Chapter 1

THE PROBLEM AND ITS BACKGROUND

1.1 Introduction

Customers are the most important element for any business and keep them

satisfied is the result of fulfill and delight their expectations and exceed them (Al

Khattab & Aldehayyat, 2011)and delivering service quality to customers is a core

factors for success, and it need to be continuously evaluated focusing improve the

current situation if necessary (Mohd, et al., 2013).

The world economy faces an increasingly trend in the importance of the

service industry. The value added of service industry as percent of world gross

domestic product is about 68% (World Bank, 2008). In recent decades, attention has

become increasingly focused on the key roles that services fulfill domestically and

internationally. It is widely recognized that services account for a significant and

rising share of domestic output and employment (Robert 2005).

Customer satisfaction with goods frequently focuses on the product itself:

does it work, doing what it is supposed to do? In the service field this is not the case.

Since the “product” is intangible, satisfaction is a perception about performance,

rather than the utilization of an object (Berry, 1987). Service satisfaction is a function

of consumers’ experiences and reactions to a provider’s behavior during service

encounter; it is also a function of service setting. Were consumers content? Did they

get what they wanted? Were they helped? Were the service surrounding pleasant?

Thus, service is, typically, about the present, the “now”.

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 The offers of banking industry are mainly of service in nature. Service is an

activity or benefit that one party can offer to another that is essentially intangible and

does not result in the ownership of anything. Its production may or may not be tied to

a physical product (Kotler et al., 1999). Services are economic activities that create

value and provide benefits for customers at specific times and places, as a result of

bringing about desired change in or on behalf of the recipient of the services (Love

lock and Wright, 2002).

Quality and customer satisfaction have long been recognized as playing a

crucial role for success and survival in today’s competitive market. Not surprisingly,

considerable research has been conducted on these two concepts. Notably, the quality

and satisfaction concepts have been linked to customer behavioral intentions like

purchase and loyalty intention, willingness to spread positive word of mouth, referral,

and complaint intention by many researchers (Hallowell, 1996, and Jacoby et al.,

1973). The most commonly found studies were related to the ‘antecedents,

moderating, mediating and behavioral consequences’ relationships among these

variables – customer satisfaction, service quality, perceived value and behavioral

intentions. However, there have been mixed results produced.

Besides, Albert Caruana (2002) identified Service quality, corporate image

and price as the independent variables of customer satisfaction and service loyalty.

According to (Gremler and Brown, 1996, cited in Caruana, 2002), service loyalty

refers the degree to which a customer exhibits repeat purchasing behavior from a

service provider, possess a positive attitudinal disposition toward the provider, and

considers using only this provider when a need for the service arises.

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1.2 Background of the Study

BDO is a full-service universal bank in the Philippines. It provides a complete

array of industry-leading products and services including Lending (corporate and

consumer), Deposit-taking, Foreign Exchange, Brokering, Trust and Investments,

Credit Cards, Corporate Cash Management and Remittances in the Philippines.

Through its local subsidiaries, the Bank offers Leasing and Financing, Investment

Banking, Private Banking, Rural Banking, Banc assurance, Insurance Brokerage and

Stock Brokerage services.

BDO’s institutional strengths and value-added products and services hold the

key to its successful business relationships with customers. On the front line, its

branches remain at the forefront of setting high standards as a sales and service-

oriented, customer focused force. BDO has one of the largest distribution networks,

with more than 1,000 operating branches and over 3,000 ATMs nationwide (including

One Network Bank).

Through selective acquisitions and organic growth, BDO has positioned itself

for increased balance sheet strength and continuing expansion into new markets. As

of 31 March 2016, BDO is the country’s largest bank in terms of consolidated

resources, customer loans, deposits, assets under management and capital, as well as

branch and ATM network nationwide.

BDO is a member of the SM Group, one of the country’s largest and most

successful conglomerates with businesses spanning between retail, mall operations,

property development (residential, commercial, resorts/hotel), and financial services.

Although part of a conglomerate, BDO’s day-to-day operations are handled by a team

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of professional managers and bank officers. Further, the Bank has one of the

industry’s strongest Board of Directors composed of professionals with extensive

experience in various fields that include banking, accounting, finance, law, bank

regulations and risk management, strategy formulation and merchandise marketing

(https://www.bdo.com.ph/about-bdo/business-operation).

Financial institutions, such as the BDO, generally believe that customers are

the aim behind their services and hence their activities depend on their customers.

This is why financial institutions are more concerned with customer satisfaction,

customer loyalty and their retention (Zairi, 2000). In fact, customer loyalty stems

from the organization’s creation of benefit for customers so they will be retained and

continue doing business with the organization (Anderson & Jacobsen, 2000).

If a service provider has a positive image in the eyes of customers, minor

mistake will be forgiven but the image will be damaged if mistakes often occur. On

the other hand, if a service provider’s image is negative, the impact of any mistake

will be significant and affect level of satisfaction. Researchers such as (DeRuyter and

Bloemer, 1998) demonstrated the positive impact of corporate image on customer

satisfaction in the retailing context. It can be assumed that this kind of positive

influence will also hold in the bank service sector as image represents an essential

factor for the perception of satisfaction. Dolan et al., (2000) stated that if the central

role of pricing in consumer behaviour as well as cost effectiveness is considered as

one of the criteria that consumers rank as being particularly important when selecting

a product or service, the fact that the price has received little attention when analyzing

customer satisfaction is astonishing. Price is an important variable in services. As

such, it is also crucial for organizations to set and manage price which it directly

influence an inflow of resources.

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 In light of the above facts, banks should continuously undertake surveys as to

identify the problems in service delivery, corporate image, and pricing to foster the

level of satisfaction and loyalty. The purpose of this study is to give indications of the

loopholes to the service provider as to where best to devote marketing attention.

1.3 Theoretical Framework

Service quality dimensions

The evaluation of service quality is formed during the service supply is

process. In the figure1 depicting service qualities is focused evaluation that reflects

the customer’s perception. Showing in the figure that five principal dimensions that

customers use to judge service. Quality-reliability, responsiveness, assurance,

empathy and tangibles. (Fitzsimmons and Fitzsimons 2006, 108)

Figure 1. Perceived Service quality. (Fitzsimmons and Fitzsimmons 2006, 108)

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 In dimensions of service quality-reliability represents the ability of perform

the service both dependably and accurately. It also means service carry out on time, in

the same way and without any error every time. Responsiveness refers the ability to

respond to customer requirements and to provide prompt service. This ensures to the

customer the best service and if any failure occurs, the ability to recover quickly that

can create positive perceptions of quality. Assurance is the knowledge, courtesy,

confidence and ability to convey trust of the employees. It includes these features-

respects for the customer, politeness, effective communication with the customer.

Empathy is the carrying and individual attention to customers including the features

of sensitivity, approachability and understanding customers’ needs. Tangibles are the

appearance of physical facilities, equipment, personnel. It has the impact upon

perceived service quality for instance cleanliness of the service premises.

(Fitzsimmons and Fitzsimmons 2006, 109)

This dimensions of service quality contain a large part of disconfirmation that

derive the perceive service quality. However the process is influenced by four

externalities, word of mouth, personal needs, past experience and external

communications that actually have an impact on the formation of expectations.

(Kasper et al. 2006, 190)

However in the perceived service quality in the figure-4, when the expected

service exceeds the perceived service customers become delightful and overwhelmed,

when the expected service cannot met; customers become depress and create a

negative idea for the service.

1.4 Conceptual Framework

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 Using the systems approach, the theoretical framework earlier discussed is

operationalized in the conceptual framework of the study illustrated as follows:

Customers’ Enabling Steps Quality Customer

Satisfaction and Service
Service Loyalty Step 1 - Customers’
Assessment in BDO assessment in
Customers 1. Service Quality
Dimensions:
Enhanced/Improved
Profile of the -Physical Customer Satisfaction
Aspects/Tangibles Program
Participants:
-Reliability
-Responsiveness Effective Strategies in
-Gender
-Assurance gaining Customer
-Age Group
-Empathy Loyalty
-Highest Level of
2. Customers’ Satisfaction
Education
3. Customers’ Loyalty
-Type of Accounts
Step 2 - Evaluation of the
findings/output based on
the study

Figure 2. Conceptual Framework of the Study

This conceptual paradigm serves as the research scheme of this study. It

adopts the ‘systems approach’ otherwise known as the input-transformation-output

model (Hill, 1991:57; Slack, et al., 1998:9-17). The model involves transforming

inputs to outputs, which is accomplished by a combination of processes. Through this

conceptual framework, the theoretical framework illustrated earlier is realized.

The input for this study refers to the “customer satisfaction and service

loyalty assessment” armed with SERVICEQUAL discussed in theoretical framework.

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As the customers of BDO, their profiles in the input stage will be used as the basis of

the study.

The transformation process relates to a combination of enabling steps that

leads to competency of the teachers, a prerequisite to enhanced stress management

and to promote effective teaching strategies for their work performance. These steps

are: Step 1 – Customers’ Assessment in Service Quality Dimensions, Satisfaction, and

Loyalty; and, 2 – Evaluation of the Findings/Outcome.

The first enabling step deals with assessment of the customers on their

experience of the service quality dimension offered by the BDO, their satisfaction and

loyalty in their bank provider. This entails a clear-cut understanding and personal

response by these customers on how their evaluation can be utilized to improved

customer satisfaction program of BDO.

The second enabling step deals with evaluation of findings. These findings

will help the BDO to create or enhance strategies that will gain more customer loyalty

to patronize their services.

The present study holds that assessment or evaluation of the customers that

would be utilized for the purpose of enhancing customer satisfaction and thus, can

contribute on the effective strategies for their customer loyalty.

For purposes of this study, the output referred to is premised on the quality

service which ensures on the improvement of BDO’s customers’ satisfaction and

loyalty programs.

1.5 Statement of the Problem

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 According to Stafford (1996), “In service industries, the subject of service

quality remains a precarious one as businesses strive to maintain a comparative

advantage in the marketplace. Since financial services, particularly banks, compete in

the marketplace with generally undifferentiated products, service quality becomes a

primary competitive weapon.” Presently, technological developments are causing

banks to reconsider their strategies for services offered to both commercial and

individual customers. Furthermore, banks that excel in quality service can have a

distinct marketing edge since improved levels of service quality are related to higher

revenues, increased cross-sell ratios and higher customer retention (Bennett and

Higgins, 1993), and expanded market share (Bowen and Hedges, 1993). As well, the

banks understand that customers will be loyal if they can produce greater value than

competitors (Dawes and Swailes, 1999).

The aim of the study is to assess and analyze customer satisfaction and loyalty

in the selected BDO branches within Las Piñas.

More specifically, the study seeks the following questions:

1. What is the profile of the respondents to the present study in terms of:

1.1 Gender

1.2 Age

1.3 Highest Level of Education

1.4 Type of Accounts

2. What are the main Service Quality Dimensions and their prioritization as

perceive by BDO bank customer?

3. Does service quality influence customer satisfaction and service loyalty?

4. Does customer satisfaction lead to service loyalty?

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1.6 Hypothesis of the Study

This study will be tested in the research:

H1 - The five dimensions of service quality (tangibility, reliability,

responsiveness, assurance and empathy) vary in the degree to which they instigate

customer satisfaction and service loyalty.

H2- Service quality has a positive effect on customer satisfaction and service

loyalty.

H3 – Customer satisfaction has a positive effect on service loyalty.

1.7 Significance of the Study

The findings of this research are significant in various respects. First, from the

findings the researcher will be able to distinctly put up the clear gaps in specific

reference to customer satisfaction and service loyalty of BDO banks in selected

branches within Las Piñas area. On the basis of the study, the researcher will endorse

set of alternative courses of actions to be considered to enhance the level of

satisfaction and loyalty of the customers towards the BDO bank. Second, this study

seeks to contribute to the growth of conceptual framework that integrates service

quality, customer satisfaction, and service loyalty. Third, the effects for further

research will be set and it will be used as a stepping-stone for similar research works.

Fourth and most important, the methodologies and the experiences that will be

applied in the research can be disseminated to other banks and financial institutions

undertaking similar activities.

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1.8 Scope and Limits of the Study

The study presents a model of “Customer Satisfaction and Service Loyalty in

Selected BDO Branches within Las Piñas” using the descriptive approach. This

approach would be discussed extensively in Chapter 3, on the study’s research

methodology.

This study is focused on assessing satisfaction and service loyalty of

customers of BDO banks in selected branches within Las Piñas area. Though

customer satisfaction and service loyalty are issues that deserve the involvement of

both the service providers and customers, the scope of the study is limited to the

perception of customers only. And, the research sample was selected from saving,

current account, or a person who makes use of BDO bank services.

The sample consists of BDO customers in selected branches with the age

range of 18-65 years old. Due to the nature of the sample, the results may not be

representative of the rest of other BDO banks in the Philippines’ banking industry.

Only customers in selected BDO Las Piñas branches served as the respondents of the

study. Exempted from the study are other BDO customers outside of Las Piñas area.

The time frame for this study is from August to September 2016 covering the

data gathering period and October – November 2016 for processes and analysis,

writing up for the report and final thesis. Thus, any or all developments that occurred

thereafter are deemed excluded. These developments may contain situations in the

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customer satisfaction and service loyalty in banking industry and other future trends

that may influence the findings, observations and recommendations of the study.

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