Principal Components Factor Analysis The purpose of principal components factor analysis is to reduce the number of variables in the

analysis by using a surrogate variable or factor to represent a number of variables, while retaining the variance that was present in the original variables. The data analysis indicates the relationship between the original variables and the factors, so that we know how to make the substitutions. Principal components are frequently used to simplify a data set prior to conducting a multiple regression or discriminates analysis. To demonstrate principal components analysis, we will use the sample problem in the text which begins on page 120. Stage 1: Define the Research Problem The perceptions of HATCO on seven attributes (Delivery speed, Price level, Price flexibility, Manufacturer image, Service, Salesforce image, and Product quality) are examined to (1) understand if these perceptions can be "grouped" and (2) reduce the seven variables to a smaller number. (Text, page 120) Stage 2: Designing a Factor Analysis In this stage, we address issues of sample size and measurement issues. Since missing data has an impact on sample size, we will analyze patterns of missing data in this stage. Sample size issues Missing Data Analysis There is no missing data in the HATCO data set. Sample size of 100 or more There are 100 subjects in the sample. This requirement is met. Ratio of subjects to variables should be 5 to 1 There are 100 subjects and 7 variables in the analysis for a ratio of 14 to 1. This requirement is met. Variable selection and measurement issues Dummy code non-metric variables All variables in the analysis are metric so no dummy coding is required. Parsimonious variable selection The variables included in the analysis are core elements of the business. There do not appear to be any extraneous variables. Stage 3: Assumptions of Factor Analysis In this stage, we do the tests necessary to meet the assumptions of the statistical analysis. For factor analysis, we will examine the suitability of the data for a factor analysis.

Metric or dummy-coded variables All variables are metric in this analysis. Departure from normality, homoscedasticity, and linearity diminish correlations In the last class, we conducted an exploratory analysis of these variables. We know from this several variables are not normally distributed. Non-normality will diminish the correlations among the variables, such that the relationships between variables might be stronger than what we are able to represent in this analysis. Multivariate Normality required if a statistical criteria for factor loadings is used We will use the criteria of 0.40 for identifying substantial loadings on factors, rather than a statistical probability, so this criteria is not binding on this analysis. Homogeneity of sample There is nothing in the problem to indicate that subgroups within the sample have different patterns of scores on the variables included in the analysis. In the absence of evidence to the contrary, we will assume that this assumption is met. Use of Factor Analysis is Justified The determination that the use of factor analysis is justifiable is obtained from the statistical output that SPSS provides in the request for a factor analysis. Requesting a Principal Components Factor Analysis

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Assessing the Sampling Adequacy Problem

Measures of Appropriateness of Factor Analysis

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T e n t i- im a g e C o r r e la t io n M a t r ix c o n t a in s t e m e a s u r e s o f s a m p lin g a d e q u a c y f o r t e in d iv id u a l v a r ia b le s o n t e d ia g o n a l o f t e m a t r ix , h ig h lig h t e d in c y a n . T h e m e a s u r e s f o r t h r e e v a r ia b le s f a ll b e lo w t h e a c c e p t a b le le v e l o f 0 . 5 0 : X 1 ' e liv e r y S p e e d ' ( . 3 4 4 ) , X 2 'P r ic e L e v e l' ( . 3 3 0 ) , a n d X 5 'S e r v ic e ' ( . 2 8 8 ) . T h e c o r r e c t iv e a c t io n is t o d e le t e t h e v a r ia b le s o n e a t a t im e , s t a r t in g w it h t h e o n e w it h t h e s m a lle s t v a lu e , u n t il t h e p r o b le m is c o r r e c t e d .

Removing X5 'Service' from the Analysis

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The Revised Measures of Appropriateness of Factor Analysis

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The Revised Anti-image Correlation Matrix

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Stage 4: Deriving Factors and Assessing Overall Fit 1 In the stage, several criteria are examined to determine the number of factors that represent the data. If the analysis is designed to identify a factor structure that was obtained in or suggested by previous research, we are employing an a priori criterion, i.e. we specify a specific number of factors. The three other criteria are obtained in the data analysis: the latent root criterion, the percentage of variance criterion, and the Scree test criterion. A final criterion influencing the number of factors is actually deferred to the next stage, the interpretability criterion. The derived factor structure must make plausible sense in terms of our research; if it does not we should seek a factor solution with a different number of components. It is generally recommended that each strategy be used in determining the number of factors in the data set. It may be that multiple criteria suggest the same solution. If different criteria suggest different conclusions, we might want to compare the parameters of our problem, i.e. sample size, correlations, and communalities to determine which criterion should be given greater weight. Stage 4: Deriving Factors and Assessing Overall Fit 2 One of the most commonly used criteria for determining the number of factors or components to include is the latent root criterion, also known as the eigenvalue-one criterion or the Kaiser criterion. With this approach, you retain and interpret any component that has an eigenvalue greater than 1.0. The rationale for this criterion is straightforward. Each observed variable contributes one unit of variance to the total variance in the data set (the 1.0 on the diagonal of the correlation matrix). Any component that displays an eigenvalue greater than 1.0 is accounting for a greater amount of variance than was contributed by one variable. Such a component is therefore accounting for a meaningful amount of variance and is worthy of being retained. On the other hand, a component with an eigenvalue less than 1.0 is accounting for less variance than had been contributed by one variable. The latent root criterion has been shown to produce the correct number of components when the number of variables included in the analysis is small (10 to 15) or moderate (20 to 30) and the

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communalities are high (greater than 0.70). Low communalities are those below 0.40 (Stevens, page 366). Stage 4: Deriving Factors and Assessing Overall Fit 3 Proportion of Variance Accounted For Another criterion in determining the number of factors to retain involves retaining a component if it accounts for a specified proportion of variance in the data set, i.e. at least 5% or 10%. Alternatively, one can retain enough components to explain some cumulative total percent of variance, usually 70% to 80%. While this strategy has intuitive appeal (our goal is to explain the variance in the data set), there is not agreement about what percentages are appropriate to use and the strategy is criticized for being subjective and arbitrary. We will employ 70% as the target total percent of variance. Stage 4: Deriving Factors and Assessing Overall Fit 4 The Scree Test With a Scree test, the eigenvalues associated with each component are plotted against their ordinal numbers (i.e. first eigenvalue, second eigenvalue, etc.). Generally what happens is that the magnitude of successive eigenvalues drops off sharply (steep descent) and then tends to level off. The recommendation is to retain all the eigenvalues (and corresponding components) before the first one on the line where they start to level off. (Hatcher and Stevens both indicate that the number to accept is the number before the line levels off; Hair, et. al. say that the number of factors is the point where the line levels off, but also state that this tends to indicate one or two more factors that are indicated by the latent root criteria.) The Scree test has been shown to be accurate in detecting the correct number of factors with a sample size greater than 250 and communalities greater than 0.60. Stage 4: Deriving Factors and Assessing Overall Fit 5 The Interpretability Criteria Perhaps the most important criterion in solving the number of components problem is the interpretability criterion: interpreting the substantive meaning of the retained components and verifying that this interpretation makes sense in terms of what is know about the constructs under investigation. The interpretability of a component is improved if it is measured by at least three variables, when all of the variables that load on the component have the same conceptual meaning, when the conceptual meaning of other components appear to be measuring other constructs, and when the rotated factor pattern shows simple structure, i.e. each variable loads significantly on only one component.

The Latent Root Criterion

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Scree Test Criterion

I n m y a n a ly i o f t h e cre e lo t , t h e e i e n a lu e le e l o f f e in n in it h t h e t h ir d e i e n a lu e . T h e n u m e r o f c o m o n e n t t o r e t a in c o r r e ond to t h e n u m e r o f e i e n a lu e e fo r e th e lin e le e l o f f . T h e r e f o r e , e o u ld r e t a in t o c o m o n e n t , h ic h co rre ond t o t h e n u m e r d e t e r m in e d y t h e la t e n t r o o t c r it e r io n . ( N O T E : in a ly in t h i t e t , t h e t e x t id e n t if ie t h r e e c o m o n e n t u in t h e ir in t e r r e t a t io n o f t h e c r it e r ia ) .

Stage 5: Interpreting the Factors 1 All three of the criteria for determining the number of components indicate that two components should be retained. If this number matches the number of components derived by SPSS, we can continue with the analysis. If this number does not match the number of components that SPSS derived, we need to request the factor analysis, specifying the number of components that we want SPSS to extract.

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Once the extraction of factors has been completed satisfactorily, the resulting factor matrix, which shows the relationship of the original variables to the factors, is rotated to make it easier to interpret. The axes are rotated about the origin so that they are located as close to the clusters of related variables as possible. The orthogonal VARIMAX rotation is the one found most commonly in the literature. VARIMAX rotation keeps the axes at right angles to each other so that the factors are not correlated with each other. Oblique rotation permits the factors to be correlated, and is cited as being a more realistic method of analysis. In the analyses that we do for this class we will specify an orthogonal rotation. The first step in this stage is to determine if any variables should be eliminated from the factor solution. A variable can be eliminated for two reasons. First, if the communality of a variable is low, i.e. less than 0.50, it means that the factors contain less than half of the variance in the original variable, so we might want to exclude that variable from the factor analysis and use it in its original form in subsequent analyses. Second, a variable may have loadings below the criteria level on all factors, i.e. it does not have a strong enough relationship with any factor to be represented by the factor score, so that the variables information is better represented by the original form of the variable. Stage 5: Interpreting the Factors 2 Since factor analysis is based on a pattern of relationships among variables, elimination of one variable will change the pattern of all of the others. If we have variables to eliminate, we should eliminate them one at a time, starting with the variable that has the lowest communality or pattern of factor loadings. Once we have eliminated variables that do not belong in the factor analysis, we complete the analysis by naming the factors which we obtained. Naming is an important piece of the analysis, because it assures us that the factor solution is conceptually valid. Analysis of the Communalities Once the extraction of factors has been completed, we examine the table of 'Communalities' which tells us how much of the variance in each of the original variables is explained by the extracted factors. For example, in the table shown below, 65.8% of the variance in the original X1 'Delivery Speed' variable is explained by the two extracted components. Higher communalities are desirable. If the communality for a variable is less than 50%, it is a candidate for exclusion from the analysis because the factor solution contains less that half of the variance in the original variable, and the explanatory power of that variable might be better represented by the individual variable. The table of Communalities for this analysis shows communalities for all variables above 0.50, so we would not exclude any variables on the basis of low communalities. If we did exclude a variable for a low communality, we should re-run the factor analysis without that variable before proceeding.

The table of Communalities for this analysis shows communalities for all variables above 0.50, so we would not exclude any variables on the basis of low communalities. If we did exclude a variable for a low communality, we should re-run the factor analysis without that variable before proceeding.

Analysis of the Factor Loadings 1 When we are satisfied that the factor solution explains sufficient variance for all of the variables in the analysis, we examine the 'Rotated Factor Matrix ' to see if each variable has a substantial loading on one, and only one, factor. The size of the loading termed substantial is a subject about which there are a lot of divergent opinions. We will use a time-honored rule of thumb that a substantial loading is 0.40 or higher. Whichever method is employed to define substantial, the process of analyzing factor loadings is the same. The methodology for analyzing factor loading is to underline or mark all of the loadings in the rotated factor matrix that are higher than 0.40. For the rotated factor matrix for this problem, the substantial loadings are highlighted in green.

Analysis of the Factor Loadings 2 We examine the pattern of loadings for what is called 'simple structure' which means that each variable has a substantial loading on one and only one factor. In this component matrix, each variable does have one substantial loading on a component. If one or more variables did not have a substantial loading on a factor, we would re-run the factor analysis excluding those variables one at a time, until we have a solution in which all of the variables in the analysis load on at least one factor. In this component matrix, each of the original variables also has a substantial loading on only one factor. If a variable had a substantial loading on more than one variable, we refer to that variable as "complex" meaning that it has a relationship to two or more of the derived factors. There are a variety of prescriptions for handling complex variables. The simple prescription is to ignore the complexity and treat the variable as belonging to the factor on which it has the highest loading. A second simple solution to complexity is to eliminate the complex variable from the factor analysis. I have seen other instances where authors chose to include it as a variable in multiple factors, or to arbitrarily assign it to a factor for conceptual reasons. Other prescriptions are to try different methods of factor extraction and rotation to see if a more interpretable solution can be found. Naming the Factors Once we have an interpretable pattern of loadings, we name the factors or components according to their substantive content or core. The factors should have conceptually distinct names and content. Variables with higher loadings on a factor should play a more important role in naming the factor. If the factors are not conceptually distinct and cannot be named satisfactorily, the factor solution may be a mathematical contrivance that has not useful application. The naming should take into account the signs of the factor loadings, i.e. negative signs imply an inverse relationship to the factor. For example, X1 'Delivery Speed', X2 'Price Level', X3 'Price Flexibility', and X7 'Product Quality' load on the first factor. Two of these variables: X1 'Delivery Speed' and X3 'Price Flexibility' have a negative sign meaning that they vary inversely to the two variables which have a

positive loading: 'Price Level' and X7 'Product Quality'. The name for this factor, which the authors term 'basic value' on page 126 of the text, attempts to take into account the direction of the relationships among all of these variables. The two variables loading on the second factor X4 'Manufacturer Image' and X6 'Salesforce Image' both have positive signs and are named 'HATCO image' by the authors on page 127 of the text. Stage 6: Validation of Factor Analysis In the validation stage of the factor analysis, we are concerned with the issue generalizability of the factor model we have derived. We examine two issues: first, is the factor model stable and generalizable, and second, is the factor solution impacted by outliers. The only method for examining the generalizability of the factor model in SPSS is a split-half validation. To identify outliers, we will employ a strategy proposed in the SPSS manual. Split Half Validation As in all multivariate methods, the findings in factor analysis are impacted by sample size. The larger the sample size, the greater the opportunity to obtain significant findings that are present only because of the large sample. The strategy for examining the stability of the model is to do a split-half validation to see if the factor structure and the communalities remain the same.