Cluster analysis

Cluster analysis is the name given to a group of multivariate techniques that identify similar entities from the characteristics possessed by the entities. Objects or variables are identified or classified so that each object is very similar to the others in the cluster with respect to some criteria. The technique examines similarities between observations of entities based on profiles of their scores on a number of measured characteristics. Applications include:

• determining the number and composition of market segments

• facilitating the selection of test markets

• identifying groups of people with common purchasing interests in segmentation studies; this helps to identify target markets and provides information for establishing product positioning and developing promotional themes.

EXAMPLE

Various measures of the standard of living in European countries at the end of the 1980s are shown in Table 10.9 and Figure 10.7. On the basis of these measures, countries are clustered according to similarities in the standard of living. The data are standardised and hierarchical clustering using group average linkage is used to obtain clusters.

From the dendrogram a number of clusters are seen, for example: 'Denmark, Sweden and Switzerland', 'France, Netherlands and Norway', and 'Belgium and Spain'. Subsequent clustering obviously depends on what indicators of the standard of living are taken - a different set of indicators could produce different clustering. Another point is that through standardisation of the data in this example, equal weighting to each of the measures is given. It might be desirable to give more weighting to some measures than to others.

For further information on cluster analysis, see Hair et al.3 and Green et al.4

Measures of living standards in Europe

Private

Per '000

Per '000

Per '000

per capita

population

live births

ownership

Consumption

Doctors

Infant deaths

TV

Cars

Phones

Austria

7,434

2.1

8.3

323

370

525

Belgium

8,486

3.3

8.6

301

349

478

Denmark

7,705

2.7

7.5

386

321

864

France

8,733

2.6

7.5

332

394

608

Germany

8,120

3.0

7.5

379

457

650

Ireland

5,079

1.5

7.5

216

210

265

Italy

8,577

1.3

8.9

255

408

488

Netherlands

8,133

2.4

6.8

327

348

639

Norway

8,224

2.5

8.3

348

388

622

Spain

6,443

3.7

7.8

322

263

396

Sweden

8,090

3.1

5.8

393

400

890

Switzerland

10,181

2.9

7.3

411

419

856

UK

9,154

1.4

8.4

534

318

Ireland

Italy

Germany

Belgium

Spain

Denmark

Sweden Switzerland

Austria

Netherlands

France

Norway

FIGURE 10.7

Dendrogram showing measures of standard of living in Europe (produced with the aid of S-Plus for Windows)5

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