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Exploratory Factor Analysis

2011

MKT3004 ANALYTICAL TECHNIQUES FOR MARKETING EXPLORATORY FACTOR ANALYSIS

NEWCASTLE UNIVERSITY 2011

BY: ATIQAH ISMAIL

NEWCASTLE UNIVERSITY BUSINESS SCHOOL TUTOR: MITCHELL NESS

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Atiqah Ismail

Exploratory Factor Analysis

2011

1. INTRODUCTION

Factor analysis provides a set of techniques aimed to condense the dimensionality of an original set of metric variables into a new, smaller set of composite variables which can explain the interrelationships between the original set of metric variables, with minimum loss of information (Hair et al., 2010).

Social studies often involve multi-item scales or constructs consisting large number of variables with complex, multidimensional relationships. Factor analysis helps to analyse the structure of interrelationships among those large number of variables by identifying dimensions or factors. The main aim of this paper is to apply and conduct exploratory factor analysis (EFA) on a scale that measures students‟ attitudes to the importance of supermarket features, to identify the underlying dimensions of the scale, evaluate its goodness of fit, and to interpret the derived factors.

The following section will introduce the theory of factor analysis. Subsequently, section three will illustrate an application of factor analysis in establishing the dimensionality of a scale based on a research by Mai and Ness (2006). Section four will explain and discuss the research methodology for the attitudinal measures to the importance of supermarket features. This is followed by the presentation of the empirical results. Section six will evaluate the marketing implications of the results. Finally, section seven will conclude with summary, evaluation of the study and research recommendations.

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Atiqah Ismail

Exploratory Factor Analysis

2011

2. THEORY

2.1. Objective of Factor Analysis Factor analysis identifies and allows interpretation of the underlying structure of the original data. In particular it seeks to discover if the observed variables can be explained largely in terms of a much smaller number of variables called factors.

The two main purpose of factor analysis is data reduction and theory development; data reduction seeks to reduce the number of variables into a smaller number of factors, whereas, theory development is concerned with identifying structures underlying the correlations between variables in order to classify highly correlated variables into factors (Neill, 2010).

2.2. Data Requirement Theory development is concerned with variance-covariance matrix (see Appendix A) which represents the variances of variables and associations between pairs of variables.

The basis of factor analysis is the correlation matrix (see Appendix B), within which the correlation of each variable with itself and other variables are represented. Therefore, data for factor analysis must be suitable for correlation analysis. Firstly, the original data is required to be metric or ratio data, or at least at an interval level. Secondly, data is required to be correlated.

2.3. The Factor Analysis Model Factor analysis is based on the Common Factor Model (Figure 1, Equation 1) which proposes that each original observed variable (x‟s) is influenced by underlying non-observable common factors (F‟s) and non-observable unique factor (e‟s) (DeCoster, 1998).

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Atiqah Ismail

Exploratory Factor Analysis

2011

Figure 1 The Common factor Model

x1

e1

F1

x2

e2 e3

x3

F2

x4

e4

x5

e5

Adapted from: DeCoster (1998)

Hence, it assumes that each p original observed variables (x‟s) are the linear combinations of k non-observable common factors (F‟s) and the non-observable unique factors (e‟s).

Equation (1)

Therefore, the basic model assumes that: The original observed variables and the common factors are standardised to have a mean of zero and a variance of unity, The covariances between common factors are zero so that they are uncorrelated, Common and unique factors are not correlated, Covariances between unique factors are zero so that pairs of unique factors are not correlated.

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Atiqah Ismail

Exploratory Factor Analysis

2011

3. APPLICATION TO MARKETING

In marketing research factor analysis can be applied to facilitate the identification of factors or dimension of scales, to use factor input as variable for subsequent analysis, and to confirm the dimensionality of existing scales.

This section will use a study by Mai and Ness (2006) to illustrate the application of EFA in establishing the dimensionality of a scale.

Aim of the Study Mai and Ness (2006) aims to investigate mail-order shopper‟s characteristics, attitudes, preferences and behaviour. The survey was implemented as a national survey in the United Kingdom (UK). The study employed a mail survey on customer contacts supplied by five mail-order specialty food companies. The study employed a stratified random sampling method based upon the relative sizes of the firms‟ contact lists. The survey yielded 1,028 valid responses for factor analysis.

EFA was applied to establish the dimensionality of a scale to measure satisfaction with mailorder specialty food, based on 8 features of mail-order shopping, in the form of 8-item fivepoint satisfaction scale.

Description of Data and Measures The original variable consisted of an 8-item five-point scale concerned with the levels of transaction satisfaction (1 = Very satisfied, 5 = Very dissatisfied). The scale is assumed to be a metric measure.

Mai and Ness (2006) applied EFA to the 8-item five-point scale of transaction satisfaction. The analysis employed principal components with Varimax rotation, and the extraction criterion was to derive factors with eigenvalues greater than unity.

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Atiqah Ismail Results

Exploratory Factor Analysis

2011

Two factors were derived from the analysis (see Appendix C). Both factors account for 59% of total variance, while communalities are generally respectable, apart from those for catalogue presentation (0.410) and price (0.411). The first factor is most associated with, in descending order of magnitude, ordering process (0.819), payment terms (0.801), delivery service (0.762) and catalogue presentation (0.537) and is defined as “Service satisfaction”. The second factor is most associated with, in descending order of magnitude, product selection (0.833), product quality (0.827), price (0.553), and enquiry service (0.520) and is defined as “Product satisfaction”.

Implications The two-dimensions of the scale indicate that customer satisfaction is associated with both service and product features of mail-order specialty food, however, satisfaction with service transaction appears to be more important. Hence, the implication for mail-order firms is that they need to expand their vision beyond food delivered by post, and consider in-store specialty food that it is the high-level of customer care and service which differentiate the mail-order product from the in-store equivalent. Satisfaction and re-purchase likelihood are dependent on integrated features of both product and service aspects of the mail order business

3.1. Other Applications Factor analysis can also be used to confirm or evaluate the suitability of an existing scale to a new body of study. For example, Dobson and Ness (2009) adopted attitude to food shopping scale from Chethamrongchai and Davies (2000) and attitudes to time scale from Davies and Madran (1997) to be used in their study. Dobson and Ness employed factor analysis to evaluate the suitability of the adopted scales to their current study of students‟ attitudes to food shopping and students‟ attitudes to time. Factor analysis can therefore help researchers in employing suitable scales in their study and hence produce a more reliable and accurate output.

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Atiqah Ismail

Exploratory Factor Analysis

2011

Factor analysis can establish factors for a basis for a further research, where, subsequently, Dobson and Ness used the evaluated measure and the post hoc factor structure from factor analysis to form the basis of cluster analysis in exploring the existence of student segments.

4. METHODOLOGY

Data Explanation The study employed a questionnaire survey designed to include nominal measures of shopping behaviour, a scale of students‟ attitudes to the importance of supermarket features, and nominal measures of students‟ characteristics. The survey adopted face-to-face interviews with full-time undergraduate Newcastle University students. A convenience quota sampling method was used to approximate student representation by gender and faculty. Subsequently the survey yielded 731 valid responses.

Measures The scale consists of fourteen five-point scales concerned with measuring the importance of supermarket store features to students (1 = Not at all important, 5 = Very important). Specific measures are identified in Appendix D.

Confirmation that Data are Metric The use of ordinal scale (Appendix E) with explicit numerical scores and equal intervals of unity (1) between descriptors implies that the scale is assumed to be interval and thus a metric measure.

Confirmation that Data are Correlated The confirmation that data are inter-correlated is indicated by a KMO index of 0.697 (0.7 rounded), classified by Kaiser (1974, cited in Ness, 2011) as “middling”. Additionally, the Bartlett‟s test of sphericity results in the rejection of the null hypothesis, indicating that data are inter-correlated at the 5% significance level (χ2 (91) = 1848.233, p<.000). 7

Atiqah Ismail Explanation of factor Method

Exploratory Factor Analysis

2011

The analysis employed principal components with Varimax rotation, and the extraction criterion was to derive factors with eigenvalues greater than unity (1). The analysis yielded a 5-factor solution (Table 1). Factor scores were generated for each respondent for subsequent analysis. The analysis was conducted IBM SPSS 19.0 (SPSS, 2008).

5. RESULTS

Table 1 Varimax Rotated Factor Matrix for Importance of Store Attributes Store Feature Convenient location Parking facilities Pleasant atmosphere Well-known brands Own label products High quality products Value for money Low prices Special offers Friendly, helpful staff Check-out speed Methods of payment Cash-back facilities Other facilities Factor Number 1 .181 -.013 .008 .010 .601 .047 .767 .833 .757 .103 .021 .077 .003 -.020 2.754 19.669 19.669 2 .156 .123 -.010 .173 .044 .066 .078 -.067 .054 -.026 .555 .824 .846 .088 2.219 15.853 35.522 3 .114 .132 .594 .769 .132 .734 .098 -.097 -.017 .201 .043 .162 .055 .087 1.370 9.787 45.310 4 .069 .161 .402 .020 -.255 .100 .084 .077 .095 .805 .531 .024 .006 .560 1.312 9.368 54.678 5 -.769 .781 -.187 .099 .211 .037 -.148 -.123 -.090 -.114 .074 -.013 -.027 .291 1.019 7.278 61.956 h2 .665 .668 .550 .632 .490 .557 .634 .729 .594 .714 .597 .711 .719 .414

**Eigenvalue Variance % Cumulative variance %
**

Notes 1. h2 refers to communality

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Atiqah Ismail

Exploratory Factor Analysis

2011

Report and Evaluation: Goodness of Fit Goodness of fit is evaluated using total variance explained and communalities (h2). The minimum acceptable value for communalities was set at 0.5 (Hair et al., 2010), the minimum threshold for the inclusion of factor loadings consistent with the sample size 731 was set at 0.300 (Hair et al., 2010). Total variance explained and communalities with values greater than 0.6 are considered to be „respectable‟ for social science data (Ness, 2011).

Goodness of fit resulted to acceptable total variance of 62% and a generally respectable communalities, apart from variable ‘other facilities’ (.414). The communality for ‘other facilities’ (.414) is very weak. It indicates that only 41% of the variance in ‘other facilities’ is explained by the 5 factors, and may indicate that this attribute do not fit well with the factor solution. However this was retained because it loaded significantly on one factor.

All measures load uniquely and significantly on at least one factor, hence contribute to the validity of the measure. Goodness of fit indicates an acceptable fit of 14 features consisting of 1 very weak, 3 weak, 6 respectable, and 4 strong communalities. Goodness of fit is also supported by an acceptable total variance of 61.956 indicating that 62% of all original variables are explained by the 5 factors. The 14 original variables are replaced by 5 factors in which the degree of data reduction is 64% and information loss of 34%.

Interpretation of Results Factor 1 is most strongly associated, in descending order of importance, with ‘low prices’ (.833), ‘value for money’ (.767) and ‘special offers’ (.757). It is therefore interpreted as “Economy” factor.

Factor 2 is most strongly associated, in descending order of importance, with ‘cash-back facilities’ (.846) and ‘method of payment’ (.824). It is therefore interpreted as “Payment facilities” factor. Factor 3 is most strongly associated, in descending order of importance, with ‘wide range of well-known brands’ (.769) and ‘high quality products’ (.734). It is therefore interpreted as “Range in quality product” factor. 9

Atiqah Ismail

Exploratory Factor Analysis

2011

Factor 4 is most strongly associated with ‘friendly, helpful staff’ (.805) and therefore it is interpreted as “Friendly staff” factor.

Factor 5 is most strongly associated, in descending order of importance, with ‘car-parking facilities’ (.781) and ‘inconvenient location’ (.769). It is therefore interpreted as “Accessibility” factor.

Hence, in descending order of magnitude factors are economy, payment facilities, range in quality product, friendly staff, and accessibility. Therefore, these factors represent the relative importance of supermarket features to students.

**6. MARKETING IMPLICATIONS OF RESULTS
**

Factor analysis was conducted to develop a measure for students‟ attitudes to the importance of supermarket features. The factor structure could provide strategic direction to managerial decision-making for supermarkets seeking to cater the student segments.

Managers could shape their promotional strategies based on the identified dimensions. Promotional strategies can be adapted to effectively attract students by focusing its core message on economy, such as discounts or availability of quality product-range in-store. An example of a promotional campaign can be a ‘buy 4 for the price of 3’ on its quality product range.

Identification of “Accessibility” factor may assist managerial decision-making in locating a new supermarket branch. For example, strategically locating near public transport facilities or selecting a location which provides abundant space for car-parking facilities. “Economy” factor may assist operational decision-making in the strategic selection of suppliers, for example, selecting suppliers which enable the supermarket to provide economy and range in quality product in its offering, efficiently and effectively. Other managerial strategies may

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Atiqah Ismail

Exploratory Factor Analysis

2011

also include staff motivation and human resource training, in contributing to reliable shopfloor staff.

However, it is important to note that the resulting factors merely indicate the importance of supermarket features. They do not indicate students‟ preferences.

**7. SUMMARY AND CONCLUSION
**

The purpose of this paper is to identify the dimensions underlying the measure of students‟ attitudes to the importance of supermarket features. The study employed a questionnaire survey using face-to-face interviews with full-time undergraduate Newcastle University students. Factor analysis was conducted on 14 original variables to identify the structure of the measure using Varimax rotation with an extraction criterion to derive factors with eigenvalues greater than unity. The analysis resulted in a five-factor solution defined as, ‘economy’, ‘payment facilities’, ‘range in quality product’, ‘friendly staff’, and ‘accessibility’. Goodness of fit resulted to acceptable total variance of 62% and a generally respectable communalities.

However, the representativeness of the findings is limited to full-time undergraduate Newcastle University students. This does not represent the whole student population

students, hence suggests the need for further research to extend the sample frame to a more representative student population. For example, inclusion of undergraduate and post graduate university students from other regions of the UK in the sample frame. The potential significance of a wider representativeness could enable an extension of the study to include subsequent research, such as cluster analysis, to allow the identification of student segments and potentially allows segment profiling. This can ultimately allow more refined marketing strategies. Moreover, the study is an exploratory research, hence merits further research.

Nevertheless, the significance of the findings can contribute valuable implication to marketers in strategic decision-making, in establishing promotional strategies and other managerial decision. This finding is particularly valuable, to supermarkets in Newcastle city

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Atiqah Ismail

Exploratory Factor Analysis

2011

centre where university campus (Newcastle University and Northumbria University) and students‟ residence are within proximity of the city.

The study is also limited to the importance of supermarket features, it does not reflect students‟ preferences and the extent to which these features influence their supermarket selection, and hence the scope for further research is indeed significant.

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UsefulNot usefulThis essay employs factor analysis to investigate students' attitudes to the importance of supermarket features.

This essay employs factor analysis to investigate students' attitudes to the importance of supermarket features.

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