FACTOR ANALYSIS

It is a multivariate analysis technique that is helpful for exploring factors from large
numbers of variables. It is useful for grouping similar variables into factors. Factor
analysis is useful for developing business strategies related with consumer behavior,
investor behavior, human resource behavior, customer satisfaction, service quality, etc.

Procedure for factor analysis using SPSS:

1. Before applying factor analysis, it is required to check the reliability of

participating variables. Cronbach alpha method of reliability analysis will be used
to check reliability of each participating variable. Cronbach alpha value near to 1
is showing very high reliability. If the value is less than 0.5 the reliability is
missing.
2. After checking reliability, factor analysis is applied with following command:
Analyze->dimension reduction->factor->then press enter
Shift all the reliable items into variables window.
3. Click on Descriptive Button and select KMO and bartlett’s test of sphericity. This
will help us to check the validity of factor analysis.
4. Click on continue.
5. Click on Extraction Button and select principle component method of factor
analysis. In case of large numbers of variables it is suggested to increase
maximum iterations for convergence.
6. Click on Rotation Button and select varimax method. Here also maximum
iterations for convergence can be increased.
7. Click on Options Button and select sorted by size. Click on continue.
8. Finally click on Ok Button to see the result of factor analysis in output window.
9. Output of factor analysis:
a) KMO and Bartlett’s test: Kaiser Meyer Olkin measure of sampling adequacy.
KMO value must be greater than 0.5. Significance value of Bartlett’s test must
be less than 0.05. This shows validity of factor analysis.
b) Extraction values in communalities table must be greater than 0.4 i.e. 40%.
If the extraction values is less than 0.4 for a particular variable then we have
to drop this variable and again apply factor analysis with remaining variables.
c) Total variance explained: The table shows initial eigenvalues, % of variance
and cumulative % of variance of factors whose eigenvalues is greater than 1.
The table shows total number of factors extracted from the data set. The
method of rotation is varimax.
10. Rotated component matrix: This table explains how many variables are clubbed
in a particular Factor along with item loads of each variable.
11. Finally following table will be created on the basis of SPSS output received.
Factor Item Item Factor % of Eigen
Name Load Load Variable Values