The strategic issue of customer retention in financial service based on the analysis of Bank of China                                          

Abstract

This report focuses on strategic issue of customer retention in financial service industry based on the analysis of Bank of China. The aim of the report is to provide an understanding of challenges faced by current financial service industry and the factors which drives financial service to change.

The strategy is considered as one of the key reasons for business success because it implements different actions in order to achieve business goal. Therefore, it is increasingly considered by businesses. As one of the biggest state-owned commercial banks, Bank of China now is facing challenges from competitors as well as opportunities of the development of technology. In order to retain customers, Bank of China has carried out a series of strategic development addressing on launching online banking, international service as well as updated products. Such development is considered effectively because these changes enable Bank of China to meet customers’ expectation better. In addition to these actions, it is also recommended that Bank of China should re-segment the market and pay attention to staff retention so that better service could be provided.

Table of Content
Introduction                                                    4
Main Body                                                      4
The concept of strategy
2.2 Background of Bank of China                                   5
2.3 The forces for the change of Bank of                              7
China—environment analysis
2.4 Strategic development of Bank of China                          10
3.0 Conclusion and Recommendation                                   13#p#分頁標題#e#
Bibliography                                                       14
Appendix 1—The stable RMB exchange rate                            16
List of figure
Figure 1– GDP of China                                               8
Figure 2– Porter’s Five Forces Framework                               9

Introduction

According to Oster (1994), strategy is a concrete plans to help the organization achieve its goals. The concept of strategy is increasingly considered by businesses because it is the key force to obtain competitive advantages. As a result, different strategic issues are concerned by businesses such as employee retention, changes of organizational culture as well as structure and so on.
Financial service industry is one of the most important elements in a country as it contributes a lot to a country’s economy growth. The financial service sector can be widely categorized as four which are banks, insurance companies, building societies and estate agents. This report will focus on banking industry based on the analysis Bank of China in order to highlight the challenges faced by financial service industry and. The report aims to discuss the strategic issue of customer retention in Bank of China and draws some recommendations.

The report contains four sections. Firstly, the concept of strategy will be introduced so that a basic understanding of the importance of strategic issue can be obtained. After that, a background of Bank of China will be provided in order to show its current position in China. Thirdly, key forces which drive Bank of China to change will be analyzed based on external and industry environment evaluation. Finally, the strategic development of Bank of China will be discussed.

2.0 Main Body

2.1 The concept of strategy

The concept of the strategy has existed for many centuries. Even in the ancient China, the Chinese philosopher Sun Tzu demonstrates that “ the one who figures on victory at headquarter before even doing battle is the one who has the most strategic factors on his side” (Hawkins and Rajagopal, 2005). Sun Tzu’s idea was widely used in ancient war time and it is widely considered as the key factor to win a battle. As the rise of the concept of management, Sun Tzu’s view can be also used in strategic management. For example, the strategies play key roles in a business and strategic issues are considered very important to enhance a business’ competitive advantages.#p#分頁標題#e#

Kay (1993) defines strategy as the match between its internal capabilities and its external relationship. Kay (1993) emphasizes the match between what an organization is particularly capable of doing and its relationships with its stakeholders such as employees, customers, shareholders. That is to say, strategy can be understood as the situation that the business uses analytical techniques to help it understand and therefore influence its position in the market (Henry, 2008).

Effective strategies enable business to best use its resources and capabilities to exploit opportunities and reduce the threats from external environment by developing business competitiveness (Fanelli, 2012). Therefore, strategic issues are more widely concerned by businesses in order to enhance their overall performance when surviving in intensively competitive industry. There are various types of strategic issues. Widely speaking, some popular areas are increasingly invested such as employment retention, customer retention, changes of organizational structure as well as organizational culture and so on.

2.2 Background of Bank of China

“Aiming at excellence, sustaining growth and building a first-class international bank”.
——-The strategic goal of Bank of China

“A large transnational banking group focusing on commercial banking business and providing diversified services integrated both at home and abroad”.

 —–The strategic positioning of Bank of China
(Bank of China, 2011)
Bank of China was the oldest bank in China which was founded in 1912 by the Chinese government (Bank of China, 2011). It is now one of the big four state-owned commercial banks in China. Bank of China had initially played the role as the Chinese central bank until 1928 (ibid). After that, it became a commercial bank which is considered as the most popular bank in China.

Bank of China maintained the stable development in line with the mission of serving the people and it contributes a lot to the national financial industry (Cheng, 2007). It became a wholly state-owned commercial in 1994 and listed on Hong Kong Exchanges in 2004 (ibid). According to Hong Kong Stock Exchange (2011), Bank of China was the largest IPO (Initial Public Offering) in the world since 2000 and the fourth largest IPO in the world ever. The bank operates so well that it is the first commercial bank which lists in both the mainland and Hong Kong.

The Bank of China operates well since its establishment that it has over RMB 6952 billion in assets which makes the bank on the list of Fortune Global 500 over last decade (Bank of China, 2011). The bank made over RMB 60 billion profit (ibid). The service of Bank of China covers a wide range including corporate banking, personal banking and financial market business (ibid). In addition, it also has service on investment banking business, insurance service as well as fund management services. In 2009, Bank of China was considered as 11th of world’s 1000 top banks (Broadman, 2008).#p#分頁標題#e#

As the rising competition in financial sector in China and under the recession of global economy, financial industry is suffering a big challenge that businesses and customers lost their confidence on banks which make it harder for banks to survive. Therefore, Bank of China has carried out its strategic issue addressing on customer retention in order to obtain competitiveness. The next section will focus on analyzing why Bank of China had to carry out such strategic issue by evaluating external environment and industry environment of financial service industry in China.

2.3 The forces for the change of Bank of China—environment analysis

Environment is changing over the time and it could be affected by different factors. Knowing the changes of macro-environment enables firms to carry out right strategies in time. Ginter and Duncan (2007) describe PEST as a useful tool when scanning the general environment. PEST refers to political, economic, social and technology.

The political factor of PEST deals with the effects of government policy and it includes items such as government stability, taxation policy, legislation and government regulation. Since Bank of China is a state-owned bank, it is controlled by Chinese government so that the operation of banks in China is relatively flexible (Parker, 2007). Furthermore, even financial service industry is not the most important economic sector in China, banks plays an important role on regulate and control Chinese economy to some extent (ibid). Thus, the political factors bring positive effects on the development of banks in China.

The key economic indicators include interest rates, disposable income, unemployment rate, inflation rate, GDP and exchange rates. The strengthening of an economy will generally benefit industries. China is one of countries which reveal fastest growing in economy. The average growth rate in GDP maintains around 10% during the past three decades years (China Mike, 2010). In addition, China has overtaken Japan as the world’s second-biggest economy and it accounts for 7.5% of the world’s total economic activity (See Figure 1) (BBC, 2011). Meanwhile, as the low influence of the current economic crisis, the exchange rates of currency fluctuations are stable (See Appendix 1). The growth economy brings banks in China great opportunities to expand its customer base as there will an increase of customers’ demand on financial service.

Figure 1. GDP of China
 (Source from: China Statistics, 2011)

Social factors include cultural changes within the environment and are often referred to as socio-cultural. It refers to population demographics, income distribution, and social mobility and so on. China is the largest population country in the world with 1.34 billion people and the growth rate is 0.66% per year (Jordanyc, 2011). Such a large population provides banks the opportunity to enlarge its customer base as there would be more potential customers in a big market. Furthermore, according to Jordanyc (2011), there is a trend that more and more Chinese have the awareness of managing their money cleverly with the help of financial service which shows positive consumer attitude.#p#分頁標題#e#

Technology has a great influence on the changes of environment, most of companies benefit from the development of technology. Even though the technology in China is relatively less developed compared with Western countries, banks in China still have already adopted advanced technologies to enhance the performance and attract more customers. For example, the implementation of online banking in China enables customers to pay online or even make a loan online without going to branches which greatly make it more convenience for people to enjoy service (Mills, 2008). Developing technology plays an important role when Bank of China implements its strategies to retain customers which will be discussed in detail in next section.

In addition to external environment, industry environment plays a vital role for Bank of China to consider the strategic issue of retaining customers. Michael Porter’s ideas on competitive strategy include some of the most pervasive analytical tools used in strategic management (Henry, 2008). Porter’s Five Forces framework is described as a tool of analysis to assess the attractiveness of an industry based on the strengths of five competitive forces (See Figure 2). Although each organization in an industry is unique, the forces within the industry which affect its performance, and hence its profitability, will be common to all organizations in the industry.

Figure 2, Porter’s Five Forces Framework
 (Source from: Henry, 2008, p. 404)

The rivalry among competitors in an industry identifies the main competitors in banking industry. The existing competition is very intensive due the competitive big banks such as ICBC and ABC. In addition, the competition is even getting more intensive due to the rise of small commercial banks in China such as Hua Xia Bank, Guangdong Development Bank and Shenzhen Development Bank and so on. These banks bring customer more opportunities to make a loan with lower interest rate and more choices when choosing financial service. The rapid development of small commercial banks forces Bank of China to seek for a way to obtain competitive advantage.

The threat of new entrants is the extent to which new competitors may decide to enter the industry and reduce the level of profits being earned by incumbent firms. This threat is considered relatively low as there is a very high entry barrier in banking industry due to the high control from Chinese government. The threat of substitute products and service is not competition from new entrants, but from products and services which can meet similar needs. There are in fact kinds of substitute financial service in China such as private lending companies. However, these companies normally have a higher and unacceptable interest rate comparing to banks. Therefore, the threat of substitute service is considered low.

Thinking the buyers and suppliers, buyers are considered extremely important in banking industry as they are the customers of banks and banks make profits mainly from interest rate paid by customers. Therefore, the bargaining power of customers is very high because it is the key objectives of banks to provide better service in order to attract customers. Also, this is the key reasons for the strategic issue of customer retention in Bank of China.#p#分頁標題#e#

With the analysis above on external environment and industry environment, it can be found that Bank of China’s strategic issue on customer retention is mainly driven by several factors. First of all, the developing technology enables the bank to retain customer by providing more convenient service. Secondly, the rise of customers’ awareness on financial service encourages Bank of China to innovate. Thirdly, the increasing competition affects the survival of the bank. Fourthly, as the most important one, customers are considered as the most important resources of banks when making profits.

2.4 Strategic development of Bank of China

According to Ma (2010), Chinese commercial banks are always criticized by ignoring the importance customer loyalty while only focusing on products and services. However, it should be understood that products and services could be considered successful only when they can meet customers’ expectations in banking industry. When Bank of China realized that customers can determine the survival of banks, it carried out strategies which aim to retain customers.

The use of advanced technology

Internet rapidly developed in China over last decade. However, it is mainly considered as a platform for people to communicate and social at the early stage of the rise of Internet. Banks did not realize that Internet could be a good way to retain customer until more and more e-commerce appeared in China. Before that, Chinese financial service was less developed and people have to queue in banks to save or withdraw money. In big cities such as Beijing and Shanghai, customers sometimes have to wait for hours. As a result, the efficiency of banks in China was doubted and banks even lose their customer due to inefficient service.

In order to successfully retain customers, Bank of China launched its online banking in 2006 which allows customers to transfer money, pay bills, and make loans online. This greatly saves customers time and traditional banking services are replaced by advanced technologies which effectively enhanced Bank of China’s performance. It is wise for Bank of China to innovate using modern technology because as a country with world’s largest population, China has Internet users over 457 million which is to say, customers who are Internet users will be satisfied with online banking services so that the bank could successfully achieve its goal to retain customers (China Internet Watch, 2011).

Unique international banking service

Besides the launch of its Internet banking, Bank of China retains customers by its unique international banking service. Bank of China is the only state-own commercial bank that has international banking service. Due to the rapid growth of China economy, more and more Chinese are able to go abroad no matter studying or travelling. This has led to an increase demand of international services. For example, customers will need to exchange money when traveling abroad or, parents will need to transfer money if their children are studying in a foreign country. Among the four biggest banks in China, Bank of China is the only one which can provide relevant services and it effectively retains customers which have a need of international banking service.#p#分頁標題#e#

Moreover, Bank of China launched its international card which enables customers to enjoy the service worldwide. It can be found everywhere in different countries that a significant amount of Chinese student have such international card due to its huge convenience. The international card of Bank of China is shared by the family that parents do not need to exchange money and transfer to their children. Instead, they just need to simply save RMB in local Bank of China and their children can withdraw the money in any cash machine in any countries. It saves much time that children do not need to wait for several days to receive the money. Such service is greatly praised by customers and it helps Bank of China retain customers.

Updated services according to customers’ needs

Bank of China has a high insight on customers’ needs that it can always update its products and services in order to satisfy customers. For example, Bank of China was the first bank in China which launched funds. Different types of funds services were introduced in order to meet different customers’ needs as well as different personal financial plans. For example, it has long-term and short-term funds which target customers who have different available money. The customers who hold funds of Bank of China are regarded as VIP customers that there will be professional financial advisor to help them manage their money. Such service successfully establish the trust between customers and bank that customers are more confident with the services, therefore they would like to keeping using Bank of China’s services. The strategic development in Bank of China on its updated services is considered very successful as according to Lee (2010), Bank of China’s strategy on updating new services according to customers’ expectation has become one of the key perceives of it. Lee (2011) also points out that Bank of China pays much attention to investigate what products and services customers need which aims to not lose any customer.

3.0 Conclusion and Recommendation

With the analysis above, it can be found that current financial service companies are facing the challenges of rising competition. However, development of technology also provides opportunities for financial service industry so that it can better innovate. The report talks about the strategic issue of customer retention in financial service based on the analysis of Bank of China. Bank of China is one of the biggest banks in China which has great market penetration in China. However, the intensive competition and the increase of the awareness of the importance of customers drive Bank of China to consider the strategic issue of customer retention. As introduced above, the Bank of China fulfills the customer retention by using advanced technology, launching unique international service as well as updated products according to customers’ needs.

Beside these three changes happened in Bank of China, other strategic development could be adopted. The first recommendation is that the bank could re-segment the market. This is because banks in China do not have clear segmentation that they regard all the customers the same and provide similar service. However, it will be effective to divide customers into small groups and provide relevant products and service. For example, if the target customers are children, the product could be children pocket money account. A clear segmentation will enable banks to effectively launch right service as well as products.#p#分頁標題#e#

Secondly, a bank can provide better service with talented staff. Therefore, it is important for banks to consider the way to establish staff loyalty and retain staff. According to Ma (2010)，Chinese banks always lose talented staff due to inappropriate leadership style. However, it is important to understand that human resource is one of the key drivers in financial services sectors because skilled employees know how to satisfy customers which could greatly help banks retain customers. Therefore, banks should also seek the way to retain talented staff using different human resource practices.

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Appendix 1: The stable RMB exchange rate