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A paradigm for examining second-order factor models employing structural

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DOI: 10.1016/j.ijpe.2009.04.010

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 ARTICLE IN PRESS
Int. J. Production Economics 120 (2009) 633–652

Contents lists available at ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

A paradigm for examining second-order factor models employing

structural equation modeling
Xenophon Koufteros a,, Sunil Babbar b, Mehdi Kaighobadi c
a
Information & Operations Management, Mays Business School, Texas A&M University, 320 Wehner Building, College Station, TX 77843-4217, USA
b
Department of Information Technology & Operations Management, Barry Kaye College of Business, Florida Atlantic University, 777 Glades Road, Boca Raton,
FL 33431-0991, USA
c
Department of Information Technology & Operations Management, Barry Kaye College of Business, Florida Atlantic University, 2912 College Avenue,
LA Building 485, Davie, FL 33314, USA

a r t i c l e in fo abstract

Article history: We present here a paradigm for assessing second-order measurement models. Our
Received 20 June 2007 approach is hierarchical in nature. We discuss the need for higher-order models from a
Accepted 3 April 2009 conceptual perspective and illustrate how some common challenges in empirical research
Available online 24 April 2009
can be resolved through the deployment of higher-order modeling. Essentially, we argue
Keywords: that many constructs can be meaningfully described by a higher-order structure and
Research methodology testing for the existence of such structures requires a careful examination of alternative
Second-order factor models. There is a need for conceptual as well as empirical support. In order to
Measurement models demonstrate our paradigm, we use data that relate to airline service quality. Our sample
Structural equation modeling
includes two databases. Responses from 170 individuals are employed for exploratory
Service quality
purposes and responses from 437 individuals are used for subsequent data analyses.
Airlines
& 2009 Elsevier B.V. All rights reserved.

1. Introduction can be derived either from mathematical or analytical work

Theory-driven and empirically based operations man-
agement (OM) research has surfaced in the last 20–25
years and its growth is remarkably strong. Over the past
four to five years alone the number of empirically based
studies submitted to academic journals more than
doubled. Academics in the OM field came to the realiza-
tion that mathematical modeling, which has been the
primary research methodology in the field, is useful but
empirical validation and assessment is also necessary. For
example, while a mathematical model may suggest that
organizing work around manufacturing cells appears to be
the most effective approach in a given environment,
empirical assessments may indicate otherwise. Empirical
research can render or deny support to hypotheses, which
 Corresponding author. Tel.: +1 979 845 2254; fax: +1 979 845 5653.
E-mail addresses: Xkoufteros@tamu.edu (X. Koufteros),
Babbar@fau.edu (S. Babbar), Kaighoba@fau.edu (M. Kaighobadi).
or from theory. The empirical testing of hypotheses in
research is now more common place than ever before (Thun,
2008; Farris et al., 2009; Liljeblom and Vaihekoski, 2009).
As the field of OM evolved and began to assemble an
empirical tradition, new and more powerful methodolo-
gies have been adopted. While early empirical studies
were relatively descriptive and inattentive to measure-
ment issues, the field gradually moved towards more
sophisticated techniques such as exploratory factor ana-
lysis (Zhang and Chen, 2008) and path analysis. Even-
tually, the OM field caught up with other disciplines such
as Marketing and Psychology, which have a much longer
and richer tradition in empirical research, and started
employing structural equation modeling (SEM) as a
methodology of choice (Pal and Busing, 2008). Structural
equation modeling allows a researcher to test both a
measurement model and a structural model (substantive
model) and affords an assessment of model fit and
individual parameters through an array of fit-indices and

0925-5273/$ - see front matter & 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2009.04.010
 ARTICLE IN PRESS
634 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
tools. Paradigms on the use of structural equation
modeling have appeared in the OM field (i.e., Koufteros,
1999) but several SEM techniques still remain unexplored.
Only recently, Koufteros and Marcoulides (2006) pre-
sented a paradigm on the use of multi-group analysis and
factorial invariance tests. Studies that employ advanced
SEM techniques such as higher-order modeling, latent
growth modeling, and multilevel modeling remain scant.
The purpose of this manuscript is to present a
paradigm on higher-order modeling and in particular,
second-order modeling. The OM literature has not
produced a sizable volume of manuscripts that employ
higher-order modeling and those studies that have been
published or which we came across while serving as
editorial board members/reviewers of academic journals,
suffer from a variety of shortcomings. Often, there is no
explicit conceptual/theoretical advance that relates the
lower-level constructs to higher-level constructs. The
assumption is that a higher-order structure does exist
but no attempt is made to conceptually support why a
given construct can be specified at a higher-level of
abstraction. From a methodological perspective, some
researchers sum up the scores of manifest variables (the
items) into an aggregate score (called ‘‘partial aggrega-
tion’’) for each sub-dimension (i.e., first-order construct).
They then treat these aggregates as manifest variables
anew, specifying them as reflective items of a higher-order
construct (which in reality, however, is now specified at
the first-order level). While this approach may be simple
and swift, it fails to fully account for the variability of each
of the manifest variables, as their scores are summed up
into aggregates. This approach is also inconsistent with
the conceptual specification of higher-order modeling as
the higher-order construct is now specified at the first-
order of abstraction. Yet other researchers specify a
higher-order model correctly (relating manifest variables
to first-order constructs and then first-order constructs to
second-order constructs etc) but never assess the efficacy
of other measurement structures that can describe the
data (e.g., Mentzer et al., 1999; Kettinger and Lee, 1994). It
is possible that other measurement models can represent
the data equally well or even surpass the performance of
second- or higher-order configurations. In the absence of
testing for alternative measurement models, it is hazar-
dous to suggest that a higher-order specification is the
most suitable.
To illustrate the efficacy and usefulness of higher-order
modeling, we will make use of several first-order
constructs from the service quality literature although
the principles presented here are widely applicable.
Specifically, we will employ a sample of facets of company
deliverables to be expected of any airline service offering.
These include fair policies, safe flights, desired assortment of
flights, and reliable equipment. These company deliverables
do not include the deliverables expected of the employees
of airlines and can be captured by a different second-order
construct.
Each of these facets is operationalized through multi-
ple manifest variables. In order to fully appreciate higher-
order modeling, customer satisfaction will assume the role
of a dependent variable. We first elaborate on the need for
higher-order modeling from a conceptual as well as
methodological perspective. We present some of the
challenges that can afflict empirical research and demon-
strate some adverse affects that result from measurement
model misspecifications. While we examine in depth only
a few principal challenges, such challenges can prove to be
consequential when testing substantive hypotheses.
This exercise is predicated on presenting the constructs
of interest along with a description of the research design
and the samples employed. We illustrate our paradigm for
testing second-order models and provide directions for
future research along with a discussion. The survey data
we use is based on the US airline industry and includes
responses from 170 individuals for exploratory work and
from 437 for subsequent data analyses.
2. A need for higher-order modeling: conceptual and
methodological issues
There are several constructs which can be mean-
ingfully conceptualized at higher orders of abstraction.
In such cases, a higher-order modeling approach would be
the most suitable technique that can represent such
structures. Consider, for example, that an organization’s
service quality (third-order level of abstraction) can be
conceptualized as a composite of two dimensions such as
company deliverables (what the firm provides) and employ-
ee deliverables (what the firm’s employees furnish during
the service encounter) which are at the second-order level
of abstraction (Fig. 1). Employee deliverables in turn can
include several first-order latent variables such as in-
dividual attention, courtesy, promptness, and helpfulness
that can be represented by observed or manifest indica-
tors (the items on a survey for example). Likewise,
company deliverables may include fair policies, safe flights,
desirable assortment of flights, and reliable equipment.
Customers can aggregate their evaluations of the first-
order latent variables or facets to form their perceptions
on the second-order dimensions and subsequently aggre-
gate evaluations of second-order dimensions to derive
perceptions of a higher-order overall construct.
A higher-order model can be posited and can relate the
manifest variables to their respective first-order latent
variables which can then be related to their second-order
latent variable(s). Second-order latent variables can be
specified as dimensions of third-order latent variables, if
there is a conceptual and theoretical rationale for such
advance. The contribution of each dimension to a higher-
level construct can be assessed and delineated as
compared to bundling all items together in a single
composite score. If all items are bundled together
(through just one first-order latent variable for example),
the explication of the resultant construct is incomplete
(Gerbing et al., 1994) and the contribution of various
content domains to the final scale score will not be
known. In other words, if all items/manifest variables of
individual attention, helpfulness, responsiveness etc are
posited as reflective items of a single first-order construct,
then it would be difficult to ascertain the contribution of
each domain on the overall construct.
 ARTICLE IN PRESS
X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
Third-Order of
Abstraction
Airline
Service
Quality
Second-Order of
Abstraction
Employee First-Order of
Deliverables
Abstraction
Individual
Courtesy Promptness Helpfulness
Attention
… CR1 CR2 CR3 CR4 …………………..
Manifest Variables
Fig. 1. An example of hierarchical structures.
Beyond higher-order modeling being a more elegant
representation of hierarchical constructs, it can serve to
alleviate numerous methodological problems that chal-
lenge empirical studies. Nobody would deny for example
that promptness, courtesy, helpfulness, and individual
attention are important deliverables in a service encoun-
ter. Most would also agree that each of these latent
variables is ‘‘different’’ or it has something idiosyncratic
about it. However, it frequently happens that a person
who is helpful is also courteous and pays individual
attention to customers. Thus, these variables would be
expected to be highly correlated, which then raises issues
of critical importance here. If all of these variables (e.g.,
courtesy, individual attention, helpfulness, promptness)
which are at the first-level of abstraction are entered
concurrently into a model that posits them as antecedents
to customer satisfaction, a researcher will soon find that
perhaps only one or none of these variables is statistically
related to customer satisfaction. Or even, one may find
that the path coefficients may assume the opposite sign
than what might be expected. This can be symptomatic of
the degree of multicollinearity present in the model. On
an individual basis, each of these variables can have a
statistically significant relationship with an endogenous
variable such as customer satisfaction but when tested as
a group, such effects might not be manifested.
Highly correlated constructs will also fail to perhaps
produce a ‘‘clean’’ factor structure when subjected to
635
Company
Deliverables
Desirable
Fair Safe Reliable
Assortment
Policies Flights Equipment
of Flights
SF1 SF2 SF3 …………..
factor analysis. Though factor analysis applied to a group
of items intended to be measures of a single facet can
indeed appear to produce a single meaningful factor,
when factor analysis is applied simultaneously across all
items of all constructs there is a high likelihood that fewer
meaningful factors will be extracted and manifest items
might exhibit cross-loadings with non-intended factors.
This is worrisome as composite scores of first-order
factors will be difficult to assemble and meaningfully
describe and then employ in substantive hypotheses
testing. Second-order models recognize the contribution
and retain the idiosyncratic nature of each first-order
construct, such as courtesy or promptness, and treat such
constructs as facets of the higher-order construct. Path
coefficients relate each first-order construct to its second-
order construct and thus both the substantive and
statistical contribution of each first-order construct can
be estimated and evaluated. The second-order construct,
which is now a composite of the first-order constructs, can
be posited as an explanatory variable to an endogenous
variable such as customer satisfaction.
Employing higher-order modeling can also resolve
problems with what Catell (1973) coined as ‘‘bloated
specifics’’ factors. These are factors/constructs/first-order
latent variables, which are characterized/anchored exclu-
sively by a narrow content span of manifest/observed
variables. Gerbing et al. (1994) explain that as researchers
attempt to satisfy multiple-indicator unidimensionality
 ARTICLE IN PRESS
636 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
concerns (especially when tested through sophisticated
structural equation modeling methodology), they often
concoct manifest variables, which are more or less
‘‘restatements of each other.’’ While such items can satisfy
rigorous statistical criteria and can exhibit superb psycho-
metric properties (e.g., composite reliability), such narrow
content domain curtails explanatory power and theore-
tical usefulness (Gerbing et al., 1994). Gerbing et al. state
that content tapped by bloated specific factors can be too
narrow to correspond to a substantive construct of
interest. They consider instead, that such factors (i.e.,
first-order factors) can be posited as the constituent facets
of constructs of interest. These facets are the ‘‘building
blocks’’ of the second-order constructs. Each facet can be
defined by a unidimensional set of items and facets can be
treated as the indicators of second-order factors.
Many of the aforementioned complications are fre-
quently encountered in empirical research studies but
little effort has been exerted in evaluating higher-order
conceptualizations and how they can alleviate such
adverse effects. Before we illustrate in practice some of
these complications and a paradigm of examining higher-
order models, it is rather useful to discuss the constructs
of interest, the instrument development process and
research design along with sample characteristics.
3. Constructs of interest
There is indeed a wide array of elements shaping
customer experience with an airline. We focus our
attention on a given set of company deliverables that are
to be expected of airlines.
Fair policies:Seiders and Berry (1998) provide an
insightful treatise on the issue of fairness in service and
show how and why fairness matters to service customers.
Fairness is closely related to justice and these terms are
often used interchangeably (Sheppard et al., 1992;
Colquitt et al., 2001) with fairness being defined as the
customer’s perception of the degree of justice rendered by
the service provider (Seiders and Berry, 1998). Social
exchange theory (Adams, 1965) provides the foundation
for assessments of justice and fairness, and perceptions of
justice are critical predictors of customer satisfaction
(Martinez-Tur et al., 2006). Oliver and Swan (1989) helped
introduce the justice framework into investigations of
customer satisfaction with goods and services.
Safe flights: Considering the sensitivity of passengers to
safety matters, flight safety becomes paramount in
importance, and safety management an important aspect
of quality control in the aviation industry (Waikar and
Nichols, 1997). Safety and health issues are in general
receiving considerable attention in the management
literature (Law et al., 2006). In recent years, safety has
received particular attention in industries such as health
care (Katz-Navon et al., 2005; McFadden et al., 2006;
Walsh and Antony, 2007), food and agriculture (Sans et al.,
2005; Griffith, 2006; Trienekens and Zuurbier, 2008), and
aviation (Ford, 1997; Waikar and Nichols, 1997; Rhoades
and Waguespack, 1999; McFadden and Hosmane, 2001;
Rhoades and Waguespack, 2004; Rose, 2006). There are, of
course, different determinants of aviation safety such as
pilot attributes and aircraft equipment. Research has
accordingly examined some of these factors (McFadden,
1996; Sanders and Hoffman, 1975; Sanders et al., 1976;
McFadden, 1997; Ford, 1997; Sheikh et al., 1996).
Desirable assortment of flights: Selecting a particular
airline to fly with is in part a function of how different
airlines position themselves and the routes they service.
Product positioning strategies include consideration of the
breadth of offerings (Kalafatis et al., 2000; Vaagen and
Wallace, 2008) and research has recognized product
selection as a predictor of retail choice and patronage
(Arnold et al., 1983; Koelemeijer and Oppewal, 1999; Pan
and Zinkhan, 2006) across varied service industries
(Lindsley et al., 1991; Tamimi et al., 2005; Carpenter and
Moore, 2006). Availability of flight from the customer’s
city of origin to the desired destination can be even more
important than price in the air-travel industry just like
assortment in a retail store can be as, if not more,
important than a number of other key variables including
price (Stassen et al., 1999). It is important for a firm to link
its product offerings to the needs of consumers (Heuvel et
al., 2007) and to evaluate its offerings in an effort to
position itself well (Penttinen and Palmer, 2007). Such
consideration is essential for airlines as they attempt to
better serve their customers by partnering with other
airlines and servicing desired routes with desirable flight
schedules.
Reliable equipment: Safety and reliability of equipment
go hand in hand (Waikar and Nichols, 1997). Product
reliability is critically important for both manufacturing
(Barber and Darrough, 1996) and service (Parasuraman et
al., 1985, 1988) and helps create value for firms (Barber
and Darrough, 1996) while shaping their performance
(Reed et al., 1996). In this study, we limit the scope by
focusing attention on requisites of reliability as they relate
to the aircraft and equipment during transport. Unreliable
equipment may lead to flight delays, which subsequently
can have an adverse effect on customer satisfaction.
Collectively, customers expect an airline to offer fair
policies and a desirable selection of flights. Customers also
expect that the airline will assure the safety of flight
operations and the reliability of equipment so potential
flight delays and cancellations can be avoided. The four
constructs described above can be construed as facets of
airline deliverables during the execution of the service
encounter.
4. Instrument development, research design and sample
characteristics
The service quality literature was extensively reviewed
in order to develop the measurement instrument. This
literature spans numerous disciplines including Market-
ing, Operations Management, Management Information
Systems, Hospitality Management, and Health Care Man-
agement and is influenced by the seminal work on
SERVQUAL and its subsequent refinements. The SERVQ-
UAL instrument (Parasuraman et al., 1988, 1991) sepa-
rately measures the expected level of service and the
 ARTICLE IN PRESS
X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
experienced level of service. Service quality scores are
then based on the difference between these two mea-
sures. The SERVQUAL instrument, despite being exten-
sively used, has been controversial and has lead to
modifications and the emergence of other competing
instruments (e.g., SERVPERF—Cronin and Taylor, 1992;
TOPSIS—Mukherjee and Nath, 2005). Van Dyke et al.
(1997, 1999) provide an excellent summary of the
difficulties surrounding SERVQUAL. As such, we will not
engage in an exhaustive rendition of all of the conse-
quential issues pertaining to SERVQUAL’s performance.
The difficulties with SERVQUAL are both conceptual and
empirical. Conceptual difficulties include the operationa-
lization of perceived service quality as a difference or gap
score, the ambiguity of the expectations construct, and the
unsuitability of using a single measure of service quality
across different industries. Empirical problems relate to
reliability, poor convergent and discriminant validity,
unstable dimensionality, and poor predictive validity
(Van Dyke et al., 1997, 1999). Many of the empirical
problems stem from the use of gap scores and researchers
have suggested avoidance of the use of discrepancy scores
for measuring service quality.
Despite its limitations, the SERVQUAL instrument does
afford some of the most salient constructs of service
quality and it served as a basis to draw and adapt items
from. We supplemented this with an examination of the
marketing and service operations management literatures
in which numerous other scales that measure service
quality have emerged since the influential publication of
the SERVQUAL instrument. In this research, we focus on
the essential elements of airline service. Each respondent
was first asked to identify the airline s/he uses most often
for domestic (US) flights and then rate that airline relative
to what the respondent’s expectations were for that
specific airline. After generating the items, we tested the
constructs and items through a formal pre-test study. We
provided each construct, along with its definition and list
of items, to twelve faculty members from several large
universities in the United States representing multiple
disciplines such as Marketing, Service Operations, Infor-
mation Systems, and Strategy. These faculty members
evaluated each item based on how each construct was
defined and provided additional comments as they relate
to the content domain of each construct. Feedback from
them was useful and helped us reword and simplify some
of the items.
For exploratory purposes, the survey questionnaire was
administered to 170 respondents who were students
enrolled in a large university in the southeastern region
of United States. The survey in its final form was
administered to students (n ¼ 437) also enrolled at the
same university. Responses for this large-scale study were
collected throughout the course of 2006 (the spring,
summer, and fall semesters). The respondents were all
students majoring in Business. Although we acknowledge
that our respondents may not be representative of the
larger US population, students form an eligible respon-
dent group as they also fly just like a great number of
other residents of the US do. Respondents did have a fairly
decent level of experience flying with various airlines
637
(Table 1). Students also come from all walks of life with
substantial variation in their reported household incomes.
A large number of these specific respondents are con-
sidered to be ‘‘non-traditional’’ students as they worked
and attended school at the same time.
5. Complications/challenges with structural and
measurement models
There are numerous complications/challenges that can
emerge without a careful examination of alternative
measurement and structural model structures. One major
complication occurs when several exogenous variables
can be shown to each exhibit strong effects on a
dependent variable, but when all are entered simulta-
neously in a single structural model, the effects may
vanish and/or exhibit an opposite than expected sign.
Consider for example the four first-order constructs of
company deliverables (Fig. 2). Table 2 and Fig. 3 show the
results of four structural models where each of the
constructs is posited as an exogenous variable and
satisfaction is hypothesized as the endogenous variable.
All the models exhibit adequate model fit and very strong
effects are illustrated through t-values (minimum t-value
is 5.73). The importance of each exogenous variable
cannot be denied. On the other hand, consider Table 3
which shows the results of a model (Fig. 4) that examines
the simultaneous effects of all four exogenous variables on
satisfaction. Though the model acknowledged the correla-
tions amongst the exogenous variables, it produced
moderate fit indices and importantly, only fair policies
exhibits a statistically significant relationship (t-value ¼
6.46) with satisfaction. Moreover, the effects of desirable
assortment of flights (t-value ¼ 1.69) and reliable equip-
ment (t-value ¼ 1.06) have a negative sign. We would
have expected that the effects would all be statistically
significant and positive. Erroneously perhaps, one may
conclude that only fair policies have a meaningful relation-
ship with satisfaction.
Table 4 illustrates the results of yet one more model
where all manifest variables are hypothesized to be
related to just one first-order construct (Fig. 5). This
construct exhibits a strong effect on satisfaction (t-value ¼
7.77) but model fit is lacking. In addition, ascertaining
which particular aspects of company deliverables are
important for satisfaction becomes more problematic as
14 manifest variables contribute directly to the composite.
Some are measures of fair policies, some are measures of
safe flights, others are measures of desirable assortment of
flights and others are measures of reliable equipment.
When constructs are highly correlated (Table 5),
discriminant validity may also be difficult to support.
Exploratory factor analysis (n ¼ 170) may fail to produce a
‘‘clean’’ factor structure and thus the composition and
naming of factors can become difficult. While each
company deliverable exhibits a unidimensional factor
structure and a relatively high composite reliability
coefficient (Tables 5 and 6), a factor analysis of all 14
items fails to produce a ‘‘clean’’ factor structure (Table 7).
Employing the sample of respondents derived for a pilot
 ARTICLE IN PRESS
638 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652

Table 1
Demographics.

Demographic Scale

I typically fly: Less than once a Once a year Twice a year Four times a year Once a month Once a More than once a
year week week

Frequency 78 96 123 107 28 2 1

Valid percent 17.9 22.1 28.3 24.6 6.4 0.5 0.2

I am: Male Female

Frequency 190 246

Valid percent 43.6 56.4

My age is: r20 years 21–30 years 31–40 years 41–50 years 51–60 years 460 years

Frequency 32 317 46 31 9 1
Valid percent 7.3 72.7 10.6 7.1 2.1 0.2

I fly most often for: Leisure Business

Frequency 379 57
Valid percent 86.9 13.1

My ethnic background is: Black Native Hispanic White Asian/Pacific Other

American Islander

Frequency 64 2 95 226 30 14
Valid percent 14.8 0.5 22.0 52.4 7.0 3.2

My annual household o$20,000 $20,001–40,000 $40,001–60,000 $60,001–100,000 4$100,000

income is:

Frequency 79 110 71 101 63

Valid percent 18.6 25.9 16.7 23.8 14.9

The class I most often fly in Economy Business First class

is:

Frequency 409 16 10
Valid percent 94.0 3.7 2.3

study (n ¼ 170) and Principal Axis Factoring as the
method of extraction with Oblimin rotations, Table 7
shows that only three factors are extracted, explaining
about 45% of the variance. Manifest variables from three
content domains load on the first factor while the second
factor includes items from two domains and some of its
items have cross-loadings above 0.20 with factor 3. Only
two items (both from the fair policies domain) load on
factor 3 but they exhibit cross-loadings above 0.20 with
factor 1. It is evident that discriminant validity cannot be
supported. A confirmatory analysis using maximum like-
lihood estimation and a covariance matrix as input (using
the large sample n ¼ 437) shows similar findings.
Confirmatory factor analysis for each exogenous vari-
able (Table 6) has resulted in adequate model fit for each
first-order factor (e.g., NNFI, CFI, and standardized RMR).
Criteria for evaluation of model fit can be found in Byrne
(1998), Hu and Bentler (1999), and Koufteros and
Marcoulides (2006). Fig. 2 previously depicted the path
diagrams comprising the measurement models of the five
latent (i.e. unobservable) variables and their respective
measurement indicators. We followed the LISREL termi-
nology as outlined by Jöreskog and Sörbom (2001) and
denoted the five latent variables with the Greek letter x
(ksi), the (observed) measurement indicators or items
with Xs, the measurement errors of the indicators with the
Greek letter d (delta), and the true correlation between
the latent variables with the Greek letter f (phi). This
specification is called X-model within LISREL terminology.
As can be seen in the path diagrams, LISREL performed the
confirmatory factor analysis on each of the latent
variables.
The posited measurement models seem to be sup-
ported by the various fit indices. There is evidence of very
strong relationships between observed and latent vari-
ables (t-values) and fit indices are suggestive of well-
fitting models (see Table 6). The descriptive statistics were
presented in Table 5.
Relatively high levels of convergent validity (t-values
that describe the relationship between manifest variables
and latent variable, desirable to be 4|2|), composite
reliability (desirable to be 40.70), and average variance
extracted (AVE) (measure of within variance, desirable to
be 40.50) (Koufteros, 1999) are also visible (Table 6).
However, discriminant validity cannot be supported when
all four exogenous variables are considered. Discriminant
validity can be examined by comparing the squared
correlation between any two constructs against their
individual AVE. Discriminant validity is exhibited when
each AVE is higher than the squared correlation between
 ARTICLE IN PRESS
X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652 639

Fig. 2. Individual measurement models for exogenous and endogenous variables.

Table 2
Four structural models (one for each first-order factora).

Model Exogenous variable Completely standardized effect (t-value) Model fit indices

1 Fair policies 0.99 (5.73) NNFI ¼ 0.88, CFI ¼ 0.90, std. RMR ¼ 0.85
2 Safe flights 0.98 (7.57) NNFI ¼ 0.93, CFI ¼ 0.94, std. RMR ¼ 0.064
3 Desirable assortment of flights 0.99 (8.06) NNFI ¼ 0.89, CFI ¼ 0.91, std. RMR ¼ 0.078
4 Reliable equipment 0.98 (12.94) NNFI ¼ 0.91, CFI ¼ 0.93, std. RMR ¼ 0.066

a
Customer satisfaction is posited as the dependent variable in each model.

constructs (Fornell and Larcker, 1981). In almost all
comparisons, there was no evidence of discriminant
validity and this can be attributed to the fact that the
factors are highly correlated (Table 5).
As we discussed and showed in Sections 2 and 5, there
are numerous complications/challenges that can potentially
surface in empirical research. Many of these issues can be
effectively resolved with a conceptualization and specifica-
tion of higher-order measurement and structural models.
Within the context of higher-order modeling, the idiosyn-
crasy of each facet can be retained while issues of
multicollinerarity, unidimensionality, discriminant validity,
and ‘‘bloated’’ specific factors can be handled effectively.
6. A paradigm on second-order modeling
Our paradigm begins here with the assessment of
alternative measurement models that can describe the
data. This exercise is necessary as there could be multiple
measurement model configurations that can characterize
a given data set. The effort is hierarchical in nature.
6.1. Hierarchical approach
A hierarchical approach is a systematic process for
evaluating alternative models that have the potential to
describe relationships between observed and latent vari-
ables. This process includes the construction of four
Models (as shown in Figs. 6–9). The first model (Fig. 6)
is hypothesized to include one first-order latent variable
with 14 observed indicators. Model 2 (Fig. 7) hypothesizes
four first-order uncorrelated (orthogonal) factors. Model 3
(Fig. 8) is similar to Model 2 except that factor correlations
are specified; and Model 4 (Fig. 9) includes one
second-order factor and four first-order factors with
corresponding observed variables. This particular type of
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640 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652

ST1 ε1
ST1 ε1
λi1 ST2 ε2
λi1 ST2 ε2
δ1 FR1
λi1 ST3 λi1
ε3
δ1 SL1 ST3
ε3
δ2 FR2
Fair Satisfaction
ST4 ε4
Policies
η1 ST5
δ2 SL2 Desirable
Satisfaction
ST4 ε4
δ3 FR3 ξ1 ε5 Assortment
δ3 SL3
of Flights η1 ST5
ε5
δ4 FR4
ST6 ε6 ξ1
ST7 δ4
ST6 ε6
ε7 SL4
ST7
ST8 ε7
ε8
ST8
ε8
ST9 ε9
ST9 ε9

ST1 ε1
ST1 ε1 λi1 ST2 ε2
λi1 ST2 ε2 λi1
ST3
δ1 ER1 ε3
λi1 ST3
ε3 Reliable
δ1 SF1
δ2 ER2 Equipment
Satisfaction
ST4 ε4
Safe Satisfaction
ST4 ε4 ξ1 η1 ST5
δ2 SF2 Flights ε5
ξ1 η1 ST5
ε5 δ3 ER3
δ3
ST6 ε6
SF3 ST6 ε6 ST7 ε7
ST7 ε7 ST8
ε8
ST8
ε8 ST9 ε9
ST9 ε9
Fig. 3. Individual structural models.

Table 3 values of the structural coefficients (i.e., gammas and

One structural model (four first-order factorsa). betas) can be used to test the research hypothesis. The
magnitudes of the structural coefficients and the statis-
Exogenous variable Completely Model fit indices
tical significance associated with such coefficients are
standardized
effect (t- useful in the assessment of potential relationships
value) between variables. The analysis can also be complemen-
ted by an evaluation of R-squared.
Fair policies 0.76 (6.46)
Safe flights 1.66 (1.63) NNFI ¼ 0.89, CFI ¼ 0.90,
std. RMR ¼ 0.065 6.2. Second-order specification and identification
Desirable assortment of 0.77 (1.69)
flights Jöreskog (1970) introduced confirmatory second-order
Reliable equipment 0.75 (1.06)
factor analysis (based on Thurstone’s (1947) treatment of
a second-order exploratory factor analysis) where each
Customer satisfaction is posited as the dependent variable in the
model. first-order factor is presumed to be affected by two
components. The second-order factor is hypothesized to
account for or explain all of the covariance among the
second-order model, which shows first- and second-order first-order factors. One component, the construct of
indicators being reflective, is frequently encountered in interest (x), is shared with the other first-order factors
the literature (Jarvis et al., 2003) and thus it is addressed (Z). The other component is unique to that factor (z) The
here. It is called a ‘‘total disaggregation second-order following equation relates a first-order factor to the two
factor model’’ (Bagozzi and Heatherton, 1994). Our components:
methods are reflective of the body of literature that posits
and tests higher-order models (e.g., Rindskopf and Rose,
Z ¼ Gx þ z
1988; Arnau and Thompson, 2000; Somers et al., 2003; where G is the pattern coefficient (regression paths)
Lai, 2006). relating the second-order factor to the first-order factor.
After selecting a measurement model, the next step is According to Gerbing et al. (1994), this conceptual
to test the substantive hypothesis. A structural model is advance provides ‘‘an explicit delineation of the domains
evaluated and, if the model fits the data adequately, the t- of content that operationalize the constructs of interest.
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X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652 641

δ1 FR1 λi1
δ2 FR2
Fair
Policies
δ3 FR3 ξ1
δ4 FR4

λi2 ST1 ε1
δ5 SF1
Safe ST2 ε2
δ6 SF2 Flights λi1
ξ2 ST3 ε3
δ7 SF3
Satisfaction ST4 ε4
η1
Φij ST5 ε5
λi3
δ8 SL1 ST6 ε6
δ9 SL2 Desirable ST7 ε7
Assortment
of Flights
δ10 SL3 ST8 ε8
ξ3
δ11 SL4 ST9 ε9

λi4
δ12 ER1
Reliable
δ13 ER2 Equipment
ξ4
δ14 ER3

Fig. 4. Structural model with four first-order correlated exogenous factors.

Table 4 order factors is given as:

One structural model (one first-order factora).
Exogenous Completely standardized effect Model fit indices
variable (t-value)
Company 0.70 (7.77) NNFI ¼ 0.82,
deliverables CFI ¼ 0.84,
std. RMR ¼ 0.099
a
Customer satisfaction is posited as the dependent variable in the
model.
That is, the failure of a unidimensional measurement
model does not alone invalidate the operationalization of
the hypothesized construct. Rather, the problem may be
operationalization of the construct as a first-order factor,
so that the construct may be represented as a second-
order factor’’ (p. 863). Each facet is conceptualized as one
of the building blocks of the higher-order construct. The
idiosyncrasy of each content domain is retained while
unidimensionality and discriminant validity can be ad-
dressed by the higher-order specification. ‘‘Bloated spe-
cific’’ factors can be included as some or all of the
constituent building blocks of higher-order structures and
highly-correlated factors can now be related through what
they all share, a common higher-order factor.
The observed variables are represented by a vector of y.
The matrix Ly contains the loadings of the observed
variables on the first-order factors. The unique compo-
nents in the observed variables are represented by e. The
equation for the observed variables in terms of the first-
Y ¼ Ly Z þ 
To compare the four posited models and assess whether
a second-order model is plausible, various fit indices can
be compared. Such indices include chi-square per degrees
of freedom, the normed fit index (NFI), the comparative fit
index (CFI), the non-normed fit index (NNFI), and the
standardized root mean square residual. Of course, final
selection of a measurement model rests upon soundness
that goes beyond a mere comparison of fit indices.
Assuming that the models under comparison can be
supported theoretically, one may consider the evaluation
through fit-indices as the ‘‘first-cut.’’ In other words,
models that exhibit poor fit indices ought not to advance
to the next stage of scrutiny. On the other hand, a
measurement model that generates the best fit indices
cannot automatically secure its position as the leading
model. Issues such as discriminant validity and the
degree of multicollinearity that can emerge have to be
considered.
An important issue in structural equation modeling is
model identification and second-order modeling is not
immune to the requirements for identification. Byrne
(1998) summarizes the issue of statistical identification.
Byrne (1998) states that identification is concerned with
‘‘whether or not there is a unique set of parameters
consistent with the data’’ (p. 28). More specifically, if the
model is identified, then there is a unique solution for the
values of the parameters to be estimated and the model is
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642 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652

Fig. 5. Structural model: one first-order factor.

Table 5
Correlations, reliability, average variance extracted, and descriptive statistics.

Latent variable (# of Fair policies Safe flights Desirable Reliable Latent variable Latent variable Mean per
manifest items) assortment of equipment mean std. deviation manifest
flights item

Fair policies (4) 1.00 (0.52a 0.81b) 15.8379 3.11157 3.96

Safe flights (3) 0.74c 0.55d 1.00 (0.47, 0.73) 13.2562 2.38327 4.42
Desirable assortment 0.74, 0.55 0.75, 0.56 1.00 (0.49, 0.79) 16.9294 3.53829 4.23
of flights (4)
Reliable 0.74, 0.55 0.85, 0.72 0.85, 0.72 1.00 (0.62, 0.83) 13.1609 2.58605 4.39
equipment (3)

a
Average variance extracted is on the diagonal in parentheses.
b
Composite reliability is on the diagonal in parentheses.
c
Correlation.
d
Squared correlation.

testable. However, if the model is not identified, this
implies that ‘‘many sets of different parameter estimates
could fit the data equally well, and, in this sense, any one
set of values would be arbitrary’’ (p. 29). There could be
three kinds of models: just-identified, overidentified, and
underidentified. Just-identified models occur when the
number of data variances and covariances is equal to the
number of parameters to be estimated. Such models will
have zero degrees of freedom and can never be rejected
(Byrne, 1998). Overidentified models contain more data
points, such as variances and covariances of the observed
variables, than the number of parameters to be estimated.
This results in positive degrees of freedom which allows
for a rejection of the model, rendering such a model
scientifically useful and thus desirable. On the other hand,
underidentified models are manifested when the number
of parameters to be estimated is more than the number of
variances and covariances of the observed variables and
thus an infinite number of solutions are possible.
Some general rules for identification are applicable for
second-order models (Rindskopf and Rose, 1988). These
rules can be conceptualized in terms of the two parts of
the structure. The first part relates first-order factors to
the second-order factor(s) while the second part relates
the observed variables to the first-order factors. If each of
the two parts is identified, then the model is identified. If
there is only one second-order factor then there must be
at least three first-order factors. Even then, the model will
be just identified-which then implies that the overall test
for goodness of fit does not test the second-order
structure (Rindskopf and Rose, 1988). It is then suggested
to have at least four first-order factors if there is only one
second-order factor. If there are two or more oblique
second-order factors, Rindskopf and Rose (1988) state that
‘‘only two first-order factors are necessary per second
order factor for the model to be identified.’’ (p. 54).
However, more first-order factors per second-order factor
are desirable. As far as the second part is concerned (that
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X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652 643

Table 6
Measurement models for the five constructs-four exogenous and one endogenous variable.

Variable Factor Completely std. coeff. Fit indicesconfirmatory results

loadingsexploratory (t-value)confirmatory
results (n ¼ 170) results (n ¼ 437)

FR1. Fairness of excess-baggage chargesa 0.54 0.61 Chi-square (df) ¼ 28.47 (5)
FR2. Fairness of Airline’s policies when flights 0.85 0.71 (12.30) Chi-square/df ¼ 5.69
are delayed
FR3. Fairness with which Airline takes care of 0.78 0.80 (13.36) NFI ¼ 0.98, NNFI ¼ 0.97, CFI ¼ 0.98
customers when flights are cancelled
Standardized RMR ¼ 0.029
FR4. Fairness of restrictions Airline places on 0.64 0.91 (14.50) Average variance extracted ¼ 0.63
tickets
Composite reliability ¼ 0.89

SF1. Reassuring passengers during bad weather 0.78 0.70 Chi-square (df) ¼ 28.91 (5)
SF2. Adhering to safety procedures with 0.79 0.71 (12.63) Chi-square/df ¼ 5.78
passengers while airborne
NFI ¼ 0.96, NNFI ¼ 0.93, CFI ¼ 0.97
SF3. Airline’s reputation for safety 0.73 0.72 (12.84) Standardized RMR ¼ 0.032
Average variance extracted ¼ 0.49
Composite reliability ¼ 0.83

SL1. Airline and its partners providing a 0.80 0.80 Chi-square (df) ¼ 43.37 (9)
network of flights covering desired destinations
Chi-square/df ¼ 4.82
SL2. Providing desired flight connections 0.76 0.89 (22.25) NFI ¼ 0.98, NNFI ¼ 0.98, CFI ¼ 0.99
SL3. Offering flights at desired times 0.81 0.95 (24.79) Standardized RMR ¼ 0.015
SL4. Offering non-stop flights 0.68 0.92 (23.66) Average variance extracted ¼ 0.80

ER1. Dependability of aircraft 0.83 0.79 Chi-square (df) ¼ 8.81 (5)

ER2. Working order of aircraft accessories such 0.77 0.84 (19.09) Chi-square/df ¼ 1.76
as air vents, lights, and call Buttons
NFI ¼ 0.99, NNFI ¼ 0.99, CFI ¼ 1.00
ER3. Airworthiness of aircraft 0.85 0.71 (15.56) Standardized RMR ¼ 0.014
Average variance extracted ¼ 0.65
Composite reliability ¼ 0.90

ST1. I like flying with this airlineb 0.93 Chi-square (df) ¼ 23.52 (27)
ST2. My expectations from this airline were met 0.88 (30.13) Chi-square/df ¼ 5.57
ST3. I get a good value for my money 0.74 (20.33) NFI ¼ 0.97, NNFI ¼ 0.97, CFI ¼ 0.98
ST4. Other things being the same, I would prefer Not applicable 0.88 (30.29) Standardized RMR ¼ 0.022
to fly this airline Average variance extracted ¼ 0.74
ST5. I would recommend this airline to others 0.93 (36.28) Composite reliability ¼ 0.96
ST6. I have chosen this airline over others in 0.80 (23.98)
recent years
ST7. I prefer flying this airline because of my 0.87 (28.99)
experience with it
ST8. My overall experience with this airline has 0.91 (33.28)
been great
ST9. I would rate the overall service quality of 0.80 (24.10)
this airline asc

a
Respondents were asked to rate the airline they have selected for evaluation relative to what their expectations were for that specific airline. This
was based on a scale where 1 ¼ exceptionally below my expectations, 2 ¼ much below my expectations, 3 ¼ below my expectations, 4 ¼ meets my
expectations, 5 ¼ above my expectations, 6 ¼ much above my expectations, and 7 ¼ exceptionally above my expectations.
b
Responses to items were based on a Likert type scale where 1 ¼ strongly disagree, 4 ¼ neutral, and 7 ¼ strongly agree.
c
Responses to items were based on a Likert type scale where 1 ¼ terrible, 2 ¼ poor, 3 ¼ somewhat poor, 4 ¼ neither good nor bad, 5 ¼ somewhat
good, 6 ¼ good, 7 ¼ excellent.

deals with observed variables), there should be at least
two measured variables per first-order factor while more
are desirable (if there is only one item for a given factor,
then an assumption about the reliability of that measure
has to be made-and this assumption is sometimes
untenable).
6.3. Convergent and discriminant validity issues
On the basis that first-order factors are acting as
dependent variables within the confines of the type of
second-order model (characterized by both reflective
manifest indicators and first-order constructs) we present
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644 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652

Table 7
Simultaneous exploratory factor analysis of the four exogenous variables (n ¼ 170).

Variable Factor

1 2 3

ER3. Airworthiness of aircraft 0.938

ER1. Dependability of aircraft 0.674
SF3. Airline’s reputation for safety 0.547
SF2. Adhering to safety procedures with passengers while airborne 0.511
ER2. Working order of aircraft accessories such as air vents, lights, and call buttons 0.507
SF1. Reassuring passengers during bad weather 0.467
FR1. Fairness of excess-baggage charges 0.202
SL3. Offering flights at desired times 0.736
SL1. Airline and its partners providing a network of flights covering desired destinations 0.698
SL2. Providing desired flight connections 0.606
SL4. Offering non-stop flights 0.521 0.241
FR4. Fairness of restrictions Airline places on tickets 0.406 0.270
FR2. Fairness of Airline’s policies when flights are delayed 0.252 0.806
FR3. Fairness with which Airline takes care of customers when flights are cancelled 0.237 0.447

Percent of variance 34.165 6.226 4.821

Cumulative percent of variance 34.165 40.391 45.212

Note: Loadings below 0.20 are suppressed on this table to afford a better visualization of the factor structure.

δ1 FR1 λi1
δ1 FR1
δ2 FR2
δ2 FR2 Fair
δ3 FR3 Policies
δ3 ξ1
FR3
δ4 FR4

λij δ4 FR4
δ5 SF1
λi2
δ6 SF2 δ5 SF1
δ7 Company
Safe
SF3
Deliverables δ6 SF2 Flights
ξ1 ξ2
δ8 SL1
δ7 SF3
δ9 SL2
λi3
δ8 SL1
δ10 SL3
Desirable
δ9 SL2
δ11 SL4 Assortment
of Flights
δ10 SL3 ξ3
δ12 ER1

δ13 ER2
δ11 SL4

λi4
δ14 ER3 δ12 ER1

Fig. 6. Measurement Model 1: one first-order factor. Reliable

δ13 ER2 Equipment
ξ4
here, issues of discriminant validity are of less signifi- δ14 ER3
cance. The facets, posited as first-order constructs, are
treated as reflective indicators of the second-order factor Fig. 7. Measurement Model 2: four first-order orthogonal (uncorrelated)
and thus are expected to be highly correlated. It is in fact factors.
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X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652 645

δ1 FR1
λi1 ε1 FR1
ζ1
ε2 FR2
δ2 FR2 Fair Fair
Policies Policies
ε3 FR3
δ3 FR3
ξ1 η1
ε4 FR4
δ4 FR4 λi1

λi2 λi2 ζ2
δ5 SF1 γ11
ε5 SF1
Safe
δ6 SF2 Flights
ε6
Safe
Flights
ξ2 SF2

δ7 η2
SF3 ε7 SF3 γ12

Φij Company
γ13 Deliverables
λi3 λi3 ζ3 ξ1
δ8 SL1
ε8 SL1
Desirable
δ9 SL2 Assortment ε9 SL2
Desirable
Assortment
of Flights of Flights
δ10 SL3 ξ3 ε10 SL3 η3
δ11 SL4 ε11 SL4

γ14

ζ4
λi4 λi4
δ12 ER1 ε12 ER1
Reliable Reliable
δ13 ER2 Equipment ε13 ER2 Equipment
ξ4 η4
δ14 ER3 ε14 ER3

Fig. 8. Measurement Model 3: four first-order correlated factors. Fig. 9. Measurement Model 4: four first-order factors, one second-order
factor.

on the basis of what they share that we put them together
under the umbrella of a second-order construct. They share
the more abstract construct, the second-order factor. More
relevant here is the assessment of convergent validity at the
first-order latent construct to second-order latent construct
level. At this level, one cannot demonstrate and support
convergent and discriminant validity at the same time.
Establishing convergent validity takes precedence. We
would like to note that if multiple second-order factors
exist, then discriminant validity of the second-order factors
can be examined through conventional means.
6.4. Multicollinearity issues
Because the second-order factor is posited to act as the
independent variable to both the first-order latent factors
that represent it (facets) and the dependent variable, only
one path coefficient (if there is only 1 second-order factor)
is estimated from the independent variable (the second-
order factor) to the dependent variable (Fig. 10). Multi-
collinearity is a moot issue here as only one independent
and one dependent variable are regressed. However, if
multiple second-order factors exist and are posited to
impact the same dependent variable then the degree of
multicollinearity has to be examined through ordinary
means.
6.5. Results
The first model (Model 1: Fig. 6, Table 8) specifies that
all 14 items are reflective of one latent variable. The chi-
square per degree of freedom was above 5 and other fit
indices are indicative of a poor model fit. The poor model
fit also illustrates, by the way, one of the adverse
consequences of combining manifest variables from
various content domains into one first-order latent
variable. Although they can be correlated, the items of
each domain may be reflective of distinct facets which are
not acknowledged through a specification such as the one
represented by Model 1. Combining items representing
distinct facets into a single first-order construct is
conceptually and methodologically perilous.
The second model (Model 2: Fig. 7, Table 8) posits four
uncorrelated latent variables that are related to their
respective observed variables. In view of the strong
correlations between the latent variables as noted pre-
viously, an orthogonal specification for the relationships
between latent variables would be expected to produce
poor model fit. Indeed, such was in fact the case where all
fit indices here failed to pass muster. In situations where
first-order factors are poorly correlated, this specification
could prove to be appropriate. Here however, we are
presented with the reality of high correlations between
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646 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652

Fig. 10. Structural model.

Table 8
Alternative measurement model structures (n ¼ 437).

Goodness of fit indices for alternative Measurement models

models of factor structure
Model 1 Model 2 Model 3 Model 4
One first-order factor Four first-order Four first-order Four first-order factors,
factorsuncorrelated factorscorrelated one second-order factor

Chi-square (df) 496.31 (77) 1207.83 (77) 216.22 (71) 221.67 (73)
Chi-square/df 6.45 15.69 3.04 3.04
Normed-fit index (NFI) 0.84 0.64 0.92 0.92
Non-normed fit index (NNFI) 0.84 0.59 0.93 0.93
Comparative fit index (CFI) 0.86 0.65 0.95 0.94
Standardized root mean square 0.06 0.34 0.04 0.04
residual (RMR)

first-order factors and thus a specification such as the one
represented by Model 2 would not be conducive.
Model 3 (Fig. 8, Table 8) was similar to Model 2 except
for the fact that the latent variables were free to correlate.
The model fit was quite acceptable as all fit indices met
respective criteria. However, retention of such a model
would not resolve the issue of discriminant validity as
argued earlier. In addition, when first-order factors are
highly correlated, multicollinearity emerges as a critical
concern as we have illustrated earlier in Section 5 (see
also Table 3). In instances however where first-order
factors exhibit moderate correlations, a measurement
model specification such as the one represented by
Model 3 would be advisable.
Model 4 (Fig. 9, Table 8) presents a second-order factor
(i.e., company deliverables) that is related to four first-
order factors/facets that in turn are related to the
respective observed variables. At a first glance, it appears
that the first-order factors act as both independent and
dependent variables (Byrne, 1998). In Structural Equation
Modeling, if a variable has an arrow pointing to it then it is
targeted as a dependent variable and it will maintain such
status throughout. A variable can either operate as a
dependent variable or an independent variable but not
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X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
both (Byrne, 1998). Within the context of higher-order
modeling the first-order factors are conceptualized as
dependent variables. This implies that their variances and
covariance are not estimable within the model. Rather,
‘‘such variation is presumed to be accounted for by the
higher-order factor’’ (Byrne, 1998, p. 33).
In order to determine whether the second-order model
is identified, we need to first calculate the number of
parameters to be estimated. Here we have 10 first-order
regression coefficients (for identification purposes a
constraint is placed on one coefficient of each first-order
factor to be equal to one, thus if we have a total of 14
observed items and four first-order factors, then only 10
parameters, ls, need to be estimated), four second-order
regression coefficients (gs)—one for each first-order
factor, 14 measurement error variances (es)—one for each
observed variable, and four residual error terms (zs)—one
for each first-order factor, for a total of 32. Given that
there are 105 pieces of information (the total is 105 as we
have 14 items and it is computed by adding all the
elements in the lower-left triangle of the variance-
covariance matrix plus the principal diagonal elements
in the sample variance—covariance matrix) the model is
over-identified with 73 degrees of freedom.
According to the literature (Marsh and Hocevar, 1985;
Arnau and Thompson, 2000), a model that includes a
second-order model structure can never produce a model
fit that is ‘‘better’’ (i.e., better fitting in terms of the model
fit indices) than a model that specifies only first-order
correlated factors (such as Model 3). However, a second-
Table 9
Measurement model for four first-order latent factors and one second-order latent factor (n ¼ 437).
Variable First-order factors
Fair policies
FR1. Fairness of excess-baggage charges 0.53
FR2. Fairness of Airline’s policies when flights are delayed 0.81 (10.66)
FR3. Fairness with which Airline takes care of customers 0.78 (10.53)
when flights are cancelled
FR4. Fairness of restrictions Airline places on tickets 0.73 (10.17)
SF1. Reassuring passengers during bad weather
SF2. Adhering to safety procedures with passengers while
airborne
SF3. Airline’s reputation for safety
SL1. Airline and its partners providing a network of flights
covering desired destinations
SL2. Providing desired flight connections
SL3. Offering flights at desired times
SL4. Offering non-stop flights
ER1. Dependability of aircraft
ER2. Working order of aircraft accessories such as air vents,
lights, and call buttons.
ER3. Airworthiness of aircraft
Fair policies
Safe flights
Desirable Assortment of Flights
Reliable equipment
Chi-square (df) ¼ 221.67 (73), chi-square/df ¼ 3.04, normed-fit index (NFI) ¼ 0.92, non-normed fit index (NNFI) ¼ 0.93, comparative fit index
(CFI) ¼ 0.94, standardized root mean square residual (RMR) ¼ 0.04.
647
order model that rivals the performance of a first-order
correlated model can be an attractive alternative. Model 4
is well-fitting and only immaterially divergent in perfor-
mance from Model 3. Again, given the deficiency
(e.g., discriminant validity, issues of multicollinearity) of
Model 3, our prior discussion for the need of second-order
models from a conceptual point of view, and the literature
support for second-order models in the context of service
quality (e.g., Kettinger and Lee, 1994; Kettinger et al.,
1995; Myerscough, 2002; Somers et al., 2003; Rodgers
et al., 2005; Anitsal and Paige, 2006; Lai, 2006), Model 4
appears to be the most prudent choice. We examine
Model 4 in more detail.
Using the LISREL 8.51 software and applying MLE on
the entire set of items in the model, the fit indices along
with the t-values provide evidence of convergent validity
(Tables 8 and 9). The NFI was 0.92, NNFI was 0.93 and CFI
was 0.94, while the chi-square per degree of freedom was
3.04. The standardized RMR was 0.04. All of the items
have statistically significant relationships with their
factors. All factor loadings were above 0.53 and a good
majority of them above 0.70. The significance of the
t-values (also known as ‘‘Wold statistics’’ or ‘‘critical
ratios’’, t-values are ratios of the absolute values of the
parameters to their respective standard errors), as shown
in Table 9, associated with factor-to-item loadings exceeds
the critical value at the 0.001 significance level. Notice
that the loadings of the first-order factors to the second-
order factor are all above 0.81 and that the t-values are
quite substantive and statistically significant. This points
Second-
order factor
Safe flights Desirable Reliable
assortment of equipment
flights
0.63
0.68 (11.09)
0.75 (11.80)
0.64
0.71 (12.09)
0.80 (13.09)
0.65 (11.20)
0.79
0.78 (16.85)
0.77 (16.53)
0.81 (9.99)
0.88 (12.17)
0.89 (11.65)
0.94 (17.21)
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648 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
to a very strong relationship between first-order factors
and the second-order factor, attesting to the convergent
validity of the posited second-order model. As such, a
second-order model is quite effective in representing the
data. It is important to note that company deliverables (the
second-order factor) contributes the most to reliable
equipment (completely std. coefficient ¼ 0.94, t-value ¼
17.21) and the least to fair policies (completely std.
coefficient ¼ 0.81, t-value ¼ 9.99).
Once we selected Model 4 as the best representing
measurement model, we proceed with the testing of the
structural model, which builds on Model 4. In Fig. 10 we
postulate a structural model where satisfaction is specified
as the dependent variable and the second-order factor
(i.e., company deliverables) is hypothesized to affect it. The
model fit meets the generally acceptable guidelines
(Table 10). The chi-square per degree of freedom was
2.65 and NFI was 0.92. Both NNFI (0.94) and CFI (0.95) are
above 0.90 and standardized RMR was 0.039. The t-value
associated with the relationship between company deli-
verables and satisfaction (g ¼ 0.74) was 15.49 and it is
rather potent. The model explained 51% of the variance in
passenger satisfaction. Collectively, the four variables can
have a significant impact on passenger satisfaction. Thus,
we cannot discount their impact. There is a substantive
size effect as well as statistical significance.
7. Discussion and directions for future research
Conducting empirical research is a reality for many
operations and supply chain management faculty around
the world. The field has progressed through the last 20–25
years but much needs to be done just to catch up with the
sophistication of methodologies employed in other rela-
tive or distant disciplines. With this manuscript, we wish
to present a paradigm on second-order modeling. Higher-
order modeling is an important advance as several
constructs that operations and supply chain management
researchers employ can be meaningfully conceptualized
through higher-order modeling. Beyond the conceptual
elegance that higher-order models present, there are also
practical advantages that are gained through the use of
higher-order modeling.
We presented a hierarchical approach to evaluate
whether a higher-order conceptualization is prudent
given that other structures could equally represent the
data. This approach involves the assessment of several
Table 10
Structural model.
Company deliverables (path
coefficient, t-value)
Fair policies 0.82 (10.04)
Safe flights 0.88 (12.12)
Desirable assortment of flights 0.88 (12.57)
Reliable equipment 0.94 (17.47)
Satisfaction 0.71 (15.49) R2 ¼ 0.51
Chi-square (df) ¼ 596.33 (225), chi-square/df ¼ 2.65, normed-fit index
(NFI) ¼ 0.92, non-normed fit index (NNFI) ¼ 0.94, comparative fit index
(CFI) ¼ 0.95, standardized root mean square residual (RMR) ¼ 0.039.
nested models. A number of empirical manuscripts have
employed this hierarchical approach successfully. Exam-
ples include Babbar and Koufteros (2008), Somers et al.
(2003), and Myerscough (2002). The hierarchical process,
however, should not be reminiscent of a ‘‘fishing expedi-
tion.’’ The process should only involve the specification
and comparative evaluation of a series of measurement
models that can be defended conceptually. Moreover, the
selection of a given model goes beyond a prototypical
assessment of model fit-indices. As we illustrated in
Section 5, measurement models have a decisive impact on
the outcomes of substantive hypotheses testing. We thus
caution researchers that after a selection of a measure-
ment model based on fit indices, discriminant validity
should be examined followed by a critical assessment of
substantive hypotheses-testing findings. As illustrated on
Table 8, Model 3 (Fig. 8) produces the best measurement
model fit. However, in Section 5 we demonstrated that
this measurement model presents discriminant validity
shortcomings and generates undesirable challenges while
testing substantive hypotheses (Table 3 and Fig. 4). Thus,
we opted instead to select Model 4 (a second-order
specification). To summarize, measurement models that
produce poor fit indices can be excluded from further
consideration but a model that generates the best fit
indices may not always be the model of choice. Good
model fit is necessary but it should not be the only
determining factor for final model selection.
The model we presented in Figs. 9 and 10 can be
enlarged to also include other second-order factors, such
as employee deliverables (Fig. 1). The approach of testing
the enlarged measurement model would be identical to
the process we illustrated. However, we can also extend
the current model by adding exogenous variables, which
may only stand at the first-order of abstraction. In other
words, within the same model some of the exogenous
variables can be conceptualized at the second-order of
abstraction while others can be specified purely as first-
order factors. For example, competitive pricing could be
specified as another antecedent to customer satisfaction.
Fig. 11 shows a ‘‘mixed model’’ where competitive pricing
(with its four manifest variables) is modeled as a first-
order construct which directly affects satisfaction. While
the first-order constructs of company deliverables are part
of a Y-model specification (they are after all dependent on
the second-order construct), the specification of competi-
tive pricing has an X-model specification.
If a researcher is interested in testing for moderation
effects (within the context of second-order modeling), this
can be accomplished through factorial invariance tests
(Koufteros and Marcoulides, 2006). For instance, a
researcher may postulate that class of service (economy
vs business) may moderate the relationship between
company deliverables and satisfaction. To test for a
moderation effect, measurement model invariance is
examined first followed by tests to see if the structural
model is invariant across the two groups (i.e., economy vs
business class). The paradigm presented by Koufteros and
Marcoulides’s can be readily adopted except that the
invariance of the gamma coefficients that relate the
second-order construct to the four first-order constructs
 ARTICLE IN PRESS
X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
Fig. 11. Expanded structural model: mixed model.
should be examined in light of the fact that these
coefficients are now part of the measurement model.
Thus, the invariance of these specific gamma coefficients
should be assessed prior to testing for structural model
invariance.
Researchers may consider a second-order specification
as a form of aggregation. Aggregation is useful as it can
represent the relationships between variables more
parsimoniously. For example, several manifest/observed
variables can be represented by a single first-order latent
variable. Likewise, a second-order factor can embody the
meaning of many first-order latent variables. Thus, the
number of variables that need to be estimated in
the context of a structural model can be reduced
significantly.
The second-order model we describe in this manu-
script is coined as ‘‘total disaggregation second-order
factor model’’ (Bagozzi and Heatherton, 1994). It is
described as a total disaggregated model as each and
every manifest/observed variable is employed as a
reflective indicator for a latent variable and each and
every first-order latent variable is employed as a reflective
indicator of the second-order model (Coffman and
MacCallum, 2005). This approach however is not the only
means through which higher-order models and their
motivation can be represented by. Researchers, for
example, can represent second-order models via a partial
649
disaggregation approach. Moreover, given that indicators
can be either reflective or formative, researchers may also
employ a formative indicator specification possibly both
at the first- and second-order factor levels.
With a ‘‘partial disaggregation’’ approach, two or more
composite variables, the parcels, can be constructed for
each first-order construct which subsequently are treated
as indicators of a second-order factor model (Bagozzi and
Heatherton, 1994). The parcels can be constructed from
like indicators (items that load on the same first-order
factor), and thus are called homogenous parcels, or they
can be ‘‘domain representative parcels’’ (Kishton and
Widaman, 1994) where ‘‘each parcel is made up of items
that load on different first-order factors’’ (Coffman and
MacCallum, 2005, p. 236). The ‘‘partial disaggregation’’
approach represents the closest alternative to our con-
ceptual approach so we discuss its pros and cons. The
merits and criticism of using parcels relates primarily to
the philosophy and practicality of summing/averaging
indicators.
There is plenty of criticism and praise of parceling as a
measurement practice. Little et al. (2002) provide an
extensive body of work in regards to the question of
parceling and present the arguments for and against it.
They provide a multitude of arguments for each position.
They state that ‘‘From an empiricist-conservative philoso-
phy of science perspective, parceling is akin to ‘cheating’
 ARTICLE IN PRESS
650 X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
because modeled data should be as close to the response
of the individual as possible in order to avoid the potential
imposition, or arbitrary manufacturing, of a false struc-
ture. Any potential source of subjective bias on the part of
the data analyst is to be avoided at all costs, a simple a
priori principle which most would agree. In this sense,
allowing the researcher to create parcels from items
fundamentally undermines the objective empirical pur-
pose of the techniques that have been developed to model
multivariate data’’ (p. 152). Countering this philosophical
argument against parceling, Little et al. state, ‘‘From a
more pragmatic-liberal philosophical perspective, parcels
have potential merits as the lowest level of data to be
modeled. Given that measurement is a strict, rule-bound
system that is defined, followed, and reported by the
investigator, the level of aggregation used to represent the
measurement process is a matter of choice and justifica-
tion on the part of the investigator. With a compelling
justification, using parcels would not be seen as a
transgression against truth because the operational
aspects of an investigation are, fundamentally, a public
process’’ (pp. 152–153). Another argument against parcel-
ing is articulated by Little et al. as they further state, ‘‘The
empiricist-conservative position appears rooted in the
stance that all sources of variance in each item must be
represented in any multivariate statistical models invol-
ving a given scale. Failing to represent one or more sources
of variance, however minor, may lead to bias in estimates
of other key parameters throughout the model’’ (p. 154).
Offering an argument in contrast to the statement above,
Little et al. posit ‘‘In contrast, the pragmatic-liberal
position holds that representing each and every source
of variance in each item, particularly on an a priori basis, is
impossible. Under this position, researchers cannot know
every single source of variance in every single item; one
can only hope that one’s models will represent the
important common sources of variance across samples
of items. When minor influences, which are substantively
trivial yet empirically significant, cannot be predicted on
an a priori basis, they will be difficult or impossible to
distinguish from chance findings’’ (p. 154).
One can argue perhaps that the motivation for
parceling is empirically driven. Compared to aggregated/
parceled data, ‘‘item-level data contain one or more of the
following disadvantages: lower reliability, lower com-
munality, a smaller ratio of common-to-unique factor
variance, and a greater likelihood of distributional viola-
tions’’ (p. 154). A second empirical advantage pertains to
the number of parameters required to model items versus
parcels and the overall fit of structural models. Bagozzi
and Edwards (1998) and Bagozzi and Heatherton (1994)
argue that ‘‘because fewer parameters are needed to
define a construct when parcels are used, parcels are
preferred, particularly when sample sizes are relatively
small’’ (p. 155).
The motivation for second-order modeling is primarily
a conceptual one where ‘‘the central scientific interest lies
in the general construct’’ (Chen et al., 2006, p. 90). This
higher-order factor is hypothesized to account for the
relationship among the lower-order factors. It acknowl-
edges the multidimensional nature of the higher-order
factor while retaining all possible sources of variance. If
the researcher has an adequate sample size at his or her
disposal and reasonable model fit indices can be obtained,
then a total disaggregated second-order factor model
would be advisable. On the other hand, when the
researcher encounters relatively few observations and
there are model fit and reliability concerns, then a partial
disaggregation approach would be most appealing.
Here in this manuscript we describe a process through
which the viability of a particular type of second-order
models is addressed. Although the type of a second-order
model we assess is the most frequently encountered in the
literature, three other types exist along the reflective
versus formative divide and further research can aid
towards their proper construction and evaluation. Jarvis
et al. (2003) describe four main types of second-order
models. The first-order constructs can have either for-
mative or reflective indicators while those first-order
constructs can themselves be either formative or reflec-
tive indicators of an underlying second-order construct.
The four combinations that result appear as Fig. 2 in Jarvis
et al. (2003). The model we selected to address (Type I) is
the aforementioned ‘‘total disaggregation second-order
factor model’’ (Bagozzi and Heatherton, 1994) and is
characterized by first- and second-order reflective indica-
tors. Models that include a formative specification at
either the first-order and/or second-order level are more
rare but they can be meaningful representations. The work
of Diamantopoulos et al. (2008) as it pertains to formative
measurement models would be quite useful in gaining a
better understanding of the three types of second-order
models we are not examining here. Future research can
perhaps modify our process to accommodate second-
order models that include a formative conceptualization.
Second-order models are not particularly difficult to
construct or evaluate but the OM literature has yet to
make full use of the capabilities and insights they afford.
Other techniques that could prove catalytic for the
advancement of empirical tradition in operations manage-
ment also beg for attention. Two such approaches that we
deem to be quite pertinent are latent growth modeling
and multilevel modeling. Latent growth modeling is not
only useful in discerning ‘‘causal’’ effects, but it is quite
useful in research studies that examine changing pro-
cesses in individuals or individual firms or industries. One
reason for their popularity in educational, marketing,
organizational behavior and psychological research is that
repeated measurements allow researchers to investigate
individual (intra-individual) change across time as well as
between individual differences (inter-individual) and
similarities in change patterns (Raykov and Marcoulides,
2000).
Organizational research also presents an opportunity
to study phenomena that are multilevel, or hierarchical, in
nature. For example, individual strategic business units
(SBUs) are embedded within a firm which subsequently is
embedded within an industry which is embedded within
a country. A hierarchy consists of units grouped at
different levels. SBUs may be the level 1 units in a
2-level structure where the level 2 units are the firms:
SBUs may be the level 1 units clustered within firms that
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X. Koufteros et al. / Int. J. Production Economics 120 (2009) 633–652
are the level 2 units. Multi-level methodology (also
known as hierarchical linear models, generalized linear
mixed models, nested models, and random-effects mod-
els) recognizes that the group and its members both
influence and are influenced by the group membership
(Heck and Thomas, 2000). Multilevel modeling offers a
richer and probably more accurate examination of
organizational life.
The operations and supply chain management litera-
ture has no evidence of publications using either the
latent growth or the multilevel methodology and we call
for researchers to consider employing them in future
research. With this manuscript we want to encourage OM
researchers to step out of the confines of existing research
methodology and consider techniques which may shed
additional light into organizational life.
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