QUANTITATIVE ANALYSIS

FOR
MANAGEMENT –II

Analysis of Variance
 Reading Difficulty of Magazine
Advertisements

 Reading Difficulty of Magazine
Advertisements

Source of SS DF MS F Ratio
Variation
Between 48.53 2 24.26 6.97
Treatments
Within 52.22 15 3.48
Treatments
Total 100.75 17
 Reading Difficulty of Magazine
Advertisements


 Two-Way Analysis of Variance
 The purpose of designing a Two-Way analysis of variance
experiment is to reduce the within treatments variation to
more easily detect differences between the treatment means.
 Two-Way ANOVA

 Assumptions
 Populations are normally distributed
 Populations have equal variances
 Independent random samples are
drawn
 Two-Way Notation

 Let xij denote the observation in the ith block and jth
treatment
 Suppose that there are K treatments and B blocks,
for a total of n = KB observations
 Let the overall mean be x
 Denote the treatment sample means by
xj (j  1,2,  , K)
 Denote the block sample means by
x i (i  1,2,, B)
 Two-Way Analysis of Variance

 Partition of Total Variation
 TSS = SST + SSB + SSE

Variation due to
Total Sum of
Squares (TSS) = differences between
groups (SST)
+
Variation due to
differences between
blocks (SSB)
+
The error terms are assumed Variation due to
to be independent, normally random sampling
distributed, and have the same (unexplained error)
variance
(SSE)
 Two-Way Sums of Squares
 The sums of squares are Degrees of
Freedom:
B K
Total : TSS    (x ij  x) 2 n–1
i 1 j1

K
Between - Treatments : SST  B (x  j  x) 2 K–1
j1

B
Between - Blocks : SSB  K  (x i  x) 2 B–1
i 1

K B
Error : SSE    (x ij  x j  x i  x) 2 (K – 1)(B – 1)
j1 i 1
 Two-Way Mean Squares
 The mean squares are
TSS
MS(Total) 
n 1
SST
MST 
K 1
SSB
MSB 
B 1
SSE
MSE 
(K  1)(B  1)
 Experimental Design 1: Best
Magazine Layout and Cover
 A magazine publisher wants to compare three different magazine
layouts. To do this, she plans to randomly assign the three design
layouts equally among 60 supermarkets. The number of magazines
sold during a one-week period is the outcome variable.

 Now suppose a second experiment is planned for the following

week to compare four different covers for the magazine. A similar
experimental design will be used, with the four covers randomly
assigned among the same 60 supermarkets
 Experimental Design 1: Best
Magazine Layout and Cover

 In the first experiment 20 stores were assigned to each level of the

factor for a total of 60 stores. In the second experiment 15 stores
were assigned to each level of the factor for a total of 60 stores.
The total amount of time for the two experiments is two weeks.
Each experiment will be analyzed using one-way ANOVA. The
factor in the first experiment is magazine layout with three levels,
and the factor in the second experiment is magazine cover with
four levels. Let’s now consider combining the two experiments into
one.
 Experimental Design 2: Best
Magazine Layout and Cover
 Suppose we use a two-way approach for the magazine design
problem. There are two factors, layout and cover. Since layout has
three levels and cover has four levels, this is a 3×4 design. This
gives a total of 12 possible combinations of layout and cover. With
a total of 60 stores, we could assign each combination of layout
and cover to 5 stores. The number of magazines sold during a one-
week period is the outcome variable.
 Experimental Design 2: Best
Magazine Layout and Cover
 Each combination of the factors in a two-way design corresponds
to a cell. The 3×4 ANOVA for the magazine experiment has 12
cells, each corresponding to a particular combination of layout and
cover.
 With the two-way design for layout and cover, notice that we have
20 stores assigned to each level, the same as we had for the one-
way experiment for layout alone. Similarly, there are 15 stores
assigned to each level of cover. Thus, the two-way design gives us
the same amount of information for estimating the sales for each
level of each factor as we had with the two one-way designs. The
difference is that we can collect all the information in only one
week. By combining the two factors into one experiment, we have
increased our efficiency by reducing the amount of data to be
collected by half.
 Two-Way ANOVA:
The F Test Statistic

F Test for Treatments

H0: The K treatment means
MST Reject H0 if
are all the same
F
MSE F > FK-1,(K-1)(B-1),

F Test for Blocks

H0: The B population block
MSB Reject H0 if
means are the same
F
MSE
F > FB-1,(K-1)(B-1),
 General Two-Way Table Format

Source of Sum of Degrees of Mean Squares F Ratio

Variation Squares Freedom
Between SST MST
Treatments SST K–1 MST 
K 1 MSE

Between SSB MSB

SSB B–1 MSB 
blocks B 1 MSE

SSE (K – 1)(B – 1) SSE

Error MSE 
(K  1)(B  1)

Total TSS n-1

 Air Traffic Controller Stress Test
 A study measuring the fatigue and stress of air traffic controllers
resulted in proposals for modification and redesign of the
controller’s work station. After consideration of several designs for
the work station, three specific alternatives are selected as having
the best potential for reducing controller stress.

 Do the sample results justify the conclusion that the population

mean stress levels for the three systems differ? That is, are the
differences statistically significant?
 Air Traffic Controller Stress Test

 In this table we include column totals (treatments) and row totals

(blocks) as well as some sample means
 Air Traffic Controller Stress Test

 More than One
Observation per Cell

 A two-way design with more than one

observation per cell allows one further source
of variation
 The interaction between groups and blocks
can also be identified
 Let
 K = number of groups
 B = number of blocks
 L = number of observations per cell
 n = KBL = total number of observations
 More than One
Observation per Cell
 Graduate Management Admissions
Test (GMAT)
 We will consider a study involving the Graduate Management
Admissions Test (GMAT), a standardized test used by graduate
schools of business to evaluate an applicant’s ability to pursue a
graduate program in that field. Scores on the GMAT range from
200 to 800, with higher scores implying higher aptitude.
 In an attempt to improve students’ performance on the GMAT, a
major Texas university is considering offering the following three
GMAT preparation programs.
 1. A three-hour review session covering the types of questions
generally asked on the GMAT.
 2. A one-day program covering relevant exam material, along with
the taking and grading of a sample exam.
 3. An intensive 10-week course involving the identification of each
student’s weaknesses and the setting up of individualized
programs for improvement.
 Graduate Management Admissions
Test (GMAT)
 Hence, one factor in this study is the GMAT preparation program,
which has three treatments: three-hour review, one-day program,
and 10-week course. Before selecting the preparation program to
adopt, further study will be conducted to determine how the
proposed programs affect GMAT scores.

 The GMAT is usually taken by students from three colleges: the

College of Business, the College of Engineering, and the College of
Arts and Sciences. Therefore, a second factor of interest in the
experiment is whether a student’s undergraduate college affects
the GMAT score. This second factor, undergraduate college, also
has three treatments: business, engineering, and arts and
sciences.
 Graduate Management Admissions
Test (GMAT)
 Assume that two business students will take the three-hour review,
two will take the one-day program, and two will take the 10-week
course. In addition, two engineering students and two arts and
sciences students will take each of the three preparation programs.
In experimental design terminology, the sample size of two for each
treatment combination indicates that we have two replications
 More than One
Observation per Cell
(continued)

TSS = SST + SSB + SSI + SSE Degrees of

Freedom:
SST K–1
Between-group variation

TSS SSB B–1

Between-block variation
Total Variation
SSI
Variation due to interaction (K – 1)(B– 1)
between groups and blocks
n–1
SSE KB(L – 1)
Random variation (Error)
 Examples:
Interaction vs. No Interaction
 Interaction is
 No interaction:
present:

Block Level 1
Mean Response

Mean Response
Block Level 1
Block Level 3

Block Level 2
Block Level 2
Block Level 3

A B C A B C
Groups Groups
 Sums of Squares with Interaction
Degrees of Freedom:

Total : TSS     (x jil  x) 2 n-1

j i l

K
Between - groups : SST  BL  (x j  x) 2 K–1
j1

H
Between - blocks : SSB  KL  (x i  x)2 B–1
i 1

K H
Interactio n : SSI  L   (x ji  x j  x i  x)2 (K – 1)(B – 1)
j 1 i 1

Error : SSE     (x jil  x ji )2 KB(L – 1)

i j l
 Two-Way Mean Squares
with Interaction
 The mean squares are
TSS
MS(Total) 
n 1
SST
MST 
K 1
SSB
MSB 
B 1
SSI
MSI 
(K - 1)(B  1)
SSE
MSE 
KB(L  1)
 Two-Way ANOVA:
The F Test Statistic
F Test for group effect
H0: The K population group
means are all the same MST Reject H0 if
F
MSE F > FK-1,KB(L-1),

F Test for block effect

H0: The B population block
means are the same MSB Reject H0 if
F
MSE F > FB-1,KB(L-1),

F Test for interaction effect

H0: the interaction of groups and
blocks is equal to zero
MSI Reject H0 if
F
MSE F > F(K-1)(B-1),KB(L-1),
 Two-Way ANOVA
Summary Table
Source of Sum of Degrees of Mean F
Variation Squares Freedom Squares Statistic

Between MST MST

SST K–1
groups = SST / (K – 1) MSE
Between MSB MSB
SSB B–1
blocks = SSB / (B – 1) MSE

MSI MSI
Interaction SSI (K – 1)(B – 1)
= SSI / (K – 1)(B – 1) MSE

MSE
Error SSE KB(L – 1)
= SSE / KB(L – 1)

Total TSS n–1

Graduate Management Admissions
Test (GMAT)
 Graduate Management Admissions
Test (GMAT)


 Graduate Management Admissions
Test (GMAT)

 Features of Two-Way
ANOVA F Test
 Degrees of freedom always add up
 n-1 = KBL-1 = (K-1) + (B-1) + (K-1)(B-1) + KB(L-1)
 Total = groups + blocks + interaction + error
 The denominator of the F Test is always the same but
the numerator is different
 The sums of squares always add up
 TSS = SST + SSB + SSI + SSE
 Total = groups + blocks + interaction + error