CASE I

Study of Small Businesses

Group 2
Ashwani Sinha (10), Atul Mehta (11), Prashant
Akhawat (28) and Suresh Jangra (35)

Definition revisited
Factor analysis is an interdependent technique
in that an entire set of interdependence
relationships is examined

About the study

Objective of the study
Determine the reasons for success or failure of small business
Research design

150 entrepreneurs asked to indicate the perceived areas of strength and

weaknesses of their organisations
11 variables rated on a five point scale (1 represents very weak area and 5
represents very strong area)
Variables
V1 = Location of firm/Business
V2 = Type of plant, equipment and other
physical facilities
V3 = Product/ service quality
V4=Pricing of products/services
V5=Customer Services

V6=Innovations in product/services
offered
V7=Cost control
V8=Employee productivity
V9=Marketing (Personal selling,
promotion, adv, etc)
V10=Cash and Financial mgmt
V11=Overall quality of mgmt

Number of observations should be atleast four or five times the number of variables

Step 1 - Formulate the problem

11 variables are too many to handle, so
Should we go for factor analysis?
For the factor analysis to be meaningful, the variable
must be correlated.
Problem formulated >> The problem is to identify the
underlying factors which represents the impact of these
11 variables

Step 2 Construct the correlation

matrix
For the factor analysis to be meaningful, the
variable must be correlated. How do we check
that?
By constructing a correlation matrix
Any double check mechanism?
Yes. Bartletts test of sphericity can be used to
test the null hypothesis that the variables are
uncorrelated in the population

Correlation Matrix
V1

V2

V3

V4

V5

V6

V7

V8

V9

V10

V11

V1

1.000

-.155

.317

-.008

.142

.000

-.208

.020

.105

.080

.168

V2

-.155

1.000

.135

.250

-.072

.219

.216

.166

.071

.133

.104

V3

.317

.135

1.000

.372

.214

.008

-.066

.064

-.036

.022

.003

V4

-.008

.250

.372

1.000

.193

.162

.266

-.040

.046

.277

-.030

V5

.142

-.072

.214

.193

1.000

-.198

.127

.079

-.174

.239

.121

V6

.000

.219

.008

.162

-.198

1.000

.153

.104

.332

.004

-.031

V7

-.208

.216

-.066

.266

.127

.153

1.000

.257

.315

.557

.344

V8

.020

.166

.064

-.040

.079

.104

.257

1.000

.081

.006

.198

V9

.105

.071

-.036

.046

-.174

.332

.315

.081

1.000

.226

-.060

.080

.133

.022

.277

.239

.004

.557

.006

.226

1.000

.453

.168

.104

.003

-.030

.121

-.031

.344

.198

-.060

.453

1.000

V10
V11

Step 3 -Determine the method of

factor analysis
Once it has been determined that factor analysis
is suitable for analysing the data, an appropriate
method must be selected
Two approaches are used
Principal components analysis (when objective is to determine
the min number of factors that will account for maximum
variance in the data for use in subsequent multivariate
analysis)
Common factor analysis (when identifying the underlying
dimensions and the common variance is of interest)

DATA

SPSS
1.
2.
3.
4.

Select ANALYZE from the SPSS menu bar

Click DATA REDUCTION and then FACTOR
Move variables V1 to V11 into the VARIABLES box
Click on DESCRIPTIVES. In the pop-up window, in the
STATISTICS box check INITIAL SOLUTION. In the
CORRELATION MATRIX box check COEFFICIENTS, check
KMO AND BARTLETTS TEST OF SPHERICITY and also
check REPRODUCED. Click CONTINUE
5. Click on EXTRACTION. In the pop-up window, for METHOD
select PRINCIPAL COMPONENTS. In the ANALYZE box,
check CORRELATION MATRIX. In the EXTRACT box, select
BASED ON EIGENVALUE and enter 1 for EIGENVALUES
GREATER THAN box. In the DISPLAY box check
UNROTATED FACTOR SOLUTION. Click CONTINUE

SPSS (Concluded)
6. Click on ROTATION. In the METHOD box check
VARIMAX. In the DISPLAY box check ROTATED
SOLUTION. Click CONTINUE
7. Click on SCORES. In the pop-up window, check
DISPLAY FACTOR SCORE COEFFICIENT
MATRIX. Click CONTINUE
8. Click OK.

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
.542
Bartlett's Test of Sphericity

Approx. Chi-Square
df
Sig.

148.271
55
.000

Interpretation
A high Chi-square value of 148.271 with p-value less than 0.05 implies
rejection of the null hypothesis. The variables are thus correlated
Higher KMO measure of 0.542 further testifies that correlation is significant
(KMO>0.5 is desirable)

Recommendation
Factor analysis may be considered an appropriate technique for analyzing
the given data

Results of Principal Components Analysis

Communality
Communalities
Initial
Extraction
VAR00001
1.000
.839
VAR00002
1.000
.604
VAR00003
1.000
.748
VAR00004
1.000
.768
VAR00005
1.000
.547
VAR00006
1.000
.608
VAR00007
1.000
.769
VAR00008
1.000
.754
VAR00009
1.000
.737
VAR00010
1.000
.802
VAR00011
1.000
.656
Extraction Method: Principal Component
Analysis.

Communality is the amount of variance a

variable shares with all the other variables
being considered. This is also the proportion
of variance explained by the common factors.
The communalities for the variables under
extraction are different from initial because all
of the variances associated with the variables
are not explained unless all the factors are
retained

Results of Principal Components Analysis

Eigenvalue
Observations and Interpretation
Initial Eigenvalues

Factors
1

Eigenvalue
2.373

Eigen values for the factors are in decreasing

order as we go from factor 1 to 11

% of
Cumulative
Variance
%
21.574
21.574

1.684

15.305

36.880

1.455

13.224

50.104

1.224

11.124

61.228

1.098

9.980

71.208

.861

7.832

79.039

.656

5.962

85.001

.579

5.263

90.264

.445

4.041

94.306

10

.325

2.957

97.263

11

.301

2.737

100.000

11.00

100.00

Total

Factors 1-5 have the highest influence on

whether a business will be successful or
unsuccessful

Sum of variances on account of all 11 factors

is 11.00, which is also equal to the number of
variables
% of Variance is calculated as Eigen value
number of factors

Several considerations are involved in

determining the number of factors that
should be used in the analysis >>>

Step 4 -Determine the number of factors

Extraction Sums of Squared Loadings
Factor
1

Total

% of Variance Cumulative %

2.373

21.574

21.574

1.684

15.305

36.880

1.455

13.224

50.104

1.224

11.124

61.228

1.098

9.980

71.208

Rotation Sums of Squared Loadings

Factors
1
2
3
4
5

Total
% of Variance Cumulative %
2.039
18.541
18.541
1.607
14.614
33.154
1.578
14.342
47.497
1.387
12.608
60.104
1.221
11.103
71.208

Method
EIGENVALUES approach - only factors
with greater than 1.0 eigenvalues are
considered.
Extraction sums of squared loadings
Gives the variances associated with the
factors that are retained. In this case 5
factors whose eigenvalues is above 1
has been retained.

Step 5 Rotate the factors (before rotation)

1
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11

2
.047
.436
.215
.506
.268
.287
.792
.335
.375
.755
.524

.503
-.250
.533
.192
.660
-.518
-.221
-.083
-.467
.144
.220

Factor Matrix
3
.223
.305
.628
.521
-.100
.447
-.265
-.084
.188
-.292
-.489

5
.731
-.349
.038
-.386
-.170
.235
-.121
.167
.495
.034
.212

-.004
.370
.151
-.236
-.026
.043
-.090
.774
-.312
-.354
.222

Factor Matrix contain the coefficient used to express the standardized variables in terms of
the factors. These coefficients represent the correlation between the factors and the
variables. Coefficients highlighted in yellow represents close relation between the factors and
the variables.

Interpretation
Factor matrix should NOT be used to indicate the relation between the factors and the
variables. As in table above, we see factor 1 is correlated with as many as five variables. Same
is the case with factor 2. It can bet better interpreted through rotation.

Step 5 Factors rotated>> to achieve better

interpretability
1
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11

.012
.061
-.127
.221
.325
-.032
.777
.096
.287
.875
.636

Rotated Factor Matrix

2
3
.052
.057
.461
.200
.708
-.090
.827
.066
.321
-.535
.192
.734
.122
.207
-.038
.051
-.040
.786
.150
.031
-.161
-.182

5
.912
-.376
.451
-.098
.228
-.035
-.278
.052
.158
.057
.197

.028
.455
.138
-.146
-.011
.174
.174
.859
-.102
-.100
.393

Rotated Factor Matrix objective is to achieve significant coefficient values for each of the factors , for
only some of the variables. If several factors have high coefficients with same variable, it will be
difficult to interpret

Interpretation
From the rotated factor matrix above , we see that none of the factors share high coefficient with the
same variable

Orthogonal rotation
Orthogonal rotation if the axes are
maintained at right angle
Varimax is the most commonly used rotation
procedure
Rotation minimizes the number of variables
with high loading on a factor
Orthogonal rotation results in factors that are
uncorrelated

Step 6 Interpret the factors

Factors

Variables

Label

V7=Cost control
V10=Cash and Financial mgmt
V11=Overall quality of mgmt

18.541

Finance & Operations Factor

V3 = Product/ service quality

V4=Pricing of products/services

14.614

Product Quality & Price

Factors

V5=Customer Services
V6=Innovations in product/services
offered
V9=Marketing (Personal selling,
promotion, adv, etc)

14.342

Marketing Factors

V1 = Location of firm/Business

12.608

Location Factor

V8=Employee productivity

11.103

Human Resources Factor

The above constitutes 71% of the total variances

Step 7a- Calculate the factor scores

A factor is simply a linear combination of the original variables. The factor
scores formulae
Fi=Wi1V1+Wi2V2+Wi3V3+WikVk
The weights (factor coefficient) are obtained from the factor score
coefficient matrix
Factor Score Coefficients matrix

V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11

-.001
-.076
-.148
.053
.160
-.081
.369
-.054
.143
.459
.309

-.023
.291
.443
.527
.180
.102
.008
-.076
-.080
.013
-.189

.113
.058
-.042
.013
-.348
.462
.072
-.012
.524
-.002
-.140

.675
-.281
.285
-.115
.104
.029
-.190
.055
.187
.038
.146

.028
.349
.114
-.195
-.031
.104
.034
.728
-.164
-.203
.279

Step 7a- Calculate the factor scores

Variables

F1

F2

F3

F4

F5

V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11
Factor score for
respondent number
5
Factor score for
respondent number
6

-0.001
-0.076
-0.148
0.053
0.16
-0.081
0.369
-0.054
0.143
0.459
0.309

-0.023
0.291
0.443
0.527
0.18
0.102
0.008
-0.076
-0.08
0.013
-0.189

0.113
0.058
-0.042
0.013
-0.348
0.462
0.072
-0.012
0.524
-0.002
-0.14

0.675
-0.281
0.285
-0.115
0.104
0.029
-0.19
0.055
0.187
0.038
0.146

0.028
0.349
0.114
-0.195
-0.031
0.104
0.034
0.728
-0.164
-0.203
0.279

4.648

5.407

3.957

4.16

4.341

2.341

6.406

0.707

6.26

Respondent
Number 5
4
4
5
5
3
5
4
4
5
4
5

Respondent
Number 6
4
5
5
5
5
5
4
4
5

Step 7b Select surrogate variables

There can be occasions when instead of a factor, we can
consider using the variables
Selection of such a variable is made from factor matrix
1
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11

2
.047
.436
.215
.506
.268
.287
.792
.335
.375
.755
.524

.503
-.250
.533
.192
.660
-.518
-.221
-.083
-.467
.144
.220

Factor Matrix
3
.223
.305
.628
.521
-.100
.447
-.265
-.084
.188
-.292
-.489

5
.731
-.349
.038
-.386
-.170
.235
-.121
.167
.495
.034
.212

-.004
.370
.151
-.236
-.026
.043
-.090
.774
-.312
-.354
.222

So V7=Cost control could be used as a surrogate variable for Finance & Operations
Factor

Step 8 (Final step) Determine the fit

model fit
Reproduce d Corre lations

Reproduced Correlation

Residual a

V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11
V1
V2
V3
V4
V5
V6
V7
V8
V9
V10
V11

V1
.839 b
-.294
.445
-.044
.198
.024
-.221
.074
.188
.070
.181
.139
-.128
.037
-.056
-.024
.013
-.053
-.083
.011
-.013

V2
-.294
.604 b
.195
.379
-.029
.325
.329
.370
.050
.062
.033
.139
-.059
-.128
-.043
-.107
-.113
-.204
.020
.071
.071

V3
.445
.195
.748 b
.488
.336
.082
-.132
.098
-.078
.004
-.035
-.128
-.059
-.116
-.121
-.074
.066
-.035
.042
.018
.037

V4
-.044
.379
.488
.768 b
.281
.178
.288
-.138
.081
.328
-.081
.037
-.128
-.116
-.089
-.016
-.022
.098
-.035
-.051
.051

V5
.198
-.029
.336
.281
.547 b
-.351
.116
-.006
-.303
.330
.293
-.056
-.043
-.121
-.089
.153
.011
.085
.129
-.091
-.172

V6
.024
.325
.082
.178
-.351
.608 b
.190
.174
.537
.004
-.123
-.024
-.107
-.074
-.016
.153
-.037
-.070
-.205
-.001
.092

V7
-.221
.329
-.132
.288
.116
.190
.769 b
.216
.319
.671
.450
.013
-.113
.066
-.022
.011
-.037
.041
-.004
-.114
-.106

V8
.074
.370
.098
-.138
-.006
.174
.216
.754 b
-.010
-.003
.406
-.053
-.204
-.035
.098
.085
-.070
.041
.092
.009
-.208

V9
.188
.050
-.078
.081
-.303
.537
.319
-.010
.737 b
.289
.037
-.083
.020
.042
-.035
.129
-.205
-.004
.092
-.063
-.098

V10
.070
.062
.004
.328
.330
.004
.671
-.003
.289
.802 b
.498
.011
.071
.018
-.051
-.091
-.001
-.114
.009
-.063

V11
.181
.033
-.035
-.081
.293
-.123
.450
.406
.037
.498
.656 b
-.013
.071
.037
.051
-.172
.092
-.106
-.208
-.098
-.046

-.046

Extraction Method: Principal Component Analysis.

a. Residuals are computed betw een observed and reproduced correlations. There are 34 (61.0%) nonredundant residuals w ith absolute values greater than 0.05.
b. Reproduced communalities

There are 61% nonredundant residuals with absolute values greater than 0.05.
The model is therefore not fit.

 Thank you