Canonical Analysis: A Case Study on

measuring the impact of new technical tools

on the performance of a Business

INTRODUCTION
Canonical analysis in statistics belongs to the family of regression methods for data
analysis. The regression analysis quantifies a relationship between a predictor variable
and a criterion variable by the coefficient of correlation r, coefficient of determination r²,
and the standard regression coefficient β. Multiple regression analysis expresses a
relationship between a set of predictor variables and a single criterion variable by the
multiple correlation R, multiple coefficient of determination R², and a set of standard
partial regression weights β1, β2, etc. Canonical variate analysis captures a relationship
between a set of predictor variables and a set of criterion variables by the canonical
correlations ρ1, ρ2, ..., and by the sets of canonical weights C and D.
Canonical Analysis
An extension of multiple regression analysis that deals with two dependent variables.
The predictor variables are independent variables and the criterion represents the
dependent variables, depending on the independent ones. Each set is considered as a
latent variable based on measured indicator variables in its set. The canonical correlation
is optimized such that the correlation between the two variables is maximized. The
canonical correlation is between many dependent and independent variables unlike the
multiple regression. There may exist more than one linear correlation relating the two sets
of variables. Each such correlation represents a different dimension by which they are
related to each other. It basically gives the relation between sets of variables, not to
model the individual variables.
The canonical analysis can be an Ordinary one or a Canonical Correlation Analysis
(CCA). The CCA is used to find out the existence of correlation between the sets of
variables. Corresponding to the ordinary correlation, canonical squared is the percent of
variance in the dependent variable with respect to the independent variables along a given
dimension. Additional to finding the correlation existence between to sets of variables,
further this method gives the number of dimensions needed to account for the
relationship. This method finds out the linear combination of the variables that can
produce largest correlation with the second set of variables. This linear combination or
“root” is extracted and the process is continued with the residuals, the constraint is that
the second linear combination should not be related to the first one. This process is
repeated until there is no further significant linear combination between the variables.
This method, being a member of the multiple general linear hypotheses (MGLH),
shares many of its assumptions and hypothesis. Some of them are linear relationship
between the sets of variables, homoscedasticity (same level of relation for all the data),
interval/near interval data, untruncated variables, proper specification of the model, lack
of high multi-collinearity and multi variate normality for purposes of hypothesis testing.
The CCA deals with many problems related to the understanding of large dimensional
data, reduction of dimensionality, construction of good subsets of all the predictor
variables, etc. An important property of the canonical correlations is that they are
invariant (they don’t change) with respect to the affine transformation of the variables.
The canonical correlation has been used in many fields like medicine, economics,
management fields marketing, military, etc.
Canonical correlation analysis can be defined as the problem of finding two sets of basis
vectors, one for x (independent) and the other for y (dependent), such that the correlations
between the projections of the variables onto these basis vectors are mutually maximized.

Key concepts and Terms

Eigenvalues: When extracting the canonical roots, we compute the eigenvalues. These
are the proportion of variance accounted by the correlation between the respective
canonical variates. This proportion is calculated relative to the variance of the canonical
variates, i.e., the weighted sum scores of the two sets of variables; these eigenvalues do
not tell how much variability is explained in either set of variables. The number of
eigenvalues is as many as the number of canonical roots. As explained before, we will
find the weights that produce the second largest correlation between sum scores, subject
to the constraint that the next set of sum scores does not correlate with the previous one,
and so on.

Canonical correlations: The square root of the eigen values is taken as the canonical
correlation coefficients. Like the eigenvalues, the correlations between successively
extracted canonical variates are smaller and smaller as it was said earlier. Hence, the first
roots are most correlated than the later ones.

Significance of Roots: The roots that are found out are to tested for significance next.
Different canonical correlations are tested one by one and starting with the largest root.
Only those roots which are statistically significant are retained for interpretation others
are omitted. This significance test is done by evaluating the significance of all the roots
combined and then by removing one by one root starting from the first root. Once the
level reduces below a limit, we stop the significance testing there. The canonical
correlations of small magnitude are less practical and account to very little variability in
the data.

Canonical weights: After determining the number of significant canonical roots, each of
these significant roots is to be interpreted. As each root represents two weighted sums,
one for each set of variables, one way to interpret the "meaning" of each canonical root is
to look at the weights for each set. These weights are called the canonical weights. Larger
the weight, the greater is the respective variable's positive or negative contribution to the
sum. To enable the comparisons between these weights, they are reported for the z
transformed variables with a mean of 0 and a standard deviation of 1.
Canonical Scores: Canonical weights can also be used to compute actual values of the
canonical variates; that is, simply use the weights to compute the respective sums. Again,
the canonical weights are customarily reported for the standardized (z transformed)
variables.

Factor structure: The canonical roots can also be interpreted by looking at the simple
correlations between the canonical variates and among the variables in each set. These
correlations are also called canonical factor loadings. The variables that are highly
correlated with a canonical variate are more in common with it.

Factor structure versus canonical weights: The canonical weights for a variable may
be nearly zero, but the respective loading for the variable may be very high. This may
result in opposite pattern. This type of finding is not contradictory as the canonical
weights pertain to the unique contribution of each variable, while the canonical factor
loadings represent simple overall correlations. For example, in a survey, two measures
are basically the same namely: (1) "Are you satisfied with your supervisors?" and (2)
"Are you satisfied with your bosses?" These items are redundant. The method calculates
the weights of the weighted sum of the variables, and only one of these is needed. Once a
large weight is assigned to the first item, the contribution of the second item is redundant;
consequently, it will receive a zero or negligibly small canonical weight. The canonical
weights pertain to the unique contributions of the respective variables with a particular
weighted sum or canonical variate; the canonical factor loadings pertain to the overall
correlation of the respective variables with the canonical variate.

Variance extracted: The canonical correlation coefficient is the correlation between the
weighted sums of the two sets of variables. It tells nothing about how much variability
(variance) each canonical root explains in the variables. However, the proportion of
variance extracted can be inferred from each set of variables by a particular root by
looking at the canonical factor loadings. These loadings represent correlations between
the canonical variates and the variables in the respective set. By this way, the average
proportion of variance can be extracted by each root.

Redundancy: The canonical correlations can be squared to compute the proportion of

variance shared by the sum scores in each set. This proportion, when multiplied by the
proportion of variance extracted, the redundancy is obtained, that is, of how redundant
one set of variables is, given the other set of variables. In equation form, the redundancy
can be expressed as:

Redundancyleft = [ (loadingsleft2)/p]*Rc2
Redundancyright = [ (loadingsright2)/q]*Rc2

In these equations, p denotes the number of variables in the first (left) set of variables,
and q denotes the number of variables in the second (right) set of variables; Rc2 is the
respective squared canonical correlation.
The redundancy of the first (left) set of variables given the second (right) set, and the
redundancy of the second (right) set of variables, given the first (left) set is calculated.
The redundancies across all the roots are added to arrive at a single index of redundancy.

Practical significance: The measure of redundancy is used for assessing the practical
significance of canonical roots. With large sample sizes, the canonical correlations of
magnitude R = .20 may become statistically significant. If we square this coefficient (R-
square = .04) and use it in the redundancy formula, it becomes clear that such canonical
roots account for only very little variability in the variables. The redundancy is important
to know how much each of the variables is accounting for the variability.

METHOD
In case of only one pair of basis vectors (x and y) is chosen to find the linear
combination. Let the linear combination of the two variables be x=xT Ŵx and y=yT Ŵy .
The function to be maximized is:

The maximum of ρ with respect to the wx and wy is the maximum canonical

correlation. The projections onto wx and wy . The subsequent canonical correlations
should be uncorrelated for different combinations.

If two variables x and y with zero mean are considered, the total covariance matrix can be
represented as:
this is a block matrix where Cxx and Cyy are within set covariance matrices of x and y
respectively and CXY = CYXT is between set covariance matrix.
The canonical correlations between x and y can be solved by solving the
eigenvalue equations:

Where eigenvalues ρ2 are the squared canonical correlations and the eigen vectors Ŵx and
Ŵy are the normalized canonical correlation basis vectors. If the dimensionality of the
variables is 8 and 5, we take the non-zero solutions as 5. Only one eigen equation is to be
solved.

PRACTICAL IMPLEMENTATION
As it was mentioned earlier, this method of finding the relation between to sets of
variables is used widely in almost all the fields. Few examples of the research conducted
using the canonical analyses are: The Impact of Technical Factors on Information
Systems Success in the Electronic Govt. context, Analysis of Intentional Information
Security breaches by insiders, Relationship between conceptual systems theory and
piagetian theory, Corporate Social responsibility and Organizational effectiveness, etc.
Similarly, in the field of marketing, the impact of skills of a sales man on his/her
progress, impact of IT tools on the business performance, etc. can be studied using the
method.
One of the examples we’ve chosen to show the application of canonical analysis in
marketing to structure the Consumer behavior and Brand Position using canonical
analysis. The applications of canonical analysis in consumer research are directed in finding:
- The canonical correlations, indicating the degree of association between two sets of variables.

- The canonical weights indicating the relevance of variables within one set in obtaining a
maximum correlation with the other set.

- The canonical variate scores, expressing the scores of respondents on the underlying
constructs, the variates. These scores are then used in cluster analysis to find market
segments.
In the example, four newly conceived brands of cigarettes were studied. The four brands
were judged by 96 smokers on 24 five-point Likert items (a method of assessing attitudes).
With these data there are various ways to position the brands in a multidimensional space,
identified by the Likert items. The researchers of the present study justify their choice of
canonical analysis as it provides the "objective" dimensions representing the characteristics on
which consumers agree about positioning of the brands.

The authors performed the canonical analysis with Likert scores as predictors and K brands
transformed into K-1 dummies as criterion variables. By computing the scores of the brands
on the first two canonical criterion variates the positions of the brands are determined and is
shown as below:

The correlations of the Likert items with the criterion variates are the vectors of these items
projected on the axes. As the scaling of 1-5 is not optimal, i.e., the gap between two levels of
agreement may not be equal, the authors have changed the scaling pattern as shown below:
So, a canonical analysis on 96 predictor variables (created from 24 Likert items), with 3
(4-1) brands have been performed. The first linear variate accounted to 31% of variance.
By substituting the canonical weights for the dummy variables, the optimal scale values are
obtained. Instead of the original values 1, 2, 3 and 4, the new scale values obtained for item 1
are: 0.18, 0.01, -0.02 and -0.09 and for item 23: -0.31, -0.21, -0.13 and 0.0. By correlating
these rescaled items with the criterion variables, there seems to be highest possible
correlation between the predictor and criterion variates.