For a pure New Product Development study, the parts are likely to be the product features and
the price: A [100ml] tube of toothpaste with [whitening crystals], made by [Great Smile],
costing [2.50]. But for a brand-positioning project, one uses the proposition into a core Brand
Claim, alongside a Justification: [Brand 2] is [Brand Claim C] because [Justification I]. A
number of such components are used to construct the full range of possible brand positioning
statements for the conjoint to analyze.

These brand-positioning statements can be tested alongside primary product features and
benefits. This allows one to identify the effect of the brand over and above that of the core
product. More importantly from a strategy point of view, it also allows one to see which
combination of brand positioning and product features work most effectively together.