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 providers 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.

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 todays 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.

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.
BDOs 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 serviceoriented, 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 countrys 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 countrys 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, BDOs day-to-day operations are handled by a team

of professional managers and bank officers. Further, the Bank has one of the
industrys 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 organizations 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 providers 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.
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 customers 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)

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 featuresrespects 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

Using the systems approach, the theoretical framework earlier discussed is
operationalized in the conceptual framework of the study illustrated as follows:

Customers
Satisfaction and
Service Loyalty
Assessment in BDO
Customers

Enabling Steps

Profile of the
Participants:

-Physical
Aspects/Tangibles
-Reliability
-Responsiveness
-Assurance
-Empathy
2. Customers Satisfaction
3. Customers Loyalty

-Gender
-Age Group
-Highest Level of
Education
-Type of Accounts

Step 1 - Customers
assessment in
1. Service Quality
Dimensions:

Quality Customer
Service

Enhanced/Improved
Customer Satisfaction
Program
Effective Strategies in
gaining Customer
Loyalty

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. 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 BDOs customers satisfaction and
loyalty programs.

1.5 Statement of the Problem

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 Pias.
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?

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

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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 Pias 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.

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 Pias using the descriptive approach. This
approach would be discussed extensively in Chapter 3, on the studys research
methodology.
This study is focused on assessing satisfaction and service loyalty of
customers of BDO banks in selected branches within Las Pias area. Though
customer satisfaction and service loyalty are issues that deserve the involvement of

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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 Pias branches served as the respondents of the
study. Exempted from the study are other BDO customers outside of Las Pias 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
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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