Factor Analysis was the topic of discussion in the class today. Factor analysis is a process of reducing the number of variables that impact the decision making process of a manager by dividing them into a certain number of factors on the basis of some common features. Factor analysis was explained to us in the class with a simple, yet clear example by Sir. Let us take an example of a premium high-end car. The number of units sold by the manufacturer would depend on several factors like the price of the car, the price of the competitor’s offering, the resale value of the car, the after sales service, availability of components, number of service outlets in the country, etc. These components can be divided into two major parts: The Price and the Service. These two components are called as factors.
Factor analysis can be used to serve the following purposes:
1. The number of variables for further research can be reduced, thus improving drastically the efficiency and the quality of the analysis of the research.
2. When the amount of data available is very large and difficult to comprehend, factor analysis can be used for qualitative and quantitative analysis.
3. Factor analysis can also be used to check whether a particular variable is contributing to the factor, and hence to check the hypothesis of dependency of the research on a particular quality.
Factor analysis has its applications in various fields like Economics (To reduce the large number of factors impacting the economy of a country into small, important factors), Psychology (Crucial factors concerning the behaviour of an individual can be classified unto a common head to reduce the complexity of analysis), Science (Various attributes may be used for the analysis of a particular experiment, which may refer to a single quality), Marketing, etc. But the focus is to analyse the impact of factor analysis on the world of marketing.
1. The pricing decision of a product may be dependent on various factors like cost of manufacturing, Pricing of the major players, Inflation expected in the future, Ease of Availability of the raw materials in the future, Capability of altering the price of the product in the near future, Demand of the product, etc. But, to ease the decision making process, these factors can be divided into heads such as economic factors, cost, Competitor’s analysis, etc. Hence, Factor analysis can be used to make important strategic decisions like pricing.
2. With the help of analysis of various variables unto the formation of the components, the differentiator for a product from that of the competitor can be identified. That analysis may help in establishing the positioning of the company in the minds of the consumers. For example, if a car has the best fuel efficiency in its segment, the entire positioning of the car can be done on the basis of that attribute.
3. It can also be used in Market research. Market research results would contain a lot of data that is irrelevant if analysed on individual basis. Hence, factors can be formed from the variables to understand the results more clearly. Taking the example of a consumer satisfaction survey, the variables can be divided into satisfaction with the quality, service, price, etc.
4. Factor analysis can be used to form perceptual maps, which can be used for effective segmentation of the consumer groups as well.
Author: Malhar Shah
Group: Marketing - Group 4