Cluster analysis consists of methods of classifying variables into clusters. Technically, a cluster consists of variables that correlate highly with one another and have comparatively low correlations with variables in other clusters. The basic objective of cluster analysis is to determine how many mutually and exhaustive groups or clusters, based on the similarities of profiles among entities, really exist in the population and then to state the composition of such groups. Various groups to be determined in cluster analysis are not predefined as happens to be the case in discriminant analysis.
Steps: In general, cluster analysis contains the following steps to be performed:
- First of all, if some variables have a negative sum of correlations in the correlation matrix, one must reflect variables so as to obtain a maximum sum of positive correlations for the matrix as a whole.
- The second step consists in finding out the highest correlation in the correlation matrix and the two variables involved (i.e., having the highest correlation in the matrix) form the nucleus of the first cluster.
- Then one looks for those variables that correlate highly with the said two variables and includes them in the cluster. This is how the first cluster is formed.
- To obtain the nucleus of the second cluster, we find two variables that correlate highly but have low correlations with members of the first cluster. Variables that correlate highly with the said two variables are then found. Such variables along the said two variables thus constitute the second cluster.
- One proceeds on similar lines to search for a third cluster and so on.
From the above description we find that clustering methods in general are judgmental and are devoid of statistical inferences. For problems concerning large number of variables, various cut and try methods have been proposed for locating clusters. McQuitty has specially developed a number of rather elaborate computational routines for that purpose. In spite of the above stated limitation, cluster analysis has been found useful in context of market research studies. Through the use of this technique we can make segments of market of a product on the basis of several characteristics of the customers such as personality, socio-economic considerations, psychological factors, purchasing habits and like ones.
