PLS-SEM: Introduction and Overview

Joe F. Hair, Jr.

Founder & Senior Scholar

The greatest interest in any factor solution centers on the correlations between the original
variables and the factors. The matrix of such test-factor correlations is called the factor structure,
and it is the primary interpretative device in principal components analysis. In the factor
structure the element rjk gives the correlation of the jth test with the kth factor. Assuming that the
content of the observation variables is well known, the correlations in the kth column of the
structure help in interpreting, and perhaps naming, the kth factor. Also, the coefficients in the jth
row give the best view of the factor composition of the jth test.
The derivation of the factor structure S is as follows :
S 1
N

(z
i 1

m z )(f i m f )

1 z ifi
N
1 z i (L1 / 2 V z i )
N

1 ( z i z i ) VL1 / 2
N
RVL1 / 2
and since
RV VL
S VLL1 / 2 VL1 / 2

Another set of coefficients of interest in factor analysis is the weights that compound predicted
observations z from factor scores f. These regression coefficients for the multiple regression of
each element of the observation vector z on the factor f are called factor loadings and the matrix
A that contains them as its rows is . . . . .
Source: Cooley, William W., and Paul R. Lohnes, Multivariate Data Analysis, John Wiley & Sons,
Inc., New York, 1971, page 106.

SEM Model:
Predicting the Birth Weight
of Guinea Pigs
X & Y = different outcomes
B, C & D = common causes
A & E = independent causes

Sewall Wright, Correlation and Causation, Journal

of Agricultural Research, Vol. XX, No. 7, 1921.

Structural Equations
Modeling
What comes to mind?

CB-SEM
?
S
O
M
A
L
E
R
LIS
PLS-SE
M

Structural Equations
Modeling
Wireless Phone Service
Advertising
Budget

Brand
Attitudes

Purchase
Likelihood

Experience

Information
Search
Risk

Structural Equations Modeling (SEM)

Two Steps:
1. Confirm measurement model (CFA) = CFA assesses
reliability and validity of the models constructs.
CB-SEM must achieve fit to move to 2nd step. PLSSEM confirm measurement before examining
structural model (2nd step).
2. Evaluate structural model (SEM) = SEM determines
whether hypothesized relationships exist between
the constructs.
In developing models to test using CFA/SEM,
researchers draw upon theory, prior experience,
expert judgment, and research objectives to identify
and develop hypotheses about relationships between
multiple independent and dependent variables.

CB-SEM (Covariance-based SEM)

statistical objective = to reproduce
the theoretical covariance matrix,
without focusing on explained variance.

PLS-SEM (Partial Least Squares SEM)

statistical objective = to maximize
the explained variance of the
endogenous latent constructs
(dependent variables).

CB-SEM statistical objective (goodness of

fit) = minimize the differences between the

observed covariance matrix and the
estimated covariance matrix.

Research objective: testing and confirmation where

prior theory is strong.
Assumes normality of data distribution,
homoscedasticity, large sample size, etc.
A full information approach which means small
changes in model specification can result in
substantial changes in model fit.

PLS-SEM statistical objective = maximize

the explained (predicted) variance of the
dependent variables.

Research objective: theory development and

prediction.

Normality of data distribution not assumed.

Good solutions with smaller sample sizes.
Measurement models:
Can be used with fewer indicator variables (1 or
2) per construct.
OK to have ordinal scaled questions.
Can include a larger number of indicator variables
(CB-SEM = solution unlikely with 50+ items).

Preferred alternative with formative constructs.

PLS Path Model

Steps 1 & 2 are combined,

but still look at
measurement theory first
before moving to
structural model
assessment.

Which SEM Approach Should Be Used?

Rules of Thumb: PLS-SEM or CB-SEM

Use CB-SEM when:
The goal is theory testing, theory confirmation, or
the comparison of alternative theories.
Structural model has non-recursive relationships.
Research requires a global goodness of fit criterion.

Rules of Thumb: PLS-SEM or CB-SEM?

Use PLS-SEM when:

The goal is predicting key target constructs.

Formative constructs are included in the structural model.
Note that formative measures can also be used with CB-SEM,
but doing so requires construct specification modifications
(e.g., the construct must include both formative and reflective
indicators to meet identification requirements = MIMIC
measurement model).
The structural model is complex (many constructs and many
indicators).
The sample size is small and/or the data is not-normally
distributed.
The plan is to use latent variable scores in subsequent
analyses.

Should You Use SEM In Your Research?

Journal reviewers rate SEM papers more favorably

on key manuscript attributes . . .
Mean Score

Attributes
Topic Relevance
Research Methods
Data Analysis
Conceptualization
Writing Quality
Contribution

SEM
4.2
3.5
3.5
3.1
3.9
3.1

No SEM
3.8
2.7
2.8
2.5
3.0
2.8

p-value
.182
.006
.025
.018
.006
.328

Note: scores based on 5-point scale, with 5 = more favorable

Source: Babin, Hair & Boles, Publishing Research in Marketing Journals
Using Structural Equation Modeling, Journal of Marketing Theory and
Practice, Vol. 16, No. 4, 2008, pp. 281-288.

The use of PLS-SEM is increasing in different

fields
Cumulative number of articles

Marketing (Hair et al. 2012a)

MISQ (Ringle et al. 2012)

Strategic Mgmt.
(Ringle et al. 2012b)

Mgmt. Accounting
(Nitzl 2012)
1980

1990

2000

2010

Year
Hair, J. F., M. Sarstedt, C. M. Ringle, and J. A. Mena (2012a). An Assessment of the Use of Partial Least Squares Structural Equation
Modeling in Marketing Research, Journal of the Academy of Marketing Science, 40 (3), 414-433.
Hair, J. F., M. Sarstedt, T. Pieper, and C. M. Ringle (2012b). The Use of Partial Least Squares Structural Equation Modeling in Strategic
Management Research: A Review of Past Practices and Recommendations for Future Applications, Long Range Planning, 45(5/6), 320-340.
Nitzl, C. (2012). The Use of Partial Least Squares Path Modeling in Management Accounting, White Paper.
Ringle, C. M., M. Sarstedt, and D. Straub (2012). A Critical Look at the Application of PLS-SEM in MIS Quarterly, MIS Quarterly, 36(1), iii-xiv.

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distributed without express written permission from

15

.
.

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Prentice-Hall, McGraw-Hill, Sage, SmartPLS, and session presenters.

Inner Model Outer

Model ??

A PLS path model consists of two elements:

First, there is a structural model (also referred to as
the inner model in the context of PLS-SEM) that
represents the constructs (circles or ovals). The
structural model also displays the relationships
(paths) between the constructs.
Second, there are the measurement models (also
referred to as the outer models in PLS-SEM) of the
constructs that display the relationships between the
constructs and the indicator variables (rectangles).
There are two types of constructs in a SEM: the
exogenous latent variables (i.e., those constructs
that explain other constructs in the model) and the
endogenous latent variables (i.e., those constructs
that
are
being
explained
in the
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reserved
. Cannot
be reproduced or distributed
withoutmodel).
express written permission from
Prentice-Hall, McGraw-Hill, Sage, SmartPLS, and session presenters.

Path models = diagrams used to visually display the

hypotheses and variable relationships that are examined

when SEM is applied.

Constructs = variables that are not directly measured)

are represented in path models as circles or ovals (Y1 to
Y4).

Indicators = also referred to as items or manifest

variables, are the directly measured proxy variables that

contain the raw data. They are represented in path models
as rectangles (x1 to x10).

Paths = relationships between constructs, and between

constructs and their assigned indicators, shown as arrows.

In PLS-SEM, the arrows are always single-headed, thus
representing directional relationships. Single-headed
arrows
are .
considered
a predictive
relationship,
andfromwith
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Cannot be reproduced
or distributed without
express written permission
Prentice-Hall, McGraw-Hill, Sage, SmartPLS, and session presenters.
strong
theoretical support, can be interpreted as causal

Error terms = The error terms (e.g., e7 or e8; Exhibit 1.4)

are connected to the (endogenous) constructs and
(reflectively) measured variables by single-headed arrows.
Error terms represent the unexplained variance when path
models are estimated.

In Exhibit 1.4, error terms e7 to e10 are on those indicators

whose relationships go from the construct to the indicator
(i.e., reflectively measured indicators). In contrast, the
formatively measured indicators
x1 to x6, where the
.
relationship goes from the indicator to the construct, do not
have error terms.
The structural model also contains error terms. In Exhibit
1.4, z3 and z4 are associated with the endogenous latent
variables Y3 and Y4 (note that error terms on constructs and
measured variables are labeled differently). In contrast, the
exogenous latent variables that only explain other latent
All rights reserved . Cannot be reproduced or distributed without express written permission from
variables
in the structural model do not have an error term.
Prentice-Hall, McGraw-Hill, Sage, SmartPLS, and session presenters.

Reflective (Scale) Versus Formative

(Index) Operationalization of Constructs
A central research question in social science research, particularly marketing,
management & MIS, focuses on the operationalization of complex constructs:
Are indicators causing or being caused by
the latent variable/construct measured by them?

Indicator 1

Indicator 2

Indicator 3

Construct

Changes in the latent variable

directly cause changes in the
assigned indicators

Indicator 1

Indicator 2

Indicator 3

Construct

Changes in one or more of

the indicators causes
changes in the latent variable

Example: Reflective vs. Formative World

View

Cant walk a straight

line
Drunkenness

Smells of alcohol
Slurred speech

Example: Reflective vs. Formative World View

Consumption of beer
Drunkenness

Consumption of wine
Consumption of hard
liquor

Basic Difference Between Reflective and

Formative Measurement Approaches
Whereas reflective indicators are essentially interchangeable (and
therefore the removal of an item does not change the essential
nature of the underlying construct), with formative indicators
omitting an indicator is omitting a part of the construct.
(DIAMANTOPOULOS/WINKLHOFER, 2001, p. 271)
The formative measurement approach
generally minimizes the overlap
between complementary indicators
Construct
domain
Construct
domain

The reflective measurement approach

focuses on maximizing the overlap
between interchangeable indicators

Exercise: Satisfaction in Hotels as Formative

and Reflective Operationalized Constructs
The rooms furnishings
are good

The hotels recreation

offerings are good

Taking everything into

account, I am satisfied
with this hotel
The hotels personnel
are friendly

I appreciate this hotel

Satisfaction
with Hotels

The hotel is low-priced

I am looking forward to
staying overnight in
this hotel

The rooms are quiet

I am comfortable with
this hotel

The rooms are clean

The hotels service is

good

The hotels cuisine is

good

Formative Constructs Two Types

1. Composite (formative) constructs indicators completely
determine the latent construct. They share similarities because
they define a composite variable but may or may not have
conceptual unity. In assessing validity, indicators are not
interchangeable and should not be eliminated, because removing
an indicator will likely change the nature of the latent construct.

2. Causal constructs indicators have conceptual unity in that

all variables should correspond to the definition of the concept. In
assessing validity some of the indicators may be
interchangeable, and also can be eliminated.
Bollen, K.A. (2011), Evaluating Effect, Composite, and Causal Indicators in
Structural Equations Models, MIS Quarterly, Vol. 35, No. 2, pp. 359-372.

Sample Size
The overall complexity of a structural model has little influence on the
sample size requirements for PLS-SEM. The reason is the algorithm does
not compute all relationships in the structural model at the same time.
Instead, it uses OLS regressions to estimate the models partial regression
relationships.
The 10 times rule indicates the sample size should be equal to the
larger of:
(1) 10 times the largest number of formative indicators used to
measure a single construct, or
(2) 10 times the largest number of structural paths directed at a
particular latent construct in the structural model.
This rule of thumb is equivalent to saying that the minimum sample
size should be 10 times the maximum number of arrowheads pointing at a
latent variable anywhere in the path model. While the 10 times rule offers
a rough guideline for minimum sample size requirements, PLS-SEM like
any statistical technique requires researchers to consider the sample
size against the background of the model and data characteristics.
Specifically, the required sample size should be determined using power
analyses based on the part of the model with the largest number of
predictors.

Statistical power assumed = 80%

Indicators for SEM Model Constructs

Extended Reputation Model

Constructs