Background and Aims 1. 0 Introduction 1 This study explores the impact of relationship marketing on customer loyalty in banking context. In particular, it will discuss the significance and influence of the underpinnings of the relationship marketing such as trust, commitment, conflict handling, values and empathy on customers’ loyalty in the banking sector. This chapter contains; (1) Background of The Study, (2) Problem Statement, (3) Specific Objectives of This Study, (4) Research Question, (5) Theoretical Framework, (6) Hypothesis, and (7) Significant of the Study. Part one (1) Background of The Study will describe about the background and theories which related to this research. Part Two (2), Problem Statement discusses the subject related to the topic. Part Three (3), Purpose of The Study highlights the objectives of this research. Part Four (4), discusses what are the questions which needed to be answered in this research, followed by Part Five (5) explains the theoretical framework of 1 the research. Part Six (6), consists of the hypothesis of the research and the lastly Part seven (7) explains the significant of the research. . 1 An overview of customer loyalty Customer loyalty has been well established as a key to profitability and long-term sustainability (Keating et al. , 2003, Reichheld, 1996; Reichheld & Aspinal, 1993). Reichheld & Schefter (2000) maintained that, while it is important for a commercial enterprise to attract a large client, a sizeable customer-base by itself does not offer any assurance of long-term profitability unless the firm can earn loyalty from its customers. Consistent with this view, Kandampully (1998) argued that the ability of a service organization to create, maintain and expand a large and loyal customer base over a longtime horizon is critical to achieve and sustain a winning position in the marketplace. This indicates that in any business sector, customer loyalty is a major competitive advantage. A clearly examination of the literature on customer loyalty revealed several differences in the conceptualization of this construct. For example, Shanker et al. 2003) view loyalty purely as an attitude, whereas Hofmeyr & Rice (2000) consider loyalty to be “the behavioral propensity to buy a brand repeatedly”. On a different note, Heskett (2002) suggest that loyalty exist when a customer dedicates an increasing “share of wallet” to repurchase from a firm. Knox and Walker (2001), however, argued that repurchase 2 behavior is a behavioral construct that refers to the extent to which consumers repeatedly purchase from a firm, while loyalty is a more complex concept that involves both psychological and behavioral components. Thus, consumers are generally considered to be loyal when they hold favorable attitudes toward a firm or its products or services, and when they repeatedly purchase from the firm (Amine, 1998; Wong and Sohal, 2003). On the other hand, Jones & Sasser (1995) considered customer loyalty to be “the feelings of attachment to or affection for a company’s people, products or services”. They further suggested that these feelings manifest themselves through many form of consumer behavior that will eventually reflect on the bottom line of business organizations. Hence, customer loyalty is reflected through numerous behavioral outcomes, not only repurchase behavior. Why focus on customer loyalty? Customer loyalty has been well established as a key to profitability and long-term sustainability (Keating et al. 2003; Reichheld, 1996; Reichheld & Aspinall, 1993). Previous researches suggested that customer loyalty is a key driver of financial performance in service organizations (Ganesh, Arnold, and Reynolds 2000; Jones & Sasser 1995). Customer loyalty may be a more important determinant of profit than market share and position (Heskett et al. 1994). By identifying the antecedents of customer loyalty and understanding the impact of these antecedents on customer loyalty, service provider can set in practices that enhance the relationship that 3 organizations develop with their customers, potentially resulting in higher levels of customer loyalty. It is generally recognized that there are linkages between service quality, customer satisfaction and loyalty Caruana, (2002). However Oliver (1999) stated that the suggestion that satisfaction generates loyalty in erroneous, with between 65% and 85% of satisfied customers defecting to other suppliers. There have been a number of studies that have looked at the antecedents of loyalty, including value, levels of functional and emotional risk, and brand reputation, trust, effect and preference. A number of studies by various researchers (Caruana, 2002; Oliver, 1999) have contributed to the understanding of the relationship between the consumer and provider. Higher levels of customer loyalty in service organizations initiate a series of economic effects in a business system. Revenues and market share grow as loyal customers commit to the organization, become repeat customers, and recommend the organization to others. Reichheld & Sasser (1990) conducted their studies across 14 industries in the United States and found that a 5% increase in customer retention leads to an increase in profit of between 25% to 95%. Keaveney (1995) argued that losing a regular customer is a loss from the higher margin part of an organization customer-base. Customer loyalty also leads to lower costs 4 of retention compared to the costs of attracting new customers. In addition, Reichheld & Sasser (1990) indicated that it is five times more expansive to win a new customer than it is to retain an existing one. By retaining existing customers’ helps a firm reduces a large portion of marketing expenses and other associated costs that would otherwise have to be spent in order to attract and set up new customers (Bowen and Shoemaker, 1998; Egan, 2000; Keaveney, 1995; Tepeci, 1999). 1. 2 An overview of the banking sector An institution is defined as: “An established law, custom, usage, practice, organization, or other element in the political or social life of a people; a regulative principal or convention subservient to the needs of an organized community or the general ends of civilization”. Oxford English Dictionary, 1989). Institutional stature is therefore classified as the importance placed on banks by the community. Banks serve fundamental needs both on an individual level and at a community level, which has sustained their institutional stature. Banks gain institutional stature by catering to the needs of the community as a whole, not just the needs of individual customers and the imperative of corporate objectives. 5 1. 2. 1 Retail Banking Retail banking or consumer banking includes all form of banking undertaken by individuals for their own individual (or family) purpose. Retail banking encompasses any type of banking relationship from mere transactional banking with savings or credit accounts, through to consumers who use their bank for mortgages and investment banking. Two terms commonly used throughout this dissertation are “conventional banking” and “electronic banking” and these are both forms of retail banking. Bank customers can use conventional banking facilities or electronic banking facilities independently and solely or both forms of banking. These terms are fully explained as follows: 1. 2. 2 Conventional Banking Conventional banking is often called over-the-counter banking, because it is a term used to describe banking that occurs with the customer inside a bank branch. Conventional banking can be as basic as a deposit or withdrawal transaction through to negotiating a 6 bank loan or an account enquiry. All transactions conducted inside a bank branch are classified as conventional banking throughout the study. 1. 2. 3 Electronic Banking The term electronic banking is used for banking that occurs outside of a bank branch or face-to-face meeting with a bank employee. Few types of electronic banking are ATM banking, Internet banking and telephone banking. Again, this can be as basic as deposit or withdrawal transaction such as negotiating a bank loan or making an account enquiry. 1. 2. 4 Bank vs. customers Banking and financial services are an important part of services industry Mishkin, (2001). He also conducted that who are satisfied and also complained with the service recovery efforts of the bank are three times more likely to recommend the bank to someone else and to do increased business with the bank. Now, banks managers knew that delivering quality service to customers is major important for success and survival in today’s global and competitive banking 7 environment. Customer-seller relationship is recognized as pervasive, inescapable and high interdependent, with ties between consumer and business vital to the interest of both parties. Both parties which are customer and form will gain mutual reward by having a customer relationship. Consumer’s benefit in terms of enhanced value, better quality and increased satisfaction with their purchased (File & Prince, 1993). While the other parties which are firm will gain benefit from greater sales volume, better operating efficiencies, positive word of mouth publicity, improved customer feedback, and decreased marketing expenses (Reichheld & Sasser, 1990; Vavra, 1992). Now days, there are many variety of new banking products such as automated teller, machine, phone banking, tele-banking, Internet banking and many others. All these products were developed for the purposed to accommodate the increased of the customer needs, giving a clear direction regarding the changes of the banking industry has going through during the last two decades. Cost of transaction has been reduced and at the same time can increased the speed of service substantially. Growing applications of these technologies especially the computerized networks to banking has led to more usage of electronic banking. In order to achieve success in such a technology driven, complex and competitive market of today, there are few key areas that need to be considered if banks want their customer to be loyal. One of the keys areas is gaining the information about customers and thereby better understanding their needs and serves them satisfactorily. Hence, there 8 are more and more firms spending a lot on strong firm-customer relationship for the purpose in gaining invaluable information on how best way in serving customers and keep them from turning to the other firms or organizations. Therefore, nowadays customer relationship marketing becomes the key factor in determining a firm’s profit. 1. 3 Problem Statement Service quality offers a sustainable competitive advantage to a bank because it creates value and also customer satisfaction. However, service quality is reduced drastically by service breakdowns. The results of service breakdowns are customer dissatisfaction and possibly customer defection depending on the customer’s trust, knowledge and the availability of alternative service provider. In the banking sector, to maintain and having a closer relationship with the entire or existing customers are very important. The maintenance of consumer trust in the retail banking industry is of considerable importance as it can impact on the likelihood of retaining existing customers (Morgan & Hunt, 1994) and attaining new ones. Furthermore, trust in a bank can also be more important to a bank customer than price. So, each bank must make sure that their services fulfill their customers’ needs and wants. 9 The focus on this research is to identify the common relationship marketing underpinnings such as trust, commitment, empathy, values and conflict handling on customer loyalty in banking sector. This research will also look whether all dimensions mentioned contribute equally or differentially towards the loyalty of the customer. 1. 4 Purpose of Study 1. 4. 1 General purpose This study examines the concept of five underpinnings of the relationship marketing and the concept of customer loyalty. In particular, it aims to explore the nature of relationship marketing underpinnings and how it will affect each of the customers to be loyal towards their bank. 1. 4. 2 Specific purpose In assuring that the above objectives can be achieved, there are few specific objectives that need to be accomplished. These specific objectives are as follows: (i) To determine whether trust influence the extent to which customer’s loyalty towards their banks. (ii) To test whether commitment influence the extent to which customer’s loyalty towards their banks. 10 (iii) To identify whether empathy influence the extent to which customer’s loyalty towards their banks. (iv) To determined whether values influence the extent to which customer’s loyalty towards their banks. (v) To test whether conflict handlings influence the extent to which customer’s loyalty towards their banks. 1. 5 Research Question (i) (ii) (iii) (iv) (v) Will trust dimension influence the customer’s loyalty towards their banks? Will commitment influence the customer’s loyalty towards their banks? Will empathy influence the customer’s loyalty towards their banks? Will values influence the customer’s loyalty towards their bank? Will conflict handlings influence the customer’s loyalty towards their banks? 11 1. 6 Theoretical Framework The theoretical framework is the foundation on which the entire research project is based. It developed, described and elaborated network of associations among the variables that are deemed relevant to the problem situation that have been identified, through few process such as interviews, observations and a literature survey (Cavana, 2001). There are five basic features that should be incorporated in any theoretical framework: i) The variables considered relevant to the study should be clearly identified and labeled in the discussions. (ii) The discussion should state how two or more variables are related to one another. This should be done for the important relationships that are theorized to exits among the variables. (iii) If the nature and direction of the relationships can be theorized on the basis of the findings from previous research, then there should be an indication in the discussions as to whether the relationships would be positive or negative. iv) There should be a clear explanation of why we would expect these relationships to exist. The arguments could be drawn from the previous research findings. (v) A schematic diagram of the theoretical framework should be given so that the reader can see and easily comprehend the theorized relationships. 12 1. 6. 1 Dependent Variables The dependent variable is the variable of primary interest to the researcher. The researcher’s goal is to understand and describe the dependent variable, or to explain its variability or predict it. In other words, it is the main variable that lends itself as a viable factor for investigation. Through analysis of the dependent variable, it is possible to find solutions to the problem (Cavana, 2001). 1. 6. 2 Independent Variables An independent variable is one that influences the dependent variable in either a positive or negative way; that is, when the independent variable is present, the dependent variable is also present, and with each unit of increase in the independent variable, there is an increase or decrease in the dependent variable also. In other words, the variance in the dependent variable is accounted for by the independent variable (Cavana, 2001). 13 Figure1. 1: Theoretical Framework of the Research INDEPENDENT VARIABLE DEPENDENT VARIABLE Trust Adopted From: - Ndubisi (2005) Commitment Adopted From:- Ndubisi (2005) Conflict Handling Adopted From: - Ndubisi (2005), Naceur & Azaddin (2005) Customers’ Loyalty Adopted From:Ndubisi (2005) Values Adopted From: - Naceur & Azaddin (2005) Empathy Adopted From: - Huseyin et al. (2005), Ndubisi (2005) and Beerli et al. (2004) 14 1. 7 Hypothesis A hypothesis can be defined as a logically conjectured relationship between two or more variables expressed in the form of a testable statement. Relationships are conjectured on the basis of the network of associations established in the theoretical framework formulated for the research study. By testing the hypothesis and confirming the conjectured relationships, it is expected that solutions can be found to correct the problem encountered (Cavana, 2001). Based on the literatures, it can be hypothesized that trust, commitment, empathy, equity and conflict handling have a direct affect on customer loyalty especially in banking sector. The following hypotheses are generated: The first hypothesis is stated as follows: H1 : There is no relationship between relationship marketing and customers’ loyalty in banking sector. The second hypothesis is stated as follows: H2 : There is no relationship between “trust” with customers’ loyalty in banking sector. 15 The third hypothesis is stated as follows: H3 : There is no relationship between “commitment” with customers’ loyalty in banking sector. The fourth hypothesis is stated as follows: H4 : There is no relationship between “conflict handling” with customers’ loyalty in banking sector. The fifth hypothesis is stated as follows: H5 : There is no relationship between “values” with customers’ loyalty in banking sector. The sixth hypothesis is stated as follows: H6 : There is no relationship between “empathy” with customers’ loyalty in banking sector. 16 1. 8 Significant of Study The central thrust of the marketing activities of an organization is to develop, maintain and enhance customer loyalty towards its products or services. Relationship with loyal customers are typically less expensive to serve, and loyal customers contribute to the organization by buying more and paying premium prices, and engaging in behaviors that are beneficial to the organization such as acting as advocates of the organization (Ganesh, Arnold, and Reynolds, 2000). Other benefits also accrue. Customers who enter a relationship with an organization as a result of a personal referral tend to be more loyal than those who buy because of an advertisement (Reichheld, 1993). Customers’ loyalty is important to any organization in term of enhancing their profit. Without customers it is impossible for organization to enhance or grow their businesses. Observing and studying their customer’s behavior, firms can develop strategies which can give them more profit. In the service sector, for example in banking sector, firms really need to be more alert of their customer needs and wants. In order to sustain their competitiveness in the marketplace, each bank needs to provide the excellent service towards their entire of customers. If the firms failed to maintain and enhance their services, it is impossible for them to achieve their targets. However, it is really difficult to achieve customers’ loyalty. Therefore, it is important that each bank provide great services by fulfilling their entire customers needs, increasing their customers satisfaction and ultimately gaining the loyalty of the customers’. 17 Therefore, the findings of this research will contribute to banking service providers on how to implement strategies that will meet their customer’s needs and ultimately win their loyalty. . 9 Chapter Conclusion In this chapter, it is apprehensive in terms of preparing and also completing the whole research by concerning the various important aspects such as problem statement, purpose of the study, significant of the study and others. 1. 10 Overview of the thesis The thesis is set out in three major sections divided into five (5) chapters. The first section addresses the foundation of the study, the development of the conceptual framework and research hypotheses including the literature review (Chapter 1 and Chapter 2). The second section addresses the methodology (Chapter 3) of the research, a discussion and presentation of the data analysis process, and provides the result study (Chapter 4). The final section of the thesis includes discussion of the results and implications of the research (Chapter 5). 18 Literature Review 2. 0 Introduction 2 This chapter reviews the literature on customer loyalty, trust, commitment, empathy, equity and conflict handling. The first section is concerned with the nature and characteristic of customer loyalty and also the underpinnings of relationship marketing. The focus of this section is on how each of these constructs influences loyalty from each customers. 2. 1 Customer Loyalty The topic of consumer loyalty has gained its importance as the recognition of the benefits that can be derived from loyal customers emerges. The increasing level of competition is evident in most industries has resulted in an increased customer focus, with the need to meet customers’ expectations becoming more critical (Disney, 1999). The context of loyalty is of particular importance for service industries that are surrounded by the 19 ervice characteristics of inseparability of production and consumption, heterogeneity and intangibility. Initial research viewed loyalty purely as repeat purchase behavior with no implications of a cognitive relationship (Caruana, 2002). This perspective of loyalty has change, with recognition that loyalty is a complex phenomenon that includes a range of behavioral, attitudinal and cognitive aspects of behavior (Caruana, 2002). However, there is criticism that much of the loyalty research still focuses on cognitive decision-making (Fournier, 1998). There is considerable generic literature on consumer loyalty, and some researchers have defined loyalty in behavioral terms based on the volume of purchase for a particular brand (Tranberg & Hansen, 1986). Other defines loyalty as attitudinal, with loyalty being defined in terms of preferences or intentions (Jacoby & Kyner, 1973). There is consensus that there is distinction between repeat purchase behaviors, even if derived from customer satisfaction, and genuine loyalty. Behavioral loyalty is more important to an organization as actual purchase behavior is more relevant than ttitudinal. This reflects recognition that behavioral loyalty derives from many sources, including attitudinal loyalty as well as other reason, such as convenience and lack choice and that an attitudinal loyal consumer may be behaviorally disloyal for similar reason 1999). (Oliver, 20 Furthermore, customer loyalty is a combination of commitment to a service relationship and the outcome of an overall of feeling or attachment to the service organization, manifest of an overall state of feeling or attachment to the service organization, manifest by overt loyalty-related behaviors. These behaviors include primary behaviors, such as repeat patronage and share of purchase, and active and passive secondary behaviors such as expansion of service usage, price insensitivity, and resistance to counter-persuasion, customer referrals and spreading positive word-ofmouth (Ganesh, Arnold, and Reynolds 2000; Jones & Sasser 1995; Zethaml, Berry, and Parasuraman 1996). Service loyalty is the degree to which a customer exhibits repeats purchasing behavior from a service provider, possesses a positive attitudinal disposition toward the provider, and considers using only this provider when a need for this service arises (Gremler and Brown, 1999). Prior research has shown that customer loyalty is influenced by numerous factors such as service quality (Olsen, 2002), perceived value (Parasuraman & Grewal, 2000), trust (Reichheld & Schefter, 2000) and commitment (Baldinger & Rubinson, 1996; Pritchard et al, 1999). 21 2. 1. The dimensions of the customer loyalty construct The discussion of customer loyalty is built around the literature shown in Table 1. 2. The table seeks to build a composite of the development of the conceptualization of customer loyalty over time. Each research paper is classified in term of the behavior-based, attitudinal and or relationship viewpoint that the paper takes. The studies in the table are listed in chronological order and are the key studies cited in this literature review. The context of the research is classified as goods, branding, or services. The behavior-based aspect of customer loyalty is categorized as primary or secondary. Primary behavior-based are those that are repeat purchase concepts. Secondary behaviors are grouped as either or passive. Active behaviors are those that require conscious and deliberate effort to undertake. Passive behaviors are those that result from a state of resistance to change the existing relationship with the organization. When a paper includes an attitudinal approach to customer loyalty, that paper is categorized as adopting a general, relative, or component based attitude approach. A further attitude category includes an action category that encompasses an attitudinal mindset in which a consumer would take steps to foster a positive attitude towards a brand or service. Finally the table notes whether or not customer loyalty is conceptualized as having a relationship-based foundation. 22 The conclusion drawn from Table 2. 1 is that current research on customer loyalty centers on customers primary and secondary behaviors regarding the organization, customers’ intent to remain with the organization, and the relationship customers have with the organization. The following discussion regarding the dimensions of the customer loyalty construct is developed in the context of this conclusion. The research stream relating to customer loyalty began with studies that focused on repeat purchase of tangible goods. Because loyalty as a pattern of repeat purchase was inadequate to explain actual repurchase behavior, researchers sought to explain motivation to continue buying a good by turning to attitudinal explanations. Research then turned to studies of brand loyalty again in the context of tangible goods. This 23 ehavior plus attitude approach became more complex and also explained with more certainty actual long-term behavior. Finally, concepts of customer loyalty were developed in the services context. The discussion of customer loyalty is structured around the dimensions of customer loyalty as they developed from simple repeat purchase of goods conceptualization to complex relationship-attitude-advocacy-behavior concepts. That is, customer loyalty is the state that arises from a customer’s belief about an organization, feelings towards an organization, and intent to behave in a particular manner in relation to the organization. Early research conceptualized customer loyalty as a pattern of repeat purchase. This research also notes an unexplained element to repeat purchase cycles (Oliver, 1993). This unknown element suggests a strong motivation akin to commitment to purchasing behaviors beyond habit that have become the focus of subsequent research. To explain this unknown element of loyalty, and other aspects of loyalty and switching behaviors, researchers turned to attitudinal explanations for brand-specific purchase patterns within a product category. Day (1969) defined loyalty as repeated purchases based on a strong internal disposition and spurious loyalty as purchase not based on this same strong attitude. Loyalty in this framework has two dimensions-composites of attitude and composites of behavior. When an individual has a strong disposition to purchase a product from a set of alternatives, the choice is based on an appraisal of those alternatives. Loyalty is a combination of the held attitudes, situation in when the choice is made, and the subsequent behavior consistent with the combination. 24 The measure loyalty, Day (1969) suggested using a composite index consisting of a simultaneous consideration of loyal attitude and subsequent behavior. The behavioral aspect of loyalty was a measure of the proportion of purchase of a specific brand. However, purchase consistency did not necessarily mean that the customer was brand loyal. Purchase consistency could mean that the behavior was spuriously driven by price or other factors and not the strongly held loyalty attitude (Day, 1969). Thus, brand attitude and brand-related behavior combine in Day’s loyalty conceptualization. This conceptualization forms the foundation of subsequent research and is hus a key advance in brand loyalty research. Jacoby (1971) proposed a model of multi-brand loyalty, using a psychological framework where brands could be viewed as substitutes for each other, if they were perceived to be within an acceptable quality range. A later analysis of loyalty defined loyalty as the nonrandom purchase over time of one brand from a set of brands by a consumer using an explicit evaluation process (Jacoby, 1971; Jacoby & Kyner, 1973). Jacoby & Chestnut (1978) distinguish among degrees of loyalty to a brand of interest, in relation to competing brands (Table 2. 2). 25 Table 2. 2: Loyalty categories Psychological loyalty to: Focal Brand Focal Repeat purchase of: Brand Other Brand True loyalty Buyer Happen-stance other brand buyer Source: (Jacoby, 1971; Jacoby & Chestnut, 1978; Oliver, 1997) Multiple Brands Multiple-brand loyal buyer Multi-brand loyal buyer Other Brand Non-loyal repeat buyer Other brand loyal buyer No Brand Happen-stance buyer Happen-stance buyer This categorization interrelates the nature of a customer’s psychological loyalty in a brand category (to either the focal brand, a collection of brands including the focal brand, other brands excluding the focal brand, or no brand in the category) to purchasing behavior in that brand category. The resulting set of brand loyalty categories allowed for more detailed study on the factors that influence each loyalty category in relation to the focal brand. Subsequent research sought to explain how consumers came to their loyalty decisions. Amongst the categories, true focal brand loyalty is to the brand of interest. True multi-brand loyalty is loyalty to the focal brand and similar competing brands. Nonloyal repeat purchasing of the focal brand indicates loyalty to another brand. Happenstance purchasing of the focal brand indicates non-brand purchase. Happenstance purchasing includes any repeat purchase sequence due to factors other than true psychological loyalty, such as when a favored brand is unavailable or there are temporary disruptions to purchase behavior (Jacoby & Kyner, 1973). 26 Jacoby & Chestnut (1978) sought to differentiate psychological concepts of loyalty from behavioral, repeat purchase definitions. They conclude that consistent purchasing as an indicator of loyalty could be invalid because of happenstance buying or a preference for convenience. Inconsistent purchasing could mask loyalty if consumers were multi-brand loyal, suggesting that inferring loyalty or disloyalty based on repetitive purchase patterns without further analysis is simplistic. Oliver (1997) notes that loyalty definitions progressed from patterns of repeat purchasing to multibrand and attitudebased models leading to the cognitive-effective-cognitive representation of brand commitment. Thus, Oliver (1997) deepens the discussion of loyalty to include the enduring effects of loyalty, so that loyalty is conceptualized as enduring preferences for products and services. Loyalty implies continues purposeful interaction, however infrequent, with a product or service. This framework follows the cognition-affect-conation pattern but differs in that he argues that consumers can become loyal at each attitudinal phase relating to different elements of the attitude development structure. That is, consumers become loyal in a cognitive sense first, then in an affective sense, followed by a conative manner, and finally in a behavioral manner, action inertia. Consumers progress through these phases. Cognitive loyalty focuses on critical evaluation of the brand attitudes, affective loyalty focuses on emotional reaction to the brand, conative loyalty focuses on the desire to rebuy the brand, and action loyalty is commitment to the action of rebuying (Oliver, 1997). Table 2. outlines each loyalty phase, showing the progression through the phases and the characteristics of each phase. 27 Table 2. 3: A four phase progressive loyalty development framework Loyalty Phase Cognitive loyalty Brand attribute information processing indicates that one brand is preferable to its alternatives. This state is built on brand belief only, from prior or vicarious knowledge or on recent experience-based information. The consumer either remains at this level, or may enter the affective domain and remains susceptible to counterpersuasion. Affective loyalty A liking or attitude toward the brand develops on the basis of the outcomes of cumulatively satisfying usage occasions. This stage exists in the consumer’s mind as combination of cognitive and affect. The degree of affect or liking for the brand provides resistance to counter-persuasion, although customers are still prone to switch brands. Conative loyalty Behavioral intention is influenced by repeated episodes of positive affect toward the brand. This implies a brand-specific commitment to repurchase. This is a state of intention or motivation that appears to be a deeply held commitment to rebuy the brand, and is more like a desire to repurchase, which may or may not be acted upon. Action loyalty The last or final phase, the motivated intention of conative loyalty becomes a readiness to act, accompanied by an additional desire to overcome obstacles that might prevent that action. If repeated, action inertia develops, thereby facilitating ongoing repurchase. 28 Characteristics of the phase Source: (Oliver, 1999) This framework provides an insight into the attitudes and intentions of consumers. It suggests that with increasing involvement with a brand, in a series of cumulative satisfactory episodes that result in an increasingly positive affective intent towards the brand, that eventually a consumer will enter a state where potential repurchase is akin to an automatic response. The benefit of adopting this development framework is that it is potentially possible to classify and measure each of the loyalty states. Of particular interest in the current study is the action loyalty phase. The definition and characteristics of action loyalty related strongly to the definition of customer loyalty used for this study 2. 1. 2 Customer loyalty in the services context Bitner (1990) linked customer perceptions of service quality with stated intent to remain with the organization, willingness to recommend, likelihood to purchase, the likelihood of switching, and the likelihood of complaining. She found a strong relationship between perceptions of service quality and these stated intentions, which she terms expressions of loyalty. In other study examining perceived service quality and measures of behavioral intent and other actions towards an organizations, Boulding et al (1993) found a positive 29 correlation between service quality and repurchase intentions, willingness to recommend for long term involvement, paying a price premium, and remaining loyal to the company. Examining the behavioral anf financial consequence of service quality, Zeithaml, Berry, and Parasuraman (1996) found that the behavioral consequences of service quality are either retention or rejection by the customer, leading to financial gains or loses by the service provider. Behavioral intentions were operationalised as indications of whether customers would remain with, or defect from the company. Zeithaml, Berry, and Parasuraman (1996) view loyalty in terms of consumer bonding with organizations. Behaviors that indicate that customers were forging bonds with a company included praising the firm, expressing preference for the company over others, continuing to purchase, increasing the volume of purchase, and agreeing to pay a price premium. The customer loyalty construct as defined and operationalised in this manner has become firmly entrenched in marketing literature. This research established the perceived service quality-customer loyalty link, strongly supporting customer loyalty as a key measurement of organizational success. Subsequent studies continued to develop the customer loyalty construct. Fornell, Johnson, Anderson, Cha, and Bryant (1996), in research published from data collected in conjunction with the American Customer Satisfaction Index, use customer loyalty as the ultimate dependent variable because of its value as a proxy fro profitability (Fornell et al. , 1996). 30 Following Zeithaml, Berry, and Parasuraman (1996), Sirdeshmukh, Singh, Sabol (2002) define consumer loyalty as a state by an intention to perform a diverse set of behaviors that signal a motivation to maintain a relationship with an organization, including allocating a higher share of the category wallet to that service provider, engaging in positive word of mouth and repeat purchasing. Jones & Sasser (1995) define customer loyalty as customers’ feelings of attachment manifest themselves in many form of customer behavior. The paper makes the important distinction between repurchase intentions, and primary and secondary behaviors. Repurchase intent is the self-stated intent to continue to patronize an organization. Primary behavior is the actual repurchasing behavior that customer engage in, which includes frequency and recency or purchase, the amount purchased, remaining with the organization, and length of association. Secondary behaviors, such as customer referrals, endorsements, and word of mouth are those behaviors that result from a sense of attachment to and affection for an organization. These behaviors would be those expected from a consumer considered to be in the action loyalty phase of customer loyalty, proposed by Oliver (1999). These secondary behaviors are extremely important forms of consumer behavior for a company and are taken to represent the behavior of a loyal customer. 31 More free assignment, please visit: www. scribdblog. com 32 Ganesh, Arnold, and Reynolds (2000) define loyalty as a combination of both commitments to the relationship and other overt loyalty behavior. They establish an important distinction. Loyalty behaviors are classified as ither or passive loyalty behaviors. Active loyalty behaviors are a customer’s proactive behaviors or behavioral intentions that require conscious and deliberate effort to undertake (Ganesh, Arnold, and Reynolds, 2000). These behaviors include repeat patronage, positive word of mouth and expansion of service usage. Passive loyalty behaviors are those behaviors that result from a state of resistance to change to the exiting relationship. These behaviors include resistance to switching despite significant changes to the service relationship or service environment, price insensitivity, and self-stated retention. In summary, customer loyalty is an important consideration that service firms must make. Customer loyalty is manifest by primary and secondary behaviors. Primary behaviors include the actually purchase behaviors that customers engage in. secondary behaviors are associated with attitudinal outcomes of the customer relationship with the service organization. These secondary behaviors can be defined as active or passive manifestations of customer loyalty. The attitudinal outcomes associated with the secondary behaviors exist in the form of affective attachment to the organization or motivation to remain with the organization. 3 2. 2 Trust Moorman et al (1992) define trust as “the willingness to rely on an exchange partner in whom one has confidence”. The nature of service offerings means that service consumers typically pay in advance to buy a firm’s promise and, therefore, must be willing to rely on the firm to delivery its promise (Berry, 1996). Trust is considered to be a pre-requisite for loyalty, especially in the risk-dominated cyberspace where transactions are conducted at a distance (Reichheld & Shefter, 2000). The maintenance of consumer trust in the retail banking industry is of considerable importance as it can impact on the likelihood of retaining existing customers (Morgan and Hunt, 1994) and attaining new ones. Furthermore, trust in a bank can also be more important to a bank customer than price. Customer perception of a firm’s trustworthiness is valuable not only in terms of satisfying and retaining existing customers but also in attracting new customers through word-of-mouth marketing. According to Jones & Sasser (1995), word-of-mouth marketing plays a major role in acquiring new customers. Because of the high level risk perception inherent in service offerings, potential customers are more likely to seek 34 personal recommendations when choosing service providers than relying on information provided by the firms. In many cases, recommendations given by a colleague can significantly reduce a person’s perceived risk in selecting an unfamiliar service organization (Bowen & Shoemaker, 1998). A customer, when recommending a service provider to a third party, undertakes a certain level of risk on his or her credibility toward the third party that is likely to erode if the fails to back up the recommendation (Foster & Cadogan, 2000). Therefore, customer perception of the firm’s trustworthiness, which usually reduces the perceived risk of recommendation giving, will increase the likelihood of customers suggesting the firm to others (Foster & Cadogan, 2000). 2. 2. 1 Attributes of trust Bitner (1995) suggest that keeping promises is crucial to the development of a mutually beneficial relationship between customers and service providers. In order to build a trusting customer relationship, a service provider must demonstrate both its ability and willingness to deliver on what customer construe as has been promised, whether explicitly or implicitly (Bhatty et al, 2001). Therefore it is important that the firm can understand and manage the types of expectations that have been created in its customers (Bhatty et al, 2001). The firm then needs to consistently meet or exceed its customers’ expectations with regards to its performance, at the same time promoting relationshipbuilding behaviors in order to win customer trust, which is the basis of true loyalty (Bhatty et al, 2001). 35 Given that the relationship between a business and its customers is formed, and maintained, within a commercial context, the existence of the relationship depends, ultimately, on the commercial benefits that each party receives. Business organizations attract their customers by offering, fist of all, a bundle of benefits that are built around their core competencies. Thus, a firm must be able to promise and deliver a desirable level of professionalism in order to encourage repeat patronage and to develop customer relationship and loyalty. Therefore, the professional aspect of a customer-service provider relationship is more important than its interpersonal element (Bhatty et al, 2001). An empirical study by Pressey & Mathews (2000) confirms that the level of professionalism a retailer can offer to its customers correlates positively with the level of trust the customers have on the firm’s ability to deliver its promises. Therefore, it is important that a firm seeks to strengthen customer perception of its ability to perform as well as its reliability or, in other words, its ability to consistently satisfy the customers over a long time horizon. According to Bowen & Shoemaker (1998), the importance of this reliability dimension of trust is that it cannot be easily duplicated by competitors, thus can provide the firm with a more powerful competitive advantage. From a relationship marketing perspective, a service provider’s reliability reflects not only through its ability to deliver service but also through its ability to solve any 6 problems with customers that are bound to occur from time to time. In a long-term relationship, the existence of conflicts is inevitable. However, it is the resolution of such conflicts that can be constructive or destructive to the relationship. From a customer perspective, a strong relationship with a service provider offers the assurance that the firm will be accessible when something goes wrong (Kandampully, 1998). Loyal customers assume responsible behaviors from their firms, especially in unexpected circumstances (Selnes, 1998). Therefore, effective problem handling that satisfies the customers will increase their trust in service providers, while attempts to suppress conflict with customers will eventually lose out on the vitality and cooperativeness of customer relationships (Selnes, 1998). Furthermore, Morgan & Hunt (1994) express the view that trust only when a customer has confidence not only in a firm’s ability to perform consistently but, also in its integrity. Hence, a firm’s honesty, as perceived by its customers as honest n its dealings is more likely to enjoy strong and lasting relationship with the customers (Bhatty et al, 2001). In summary, trust can be considered as a function of consumer perception of a retailer’s integrity as well as its ability to perform its services, to keep its promises and commitment and in general to “do the right things” consistently. 37 2. 3 Commitment A study by Morris et al. (1999) indicates that the level of trust customers invest in a firm correlates positively with the level of commitment maintained by both parties through shared values and relationship termination costs. Commitment plays a central role in the relationship marketing paradigm (Morgan & Hunt, 1994), and has been identified as an important dimension of customer-service provider relationship quality (Wong & Sohal, 2002). Conceptually, commitment differs from loyalty in that it is though of in purely cognitive terms that describe a consumer’s attitudinal attachment to a company (Pitchard et al, 1999). For example, Moorman et al, (1992) define commitment as “an enduring desire to maintain a valued relationship”. Thus, ommitment is enduring and implies a positive evaluation of a long-term relationship (Bowen & Shoemaker, 1998; Moorman et al, 1992; Morgan & Hunt, 1994). Consequently, commitment is often seen as a key to long-term customer retention (Amine, 1998). 38 Bendapudi & Berry (1997) argue that relationship that customers maintain with a service provider can be constraint-based (having to), or dedication-based (wanting to), leading to different types of relationships of different natures and relationship outcomes. For example, a dedication-based (committed) relationship manifest itself through cooperation and advocacy (i. . recommendation), in addition to repeat patronage (Bendapudi & Berry, 1997). Stobacka et al, (1994) suggest that commitment refers to adaptation process resulting from relevant parties’ intentions to act and positive attitudes toward each other. The notion of commitment entails the belief by both parties that a lasting relationship is important as to warrant the investment of efforts and resources, and the acceptance of short-term sacrifices in order to realize long-term benefits and to ensure that the relationship endures in the long run (Bowen & Shoemaker, 1998; Morgan & Hunt, 1994). In this sense, commitment can be considered as pledge of relational continuity (Oliver, 1999). Commitment has also been shown to be a good predictor of customer future intentions and loyalty (Baldinger & Rubinson, 1996); Park & Kim, 2003). According to Wong & Sohal (2002), a higher level of commitment leads to a compelling to make the relationship mutually satisfying and beneficial. These authors point out that committed customers tend to perceive more value in the relationship with the firms they patronize, thus are more willing to take actions in favour of these firms in return for the benefits received. Therefore, the behaviors of committed customers bring more benefits to a firm 39 than the behaviors of regular, but not committed customers. As such, commitment is often seen as the driving force behind many forms of consumer behaviors. Thus, by developing a high level of commitment among its customers, a firm can make their purchase patterns more predictable and improve customer retention (Amine, 1998). For example, Bowen & Shoemaker (1998) found commitment to positively influence the incremental volume of business a loyal customer is likely to bring to a service provider. Amine (1998) concludes that the notion of commitment is critical to a better understanding of the psychological processes underlying repurchase behavior, and is useful to distinguish true customer loyalty from other forms of repeat patronage. Moreover, while repurchase behavior may be achieved through satisfaction, it is commitment that leads to what is known as “partnership” behaviors (Curasi & Kennedy, 2002; Heskett, 2002). Specifically, White & Schneider (2000) propose that commitment influences numerous consumer behaviors such as considering alternative firms before making purchase (environmental scanning), purchasing exclusively from a firm (relationship enhancement), and providing word-of-mouth recommendations (advocacy). Empirical research by Bowen & Shoemaker (1998) identifies a strong and positive relationship between customer commitment and their willingness to perform such behaviors. Committed customers are also more willing to corporate with their firms to resolve problems that might occur, as opposed to exiting from the relationship, and to use such problem solving as a basis for new understanding (Bowen & Shoemaker, 1998). 40 Amine (1998) and Pritchard et al, (1999) postulate that commitment manifest itself through a resistance to change. Therefore, loyal customers who are committed to a firm become reluctant to consider other available alternatives. This is consistent with one of the findings in Bhatty et al. (2001) which indicate that 43% of loyal customers would not buy from their etailers’ competitors. 2. 3. 1 Attributes of commitment Amine (1998) contends that customer commitment may be caused by affective reasons, such as perceived value or switching costs. Park & Kim (2003) echo this view, suggesting that customer commitment to a business firm is influenced by both emotional (i. e. effective) and judgmental (i. e. calculative) elements. Affective commitment is considered to be more powerful than calculative commitment in the development of true loyalty, because it is less likely to be affected by contingent events that may hinder the short-term benefits of repeat patronage (Amine, 1998). Hence, affective commitment is more reliable as an indicator of true customer commitment. Park & Kim (2003) further argue that customer satisfaction with service quality, which is part of overall satisfaction, and customer perception of relational benefits, which are the benefits received from long-term relationships over and above core service performance, are key to customer commitment to the retail banking. Similarly, Amine (1998) expresses the view that consistent purchasing behavior is dependent primarily on 1 consumer perceptions of the benefits that result from remaining in a relationship with a firm. On empirical study (Bowen & Shoemaker, 1998) confirms that benefits are one the most important determinants of customer commitment to a service provider. Therefore, customer perception of relational benefits can be considered as an important dimension of their commitment to a business firm. Commitment has also been found to be influenced by consumers’ perceived differences among competing alternatives (Amine, 1998). Oliver (1999) observes that customers who are loyal to a firm hold a strong belief that the firm continues to represent the best alternative. To this extent, it can be argued that commitment is a function of consumer perceptions of the degree to which a firm represents the best available choice. 2. 3. 2 The linkage between customer commitment and customer loyalty The definition and conceptualist of customer loyalty in the previous section specifies commitment as a key characteristic of action loyalty. Conceptually commitment requires examination because of the long-standing issue of the link between commitment, behavioral intentions, and subsequent action, and their relationship with loyalty. Loyalty and commitment are to some synonymous and represent each other. There is a distinction between loyalty and related concepts such as commitment. 42 Commitment serves as a precursor to a loyal attitude. Commitment is the emotional or psychological attachment to a brand that develops before a customer can determine that repeated purchase is the outcome of a sense of loyalty (Pritchard, Havitz, and Howard, 1999). Commitment ties an individual to a behavioral disposition. Commitment can also be conceptualized as a relationship. For example, an employee’s commitment to a job is the relative strength of an individual’s identification with, and involvement in a particular organization. This implies intent to remain with the organization. Commitment consist of the employee’s beliefs and opinions about the organization and also the level of intent to act in a particular way (Pritchard, Havitz, and Howard, 1999) In summary, commitment can be considered as a function of customers’ personal attachment to a retailer, as well as their perception of the company in relation to its competitors, and their orientation towards a long-term relationship with the retailer. 2. 4 Conflict Handling In interpersonal communication, conflict occurs when an individual perceives incompatibility between his or her own personal goals, needs, or desires and those of the other party (Pruitt & Rubin, 1987). In dealing with conflict, people use different strategies to accomplish their goals. Dwyer et al. 1987) defined conflict handling as the ability of each supplier’s to minimize the negative consequences of manifest and 43 potential conflicts. Conflict handling reflects the supplier’ to avoid any potential conflict, solve that particular conflict before they create problems and the ability to discuss the solutions openly when the problem arises. Conflict handling requires cooperative behavior from exchange partners. According to Evans & Beltramini (1987), in a negotiation setting, cooperative versus competitive intentions have been found to be linked to satisfactory problem solution. In short, good conflict resolution will result relationship quality positively. Conflict handling is an important relationship builder. Even though it is difficult to service industries especially in banking sector to achieve zero service failure all a time, but it is so important that the particular banks put in place effective conflict resolution or problem solving machinery. A major problem which had been resolved satisfactorily may leave in its wake a happy and loyal customer, but maybe minor issues if not handled carefully will result in defection. A more excellent approach, for example proactive in planning and implementations includes, identifying potential conflict, solving conflict before they manifest, avoiding potential conflict and blocking them. Those efforts could bring the better relationship and loyalty to the particular bank or service firm (Ndubisi, 2007). Ndubisi & Wah (2005) found a significant relationship between conflict handling and customer loyalty, indirectly through trust and perceived relationship quality. As mentioned earlier, the ability of the product or service provider to handle conflict well will also directly influence customer loyalty. 4 2. 5 Value Perception In a hyper-dynamic and competitive marketplace, increasingly demanding consumers expect their firms to deliver ever-increasing value at lower process (Slater, 1997). Parasuraman (1997) contends that the notion of customer value is dynamic because the criteria that consumers use to judge value are likely to change both over time and over the various stages of a customer’s relationship with a company (e. g. , fist-time vs. long-term customers). Consistent with this view, Vandermerwe (2003) argues that customer value should be defined by the customers, rather than by the firm. Furer et al. (2002) argue that the importance and perception of service quality are highly dependent on customer’s values and beliefs that might change from one cultural to another. Banks service quality is commonly noted as a critical prerequisite for satisfying and retaining valued customer (Cronin & Taylor, 1992; Taylor and Baker, 1994). Customer value perceptions is also regarded as a key determinant of overall satisfaction (Cronin et al. , 2000), as well as customer loyalty (Parasuraman & Grewall, 2000). Bhatty et al. 2001) conclude that firms need to continuously seek ways to improve their value propositions in order to ensure customer satisfaction, loyalty, and to encourage repeat patronage. 2. 5. 1 Attributes of customer value perception 45 From a consumer perspective, value is the benefits, such as quality merchandise and caring service, that are received in relation to the total cost of acquisition, which includes monetary cist (e. g. , price) and non-monetary costs (e. g. , shopping time) (Berry, 1996). Another explanation of the importance of values in judging the level of service quality comes from means-ends models of customer value. These models are based on the assumption that customers acquire and use products or services to accomplish favorable ends. Values are defined in term or personal values, mental images, or cognitive representations underlying customer’s needs and goals (Gutman, 1982; Wilkie, 1994). Huber et al. (2001), for example, state that the means-ends theory postulate that linkages between product attributes, consequences produced through consumption, and personal values on consumers underlie their decision making process (Gutman, 1991). Products ands services are the means, while customers’ personal values are the ends. An individual’s evaluation of the quality of a product or service is partly based on whether that product or service enables him or her to achieve his or her desired end states. Naceur and Azaddin (2005) have mentioned in their article that values and image were the most important dimensions of service quality in UAE conventional banks. On the other hand, personal skills and values were the only significant service quality dimension among the customers of Islamic banks. Customers of Islamic banks are most 6 concerned with the impression of sincerity, trust and caring given to them by their service providers. 2. 6 Empathy Empathy is the ‘capacity’ to share and understand another’s ‘state of mind’ or emotion. It is often characterized as the ability to “put oneself into another shoes”, or in some way experience the outlook or emotions of another being within oneself. The basic idea of empathy should be characterized is that by looking expressions of the people facial or body movement, or by hearing their tone of voice, which will immediate sense on how they feel (Ndubisi, 2004). Empathy has the added value of reducing reliance on legal governance, since exchange partners who are governed by the principal of empathy are more likely to treat others in the manner they would like to be treated. The importance of relationships for collectivist countries and countries with a long-term orientation, empathy is important for services providers to build long-term relationships (Raymond & Rylance, 1995). Furthermore, Hofstede’s, masculine or feminine dimensions is closely linked to the empathy dimension of service quality. Because empathy is considered a feminine trait (Kettinger et al. , 1995; Kunyk & Olsen, 47 2001) feminine cultures are likely to place higher value on empathy, for example in US services advertising is more likely to communicate the empathy dimension of service quality than Korea service advertising. SERVQUAL (Parasuraman et al. , 1985,1988) is the most widely used measure of service quality within service industries. SERVQUAL consists of five dimensions; (1) Tangibles – physical facilities, equipment and appearance of personnel. 2) Reliability – ability to perform the promised service dependably and accurately. (3) Responsiveness – willingness to help customers and provide prompt service. (4) Assurance – knowledge and courtesy of employees and their ability to inspire trust and confidence (5) Empathy – caring, the individualized attention the firm provides its customers. As mentioned by the Parasuraman et al. , 1985, 1988) empathy is one of the important elements to measure the service quality in service industries area. It’s so important to the each banks manager to recruit staff with social skills that will assist the development of long-standing relationship with customers. And the most important thing is that bank should provide reliable services in order to achieve high level of customer satisfaction, an antecedent of sustainable competitive advantage. 48 Empathy also is very higher significant associated with willingness to recommend after allowing for the effects due to overall satisfaction and affective attitude (Buamann et al. 2007). In this case, we can say that once the customers feel satisfied with the services which provided to them, they will recommend to the others about the particular firm, especially in banking sector which really need high level of customer satisfaction to ensure that the bank can enhance their business. High satisfaction and affective attitudes is in turn strongly associated with customer’s future behavioral intentions in terms of willingness to recommend and willingness to remain a customer. If the company needs to grow is a customer’s willingness to recommend, as suggested by Reichheld (2003), then effective attitude, overall satisfaction. Naceur & Hussein (2003) have stated that the human skill dimensions were found to be more significant than the dimensions of tangibles and empathy. In short, its means that people more prefer to look on the human skills in the service quality. For example, in Thailand, Korea and Indonesia, customer place greater emphasis on the quality of contact than on the product quality (Bang et al. , 2005). In summary, empathy not only increase the level and quality of the relationship between customers and the organization, but also empowers the relationship to deliver superior value, which in result customer’s repeat purchase, customer retention, and sustained loyalty. 49 Methodology 3. 0 Introduction 3 The chapter begins by describing the research design, followed by a discussion of the sample involved in the study in explanation of how the theoretical constructs were used. This will include a detailed description of how the methods of analysis were applied to determine the reliability and alidity of the measurement instrument. 3. 1 Research Design 50 This section discusses about the sampling techniques and population. Cross sectional survey approach will be used in gathering the data for the purpose to meet the research objective and finally providing findings for this research. The major objective in this research is to determine whether customer loyalty is being affected by the concept of five underpinnings of the relationship marketing. The dependent variable is customer’s loyalty while the independent variables are trust, commitment, conflict handling, values, and empathy. One of the key objectives of the research design is to understand and describe the dependent variable. It other words, it is the main variable that lends itself for investigation as a viable factor. By the analysis of the dependent variables, it is possible to find the answers or solutions to the research problem. The most universally used tool to collect beliefs and a attitudes is the self reporting technique, most commonly in the form of a questionnaire (de Vaus, 2002; Malhotra et al. 1996). This is partly due to the low costs involved, and also the relatively low demands it places on the respondents (Zikmund, 2000; Malhotra et al. 1996). 3. 2 Sampling Design 51 The main aim of the sampling method used was to capture a representative crosssectional sample of the total population (Neuman 2003; Cavana et al. 2001). The large a systematic sample, the more likely it will replicate its population (Malhota et al. 1996). A large sample will also offers improved statistical power in that the ability of a statistical test to detect significant associations or differences or related to sample size (Loewenthal
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