Chapter I

Introduction
1.1 Introduction
One of the developing industries of China is its banking industry. Competition in the financial
industry of China is high; banks of various backgrounds are operating in the market for attracting
best customers. Chinas financial market has become very attractive for many foreign investors
since China has joined World Trade Organization (WTO). Although the competition would
increase for the domestic commercial banks by Chinas act of joining WTO and by the foreign
funded banks, but it would definitely enhance the economic position of China. Chinas joining of
WTO has undoubtedly increased the foreign investment in China (Yao et al 2004). Financial
market of China had the ability to handle the financial crisis of 2008, due to foreign investment.
Competitive energy in financial institutions has been increasing rapidly. In addition with the
opportunities created by foreign investment in China, it has also created threats for the local
financial institutions. Local banks have to face large number of problems and high competition
due to increased foreign investment. It has provoked local banks to change their strategies but
Bank of China (BOC) is still considered to be an attractive opportunity for the investors, because
of its innovation of credit card in financial products (Zhou 2009).
This thesis is based on the comprehensive analysis of service quality of BOC and its
conformance with the standards of the service quality model SERVQUAL. The positivist
philosophy is used in conducting this research by using mixed approaches of induction and
deduction. The collected data is analysed and interpreted to determine the relationship of service
quality provided by BOC with its customers satisfaction. In China, state has owned four banks

that included Bank of China (BOC), offered number of services like credit card facility, started in
1905. Many powerful and rich people are the customers of BOC that has strong background
during last ten years, and considered as a status symbol for its clients for a long time. Therefore,
the study of customer services quality and its relationship with the customer satisfaction is an
important area to discuss. Due to the state owned status and largest coverage in China with its
hundreds of branches, BOC is an important case study selected for this research.

1.2 Background
China has developed a lot during last some years. It has become a powerful economy due to its
practices. Development rate of China has been enhanced a lot after its reformation in 1979. Field
of Science and Economy has developed a lot, this have resulted that now, and 10% of worlds
exports and 8% imports are of China. According to Brief Introduction to China, China is
worlds largest exporter and second largest importer of goods; this means that China is the
second largest trading country around the world. Nominal GDP of China is $4.91 trillion, thats
make it fall at number three in the ranking of largest economies in the world (National Bureau of
Statistics of China 2009).
Chinese government has set three targets in order to increase development in China, 1) Their
objective was to double Chinas GNP in 1980, and they succeeded, also food quality and clothes
was available to the residents; 2) To increase the GNP to four times till the end of last twentieth
century, country has achieved this target in year 1995; and 3) According to the Economy of
Peoples Republic of China, per capita GNP in 2050 should also be at the level on which it is
counted in middle developed countries.

In 2008, GNP of China was 30285 billion Yuan,

although according to National bureau of Statistics of China (2009), it was lower before a
decade, and it was about 8302 billion Yuan only. China made its new development plan after the

financial recession of 2008 and 2009. This plan was about the providence to affordable houses,
taxes were decreased for real estate, and barriers were reduced for the mortgage.

1.2.1

Chinese Banking System

In China, state owned banking institutions are controlled about ninety-eight percent of the
banking sector and offer chief instruments of banking and financial products (Brief Introduction
to China n.d). This state owned banking is done with the help of four large banks including
Bank of china, the largest of all. The main functions of these banks are regulation of economy,
providing customer and industrial banking solutions, and arrangement of finances for the public
projects. These banks are also responsible or industrial and international trading and dealing of
Chinese government assets management in banking (Zhang, & Wu, 2005).
BOC has offered high quality financial services to the customers. Agricultural sector is being
financed by the Chinese banks associated with agricultural banking. Similarly, other companies
are being supported by the construction banks. And in order to direct the foreign investment plus
required investment for the development of China is considered as the responsibility of
Commercial banks of China.

1.2.2

Bank of China

The bank named BOC (Bank of China) is considered as one of the largest commercial state
owned banks of China. This bank is providing its best quality financial services to its local plus
foreign customers. It is a bank in which many services are being offered to its customers which
include investment banking, commercial banking, direct investment, fund management,
insurance and leasing (particularly aircraft) etc. Other divisions of this bank include BOC Hong
Kong, BOC aviation, BOC investment management, BOC international and BOC insurance etc.

It has over ten thousand branches operating in China, plus more than 29 branches, subsidiaries
and representative offices in 29 countries of the world, on this basis, BOC is considered as the
most globalized bank of China. It has brought a lot of innovative financial products in the
Chinese banking industry. Chinas first international banking branch opened in London in 1929,
which was of BOC. In 1984, BOC was the first bank which offered bond for its international
customers. According to its report of 2008, BOC was the first bank which offered credit card
services in 1985; also, for the first time in 2007, it brought the private banking services. It has
also been financial partners of Olympics and Paralympics games of 2008. In the ranking of top
1000 banks on the basis of its capital, BOC was at number eight by The Banker Magazine
(Annual Report of BOC 2009).
This bank was started operations in 1905, in the capital city of China named Beijing. By the
founders of China, BOC was considered as a state owned bank before 1949. Its main focus was
to operate foreign exchange and to enhance the International Trade in China just after its
beginning stage. Then in 1994, it was converted to a governments commercial bank. According
to (), in August 2004, BOC floated its share in the market and became a corporate bank, then in
2006, it was listed as a first commercial bank in the Shanghai stock exchange and Hong Kongs
foreign exchange.

1.2.3 Service quality in Banking

As history shows that the interest in quality was originated in the successes of the Japanese
manufacturing industry. However, Service quality need a different focus from the traditional
manufacturing quality approaches due to its characteristics including intangibility, heterogeneity
inseparability and perish ability. Quality ultimately is measured in terms of satisfied customers.
The Zone of Tolerance concept suggested by Berry & Parasuranman is based on this. It presumes

that consumer does not have anticipation of the service attributing on a certain level. Rather, they
are ready to accept even endure levels of performance in the reality and still regard them
reasonable based on their anticipations (Zeithaml &. Bitner 2006).
Parasuraman et al. (1985) stated that there are three fundamental dimensions after studied the
existing literature on service quality. These dimensions included 1)Service quality is not easy for
the customers to assess than products quality; 2) SQ perception comes from the comparison of
customers anticipations with delivered service quality; and 3) Quality assessment is not
decided merely by the result of service; it also related to the assessment of the process of SQ
performance. Quite a few frameworks on service quality can be found. According to an
embedded literature review, the Gap Model (Zeithaml &. Bitner 2006) has been frequently
applied in analyzing service quality problems as an assessment tool in various sections. Zeithaml
and Bitner (2006) believed that it can be utilized by retailing and other business service. The Gap
model offers the framework which enables a better comprehension of service quality
construction and clarifies how flaw emerged.

1.3 Aims and Objective

The aim of this study is to analyse the service quality provided by BOC and to assess its
relationship with customer satisfaction with the help of SERVQUAL model of Parasuraman
(1985). A part from that, the secondary objectives of the research are as follows:
1. To evaluate the standards of service quality and customer satisfaction in banking sector.
2. To identify the reasons that motivate/ lead customers choose BOC for their banking service.
3. To determine the level of customer satisfaction due to the quality of services provided by
BOC.

4. To analyse the relationship of service quality and customer satisfaction for the local banking
operations of BOC in Beijing branches.

1.4 Research Questions

Based on basic objectives mentioned in the previous paragraph, this research is going to answer
the two specific research questions as follows:
1. What are the perceptions of service quality and customer satisfaction in the BOC
Beijing customers and employees?
2. What are the challenges and opportunities facing by BOC in satisfying its existing
and potential customers in terms of service quality?
3. What are the recommendations to improve the service quality of BOC Beijing in
future operations?
1.4.1

Hypotheses

To enable the investigation and analysis of the research problems specified above, three
hypotheses are proposed to be examined. Hypothesis HA is raised to assess the dimensions of
service quality and the relatively important determinant factors of service quality; hypothesis H B
is formulated to investigate the reliability of the dimensional structure which will be developed
for this study. Third hypothesis HC is related with the relationship of service quality with the
customer satisfaction. The hypotheses are listed below:
Hypothesis HA: The dimensions of SQ that will be examined in BOC are not matching the
dimensions explored in the original SERVQUAL framework.
Hypothesis HB: The total reliability of the measurement instrument and the reliability of each
dimension will meet the appropriate levels of statistical significance.

 Hypothesis HC: Service quality has the positive relationship with customer satisfaction in
BOC.

1.5

Scope and Significance

In this research paper, case study method is used to find out the quality of financial services
offered in China, satisfaction of the Chinese customers, methods and strategies used by the
financial institutes of China and also some advices are there for these institutions. In order to find
the strategies of managers to serve their customers in the first part, an analysis named
SEVQUAL is used by the researcher. Secondly, in this research, GAP evaluation method of
SERVQUAL model is used to find out and understand the satisfaction of the customers and
problems related to it. During this research, researcher have tried to get detailed, basic and
authentic information, for this purpose interviews has been taken from the consumers as well as
the managers working in the Bank of China. At last, researcher taken the results in to
consideration and presented some suggestions for the managers of BOC to improve its service
quality and customer satisfaction.
This research has made relevant contributions in the areas of service quality and customer
satisfaction in Chinese banking sector. The critical literature review put emphasis on the aspects
of service quality influencing customer perception specifically in the banking industry. Also, the
research, establishes the relationship between service quality and customer satisfaction as well as
providing tools for the Chinese banking industry to improve on service quality. The top
management of BOC can get useful insights of the consumer perceptions and employees
feedback on their quality of service, can serve as the basis for future policy making in this area.

1.6 Delimitations
This research is based on the evaluation of BOC, its quality of service, its market in China and
satisfaction of customer. Bank of China was discussed as a case study to determine the
relationship of customer satisfaction with service quality of the bank. Another delimitation is that
only Chinese macro-environment is focused in this research. Secondary data sources include
magazines, books, project reports and websites. Information provided by the company itself was
not enough for this research. Because of time limitations and sources, information about all the
financial institutions of China is not collected by the researcher.

1.7 Research Methodology

In this research, inductive and deductive both approaches are used. For the sake of attaining the
objective performance of BOC Branches, it is required to accomplish not only the interview of
front line employees about the designed and delivered service, but also conducting survey from
the bank consumers. Taking the expenditure, time, sample quality, response speed and flexibility
into account, the e-mail questionnaires and telephone interviews were used to collect primary
data. Then information generated from questionnaires and interviews was analysed with the help
of SPSS software

1.8

Dissertation Structure

This dissertation is divided in six chapters in which introduction chapter contains a brief
background of the selected research, defines the research aims and objective and research
questions. Chapter 2 is Literature Review which begins with the general discussion of service
quality and customer satisfaction. The discussion then focused on the SERVQUAL and Gap
models in this area. In chapter 3, Research Methodology presents the research philosophy,
design, and methodologies. Research onion model is used to critically review each step followed

during the conduct of this study. Chapter 4 is based on data analysis which presents the findings
of the data analysis from the primary research conducted through survey and interviews. Also,
chapter 5, discussion on Research Findings is done with the help reviewed literature. Finally,
chapter 6 presents Conclusion and Recommendation of the study.

CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
This literature review is being focused towards critical review of previous researches used in
this research paper, chapter highlights the significance of services, its quality, its impact in
banking sector along with its key determinants, the chapter also focuses on the theoretical
frameworks and the models explain the concepts and applications of service quality and
customer satisfaction.

2.2 Definition of Service

The quality and delivery of the service has great importance, irrespective of the notion that
company belong to the country which is amongst the developed or under developed countries.
Kotler (2009) is of the view that services can be described as a product which comprises of
actions, advantages or satisfaction, which work as an intangible benefits for the customers. Some
of the examples of services are banking, retail, home maintenance services, airline and hotel
services. Gronroos, (1991) explained services as a series of intangible activities between the
customers and the employees of services industry, normally customers interact with the services
employees to get the right solution for their problem.

2.3 Service Quality

According to Nejati, et al. (2009), service quality has been emphasized a lot in the service
literature because good quality service is treated as a significant competitive advantage source
and provides sustainability to any business. Gronroos (1991) says that the concept of services has
grown its importance from the discipline of marketing due to the complexity of applying quality

concepts in the services industry. There are various definitions given by different researchers
about service quality. For instance, Kasper, et al., (1999) as quoted by Nejati, et al., (2009),
describes that the extent of the service processes efficiency and an organization related to the
services industry can satisfy user's expectations is called service quality.
Parasuraman, et al., (1988) asserted that service quality is variation in the fact that what the
customer has expected about the actual service and what perception he has made about the
quality of the service actually being delivered. Service quality has become an essential part of the
strategy to survive in such a competitive and fast paced environment. Service quality has the
ability to enhance the growth of an organization and it would prove to be even more productive
and beneficial in banking industry.

2.3.1 Service Quality in banks

According to Lim and Tang (2000), banks all over the globe offer nearly similar services, that is,
they try to match the innovations and creativity of their competitors. The management of global
banks all have understood this fact that to gain the customers' loyalty and retention, and to prove
that they are being progressive and improving their core competency and overall business
performance, proper concentration and attention should be given to the service quality. Many
researchers are of the view that it is difficult to imitate service quality of a competitor (Kunst &
Lemmink, 2000; Johnston 1995). According to Johnston, (1995), the service quality is what
customer has perceived about an organization's inferiority or superiority, in fact, it is said that
services not only meet the level of satisfaction of customers but also the expectation level should
go beyond that by following the continuous improvement process. Interaction of employees
and personal contacts become viable ways to evaluate banks' performance towards a customer.
Banks specially focus on improving customer satisfaction in order to gain customer retention

and, loyalty it is considered as a huge fact that an organization should concentrate on improving
the service quality in order to attain customer satisfaction because customer satisfaction works
together with the success of business (Naumann, 1995).

The quality of the service helps to

judge the level of customer satisfaction, their loyalty and eventually competitive advantage and
core competency of an organization.
Banks tend to concentrate on the customer services department and customer related attributes. It
is said that the success of any business does not only depends upon achieving the targets but also
upon satisfying the customers. Quality services can be delivered only when an organization tries
to reduce the gap between the customers' perceived value and service quality they are being
delivered (Zeithaml et al 2006).
Fig 1: Service quality Gap model by Parasuraman

This diagram shows the gap between the expected service quality and the apperception of the
management about the service quality to be delivered to the customer. This gap analysis model
was presented by Parasuraman (1988), identified as an important contribution in analysis of the
perceived service quality art the producer and receiver ends. The specifications of the quality set
by the management and the expectations of customers are observed at the time of service
delivery. In this figure, Gap 1 shows the difference of customers expected service quality with
the management perceived quality to be delivered. On the other hand, Gap 2 shows the variation
in management perception about the service quality specification with respect to the customer
perception. Finally, Gap 3 identifies the variations in specifications of quality set for delivery and
the real service quality. Therefore, even if the expectations of customers are accurately measured
by the management and Gap 1 is closed, then Gap 2 and Gap 3 can create problem in service
delivery.
The other gaps elaborated in the model are Gap 4, the gap in the actual delivery of service with
respect to the communication company made externally. This difference is created due to the
promised services of the company and the actual services delivered by it. Finally, the Gap 5 is
there to assess the difference of consumers perception of eservice quality delivered and their
expectations with that delivery. Companies in banking sector need to narrow down Gap 4 and
Gap 5 to the maximum possible limit as their promised services, customers expected services,
and the actual services delivered play a very important role in creating customers loyalty and
satisfaction (Owusu-Frimpong, 2008).

2.3.2 Perceived Service Quality in Banks

The perception of service quality is a phenomenon where, customers compare the perceived
services against the expected services (Bahia and Nantel 2000). This phenomenon keeps on

changing with the different types services being delivered by an organization (Hamer, et al
2006). Also, the perception of service quality is an overall judgment of services at different
levels in a bank or in any other organization (Sureshchander et al 2001). Parasuraman, et al.,
(2004) presented a service quality model which describes five different dimension. This five
dimension frame work is known as SERVQUAL, and it is being considered as one of most
significant scales to evaluate the perception of service quality in any organization or specifically
in banks.

Source: Persunaramun (1985)

2.4 Customer Perception of Service Quality

Dutta and Dutta, (2009) explained that customers' perceived value should be at par because when
an organization does everything to satisfy the customers but the customers do not consider it as
of good quality then all would go in vain. Hence it is essential for an organization to get this
thing very clear that how a customer would perceive their services to be of great quality. The
major work is of marketing department to look into the activities thoroughly that which factors
are affecting service quality, customers satisfaction, and customers retention in order to
compete successfully and to have an edge over the competitors. If all the factors are considered
appropriately, this means that an organization is able to deliver the best quality services to its
customers and in this way customers would become positive and will spread a positive and more
persuasive word of mouth. Hence, perception is considered as one of the important factors which
affect customer satisfaction.

2.5

SERVQUAL MODEL

In service marketing literature, the most prominent model used to evaluate and measure the
service quality is SEVQUAL. This model takes into account the most possible expectations of
the consumers in a particular service category and the real life service they are being delivered
by the company or industry (Yu et al 2008). According to this model, majority customers
evaluate the quality of services on five different magnitudes, which are, assurance, tangibles,
reliability, consideration, and responsiveness. According to Munhurrun, et al (2010).
SERVQUAL assess consumers' perception against the quality of services they are actually
receiving by the service provider agency based on 22 statements.
Parasuraman, et al., (1988) is of the view that SERVQUAL model can assess the gaps in the
service quality and hence can serve as an important analytical tool to help the management to

reduce the service quality gaps. Gaps in quality of service are a difference between customers'
expectation and their perception, if the score of any of the gaps became positive; this means that
customers are only satisfied with the quality of services when they are receiving properly and it
is according to their expectations (Zhou, et al 2002). Though this model is quite famous in the
literature of service marketing research and is being used widely but it has also received many
criticisms from different researchers. Asubonteg, et al., (1996) and Buttle, et al., (1996) are of the
view that SERVQUAL model emphasizes only on the gaps in service quality.
In banking service quality research, Bahia and Nantel, (2000) proposed a parallel model which
was specifically made to measure and evaluate retail bankings service quality and the name of
that model is Bank Service Quality (BSQ). The BSQ model is treated as an improved version
of ten dimensions model by Parasuraman, et al. (1985). Bahia and Nantel, (2000) added the
elements of marketing mix, which are called 7Ps along with the elements like access and
courtesy. They clarified the fact that the BSQ model instrument has 31 different items related to
service quality which are related directly with banking sector and these 31 different items are
summarized in six variable dimensions.

2.5.1 SERVQUAL in Chinese Banking Industry

SERVQUAL scale was specifically made for five categories of services including retail banking
industry (Ladhari, 2009). SERVQUAL model is termed as reliable and valid in the consumer
service ,marketing literature of banking industry research. Though, there are studies which have
replicated this scale and are being used in retail banking industry ( see Arasli, et al 2005; Lam
2002; Chi Cui, C., et al 2003; Zhou, L. 2004; Ladhari, 2009).
SERVQUAL was used to evaluate the performance retail banking service sector in China by
Lam, (2002), the result came out in six different dimensions rather then the five SERVQUAL

original dimensions. The six dimensions of the result were assurance, physical aspects
(tangibles), reliability, assurance, responsiveness, empathy 1 (need understanding) and empathy
2 (suitability of operating hours). Statistical results showed that reliability and assurance are the
two most important factors in explaining the quality of the banking services in China. Lam,
(2002) also mentioned that the other three dimensions like responsiveness, empathy 1 and
empathy 2 did not load in the stable form in the factor analysis of collected results.
In another research, Zhou, et al., (2002) collected the data through survey forms from Chinese
bank to check the dimensions and validity of the service quality model SERVQUAL. The result
came out in a similar six factor outline for the score of expectations and a three factor outline for
performance and gap scores. From the results, researchers were concluded that perception and
the

gap scores are not the significant and viable determinants of switching behavior of

customers or customer satisfaction in banking sector of China.

In a similar study in South Korea, Chi Cui, et al., (2003) replicated SERVQUAL for the banking
industry and proposed that the basic five dimensions of this service quality model are replicated
in their results and not confirmed by there sample. The conclusion of Chi Cui et al (2003) was
that the SERVQUAL model and its scale is not suitable for the banking sector practices in Korea
and should not be used to measure service quality. Further more, in a comparative study, Zhou,
(2004) proposed and explored the SERVPERF scale with its multidimensional nature that is
found suitable for banking sector in China. The researcher found a three-factor pattern in this
research included the dimension of empathy/responsiveness which was formerly related to the
two factors in SERVQUAL model i.e. Empathy and responsiveness. The other combined factor
in Zhou et al (2004) study was dimension of reliability/assurance, contained all items of the

basic dimension of reliability and assurance in original model. The final dimension of tangibles
was similar to that of the original dimension of tangibility in SERVPERF scale.

2.6

Context of Customer Satisfaction

Hansemark, (2004) cited the research of Gerportt, et al., (2001) that customer satisfaction is a
main cause of customer loyalty which in turns become the central point of customer retention,
customers become satisfied when they get the desired service experience. According to Luo and
Homburg, (2007) the concept of customer satisfaction has been grown in its importance in last
few years and it affects many other key performance related determinants, it is to be noted that
customer satisfaction works success driver for any organization in achieving the competitive
advantage and success in long term. Researchers in the field of management have suggested
focusing on the customers' needs and expectations. According to Burns et al., (2006), key
determinant in retaining the customers along with achieving long term sustainability in
performance is through achieving customer satisfaction. Based on the many marketing
researches, it is concluded that good service quality will surely bring positive results in the favor
of an organization.
Kotler and Armstrong, (2009) are of the view that concept of customer satisfaction arises from
comparing products' perceived value and its actual value. The customers get satisfied if they
actually receive what they perceived about the product or the services and vice versa. In another
instance, Hallowell (1996) argues that customer satisfaction is generated due to the perception of
customers of the received value in a transaction or business relationship. The concept of value
included the perceived and the delivered value. If the perceived value is higher than the value
delivered by the company, then the customer remains unsatisfied. According to Kotler and

Armstrong (2009), customer satisfaction generated when perceived value is equal to the received
value of a service or product. Therefore, achieving customer satisfaction is extremely important
issue for marketing managers and the policy makers. The value of a service is also related to the
perception of price and quality of these services.
In another research, Levesque et al. (1996) asserted that in banking sector, the relationship
between customer and the service provider is an ongoing process because customer holds their
bank accounts for long term. On the other hand, Bennett (2004) argued this result and denied that
there is no relationship between customer satisfaction and o=repeat purchases as every
experience is a new experience for the customer and the result of every banking transaction
affect on the future behavior of the client. The other researchers like Bloemer et al. (1998); Pont
and Maquilken 2005; and Leverin and Liljander (2006) accepted that the good relationship
between bank and customers increase customer satisfaction and provide a base for consumers
loyalty, though highly satisfied customers can also change their banks due to some other external
factors.