Cluster Analysis

CLUSTER ANALYSIS

CLUSTER ANALYSIS

It is an analytical technique that is used to develop meaningful subgroups of entities. ( individual or objects.) which are homogeneous or compact with respect to certain characteristics. Thus, observations in each group would be similar to each other. Further, each group should be different from each other with respect to the same characteristics, and therefore, observations of one group would be different from the observations of the other groups.

The objective is to classify a sample of entities into a small number of mutually exclusive groups based on the similarities among the entities.

Some Situations where the technique could be used are ;

• The financial analyst of an investment banking firm is interested in identifying groups of firms that are prime targets for takeover.

• A marketing manager is interested in identifying similar cities that can be used for test marketing.

• The campaign manager for a political candidate is interested in identifying groups of voters who have similar vies on important issues.

It may be noted that while in MDA, the groups are defined, in Cluster

analysis, the groups have to be identified.

The basic methodological questions raised in the cluster analysis are:

i) What are the relevant variables and descriptive measures of an entity?

ii) How do we measure the similarity between entities?

iii) Given that we have a measure of similarity between entities, how do we form clusters?

iv) How do we decide on how many clusters to form?

The first question is very important, but there is no unique answer to it. The choice of what variables are relevant for describing an entity is basically one that must be made by the analyst. He has to predetermine what variables are important and what should be included in the analysis on the basis of his knowledge of the...