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The Budgeting Process and the use of Budgetary Information
Planning, Control & Budgeting

CIMA Official Terminology (2005) defines planning as: ‘The establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them. Planning comprises long term/strategic planning and short term/operational planning. The latter is usually for a period of up to one year.’

It further defines a budget as: ‘A quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.’

The above 2 definitions make the relationship between planning and budgeting relatively clear. A budget provides a numerical analysis of a plan. Planning can be both long and short term and budgets can cover the same timescales as the plan. However, longer term planning is generally both more aspirational and more uncertain as it requires significant assumptions to be made and this is equally reflected in longer term budgets.

CIMA also defined budgetary control as ‘The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision’.In other words, budgetary control provides a measure by which objectives and assumptions can be verified and amended in order to improve business performance. The validity of the measure will only be appropriate if the budget setting process is appropriate and leads to a realistic budget given factors known at the time of preparation.

Gowthorpe (2011 p.359) recognised that ‘budgeting, for most organizations, is an important dimension of the processes of planning, controlling and evaluating outcomes’.

To summarise, planning is the establishment of objectives, strategies and tactics to meet the desired performance of the business. A budget is a financial translation of the plan. Plans will generally involve improvements to the business either in sales, growth, diversity or other business developments over the planning cycle and as such the budget shows what this will mean for the business after taking account of the costs involved in achieving the performance. Budgetary control allows a business to track its progress against its plan by comparing the budget to the actual finances.

Budgets can be established via a top down or a bottom up approach. Top down budgets are imposed from above by senior management/the board whereas bottom up are participative and involve managers in the budget setting process (Gowthorpe 2011).Further to the overall top down or bottom up approach there are numerous methods for establishing the budget.

Gowthorpe (2011) and Siyanbola (2013) both reviewed the variety of approaches to budgeting. These consisted of incremental budgeting, zero based budgeting (ZBB), base budgeting (BB) & activity based budgeting (ABB).

Many business adopt incremental budgeting which uses the previous budget as the base from which to begin the new budget. This type of approach may be as straightforward as determining an inflationary factor to all cost lines. It tends to be relatively simple and cuts down the time spent on budgeting however, the key disadvantage is that this approach may under or overestimate the required budget’. This means that individual departments may be disadvantaged compared to others or if this approach is applied over more than one year, budgets may become misaligned with the real world conditions. It can further lead to inefficiencies being perpetuated year after year.

A second method is ZBB. This ignores any previous budgets and starts the process from the very beginning. In this approach each department is required to justify their budget. This is obviously time consuming but can be very useful in raising financial awareness across the business and will tend to mean that inefficiencies are not perpetuated.

BB is a method that has 2 phases to it. In phase 1 the business calculates what resources would be needed to keep going and then any additional spend needs to be justified on a cost/benefit basis. This is less time consuming than ZBB but can still lead to problems in both determining what level of resource may be considered ‘just enough’ and it doesn’t account well for volume shifts in revenue or product mix.

ABB could also be adopted. This calculates the cost of producing each unit of activity. This type of budgeting tends to lead to better cost focus but it does require a lot of effort to measure and it assumes a linear relationship of costs to activities which may not apply in all cases.

Finally there is Kaizen budgeting which assumes anticipated cost improvements in the budget. In reality, all budgets in business today tend to have an element of Kaizen budgeting. Incremental budgeting may have inflationary increases which will often be overlaid with efficiency challenges. A department may find themselves justifying their case for an increase in budget for a new activity using ZBB and will then still be passed an efficiency challenge to achieve.

Process for Preparation of an Annual Master Budget

The process for preparation will differ depending upon the organisation but will normally incorporate the following:

Budget responsibilities – it will be necessary to determine the budget leader in an organisation. This is normally the Financial Controller or Corporate Finance Team but some organisations have a specific budget and planning team who coordinate all the budget activities.
Budget timescales – the entire timetable needs to be set out and published to all those people who have input to the budget setting process. The timetable will cover everything from the date that templates are expected to be published through to submission dates, review periods and re submission deadlines.
Budget assumptions – all budgets will generally require some key assumptions to be made at an overall company level in relation to items such as inflation, cost of capital, exchange rates if relevant, productive hours & growth. Some of these may be assumptions in individual budgets such as sales budgets but it is essential that the master budget process consolidates all the assumptions made. This is to ensure that budgets are aligned across the business. For example, if the sales department budgets for a 10% increase in sales based on assuming excellent marketing of the new product that is being launched in the middle of the year, then it is important that the business understands if marketing have budgeted for the campaign and if production are planning to launch on time and have the relevant production quantities planned. If this is not the case then the budgets are misaligned and potentially unrealistic.
Budget instructions / manual – instructions need to be compiled for use alongside any assumptions /pre-set criteria that people need to incorporate.
Budget templates – templates need to be designed and prepared. These are often locked spreadsheets with only certain fields being available for entry. Standard templates are critical for consolidation purposes and avoidance of errors in consolidation.
Review process (often 2 stages) – this can differ widely across organisations but is often in the form of a submission and first presentation to senior management and/or the FD followed by rework to incorporate requested changes which will then be consolidated into the master budget for presentation to the board of directors.

Further to the steps above the annual master budget is compiled by consolidating all the departmental and or functional budgets into one overall budget. Walther (2014) noted that ‘the budget construction process will normally follow the organizational chart. Each component of the entity will be involved in preparing budget information relative to its unit’. Depending upon the business this could include, production budgets, sales budgets, overhead department budgets, investment budgets but will also include the cash budget. The order in which the budgets are prepared is important however, as the outputs of each budget will make the inputs for the next budget. Below is a simple graphical representation of the order of completion of a master budget.

Potential Behavioural Issues Arising from the Budgeting Process and the use of Budgetary Information

Bruns (1975 p.178) stated that ‘budgets are potential means of influencing behaviour’ and that ‘control is the successful exercise of power to influence’, hence there are many potential behavioural problems that can emerge from the budgeting process. There has been significant research exploring the effects of type of approach on the behaviours. Merchant (1981) studied how the size, diversity and degree of decentralisation affected the choice of approach which in turn affected the behaviours.

Banks and Giliberti (2008) considered that top down budgets generally have less ownership within a business since those responsible for delivering have had little or no say in the setting process and as such may be more difficult to deliver. This will depend on how challenging the budget is of course. Conversely bottom up budgets tend to have more buy in from managers but this still doesn’t necessarily mean they will be achieved and nor does it necessarily mean the budget is more accurate. Furthermore, budgets that engage the management in their development may still not have ownership if managers don’t believe that the engagement is genuine.

If the budget being set is deemed to be unachievable by those expected to deliver it, then this can become demotivating. Setting a stretch target can be motivating for people but too much stretch and they will feel as though it is not worth any effort as they cannot achieve it even if they try.

Budget owners may try to build in budgetary slack in order to make it more likely they can achieve or outperform their budget. No matter the environment, it can be very difficult to avoid budgetary slack being built into the numbers as it can be very difficult to assess or prove the level of slack built in by an astute manager. Camman (1976) and Merchant (1985) found that a managers propensity to create slack is affected by the system adopted but that this propensity is generally lower in a more participative approach whereas Antle and Eppen (1985) and Lukka (1988) argued that high participation created slack.

However, Onsi (1973) suggested that slack was not necessarily always a bad thing. It could provide funds to be able to undertake valuable activities that would not necessarily be approved by stakeholders if more transparent due to requirements for returns from the business. He also found that slack was more likely in successful firms in good markets thereby making it possible to achieve efficiencies and continue to meet expectations of shareholders in more difficult times.

If incremental budgeting is used in a business, managers may either deliberately spend up to their budgets or in some cases overspend so they can get a bigger base to start from the following year. Clearly this is not necessarily optimising for a business and this is where good budgetary control can help. Analysis of variances should be against budget at the lowest level practicable so that it is clear whether the result is due to accurate budgeting or other factors that were not budgeted originally.

The temptation to spend up to budget will almost certainly happen if an organisation adopts a ‘use it or lose it’ approach to budgeting. In today’s world, there is increasing pressure in many businesses to drive down costs as a result of decreasing margins. As such, if a budget has not been used, it can be tempting to assume it is not needed and as such reduce the following years start baseline. If the manager has made a great effort to gain efficiencies during the year, then this does not necessarily feel like a suitable reward as it is simply likely to make it harder to achieve the following year. If the efficiencies are sustainable then this may be realistic but if they were one-off opportunities that the manager took advantage off, then they will not necessarily be repeatable. The budget setting process must include a certain amount of flexibility or the budget is likely to be either unrepresentative of the actual picture or it may cause inflexibility within the business in its ability to react apropriately to short term events and changes. Sudden market changes could lead to a need to increase production of one product at the expense of another and it may be that the margin on the increased product is not as profitable. However, the process must allow for a view of the bigger picture. It may well be that the margin per product is lower but the market change means that far more product can be sold thereby increasing profits overall. The budget process should not stop the right decision being made.

The above discussion highlights the importance of a company adopting a genuine and appropriate approach to their budget setting process as it is a time-consuming and as such an expensive exercise. It would be a shame if this time consuming and expensive exercise simply produced a document that no one felt ownership for and that was in reality neither achievable for the business nor representative of the best outcome that could actually be achieved.

References
Antle, R. & Eppen, G. D., 1985. Capital Rationing & Organizational Slack in Capital Budgeting. Management Science, 31(2), pp. 163-174.
Banks, A. & Giliberti, J., 2008. Behavioural Aspects of Budgeting. In: McGraw-Hill, ed. Budgeting. s.l.:McGraw-Hill, pp. 217-215.
Bruns, W. J. & Waterhouse, J. H., 1975. Budgetary Control & Organization Structure. Journal of Accounting Research, 13(2), pp. 177-203.
Cammann, C., 1976. Effects of the use of Control Systems. Accounting, Organizations & Society, 1(4), pp. 301-313.
CIMA, 2005. CIMA Official Terminology. 2nd ed. Oxford: CIMA Publishing.
Gowthorpe, C., 2011. Business Accounting & Finance. Third ed. Andover: Brendan George.
Lukka, K., 1988. Budgetary Biasing in Organizations. Accounting, Organizations & Society, 13(3), pp. 281-301.
Merchant, K. A., 1981. The Design of the Corporate Budgeting System: Influences on Managerial Behaviour and Performance. Accounting Review, 56(4), pp. 813-829.
Merchant, K. A., 1985. Budgeting & the Propensity to create Budgetary Slack. Accounting, Organizations & Society, 10(2), pp. 201-210.
Onsi, M., 1973. Factor Analysis of Behavioural Variables Affecting Budgetary Slack. Accounting Review, 48(3), pp. 535-548.
Siyanbola, T. T., 2013. The Impact Of Budgeting And Budgetary Control On The Performance of Manufacturing Company in Nigeria. Journal of Business Management & Social Sciences Research (JBM&SSR) , 2(12), pp. 8-16.
Walther, D. L., 2014. Chapter Twenty-One: Budgeting: Planning for Success. Available at: http://www.principlesofaccounting.com/chapter21/chapter21.html

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Introduction

The intention of this essay is to analyse the development of ‘Behavioural Finance’ within the field of finance and investment. It will highlight some of the literature that has come about as a result of research in the field, some of the implications it has had on historical theories and some of the implications it has had within the world of investment.

The Birth of Behavioural Finance

Behavioural Finance is considered by many to be a new field within finance, but it does have its origins in the early 20th century. One of the initial publications to highlight the importance of investor psychology was authored in 1912 by George Selden, the intention of this book was to discuss the “belief that the movements of prices on the exchanges are dependant to a very large degree on the mental attitude of the investing and trading public”(Selden, 1912, pp. Preface), this was a pioneering thought and began the start of linking psychological aspects within the world of finance.

Throughout the 20th century, many developments were made in relation to combining psychological aspects to the world of finance. Since George Selden, many have built upon this idea and “in 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance.”(Sewell, 2010, p.1). This was of importance as considering the dynamic nature of finance, a decision one makes can often be offset by the introduction of new and inconsistent information, this may often lead practitioners to make irrational decisions which in turn affects markets, pricings and causes inefficiencies. After this, John Pratt “considers utility functions [and] risk aversion”(Sewell, 2010, p.1), which considers how practitioners evaluate a monetary amount gained or lost and also how they feel about incurring various levels of risk and how this affects behaviour and decision making. From this point the research and developments entered rapid expansion as more researchers and prominent people within the fields began to take interest in this idea that psychology may play an important role within markets and practitioner behaviour..

In 1973, two psychologists, Amos Tversky and Daniel Kahneman put forth an article and within this paper they “explore[d] a judgmental heuristic in which a person evaluates the frequency of classes or the probability of events by availability, i.e., by the ease with which relevant instances come to mind.”(Tversky and Kahneman, 1973, p.207).

A heuristic is something that financial “practitioners use [as a] rule of thumb…to process data… they are generally imperfect. Therefore, practitioners hold biased beliefs that predispose them to commit errors.”(Shefrin, 1999, p. 4). This along with the earlier articles and research began to explore in more depth the affects of individuals’ cognitive errors and misjudgements which we now know can lead to market inefficiencies.

Then, in 1974, Tverky and Kahneman produced another article with the intention of further developing the field and gaining a more in depth determination of the heuristic identified in their previous paper, within this article they had identified and described three heuristics which can be seen to be in use when making decisions under uncertainty. These three heuristics are as follows; “representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B,”(Tversky and Kahneman, 1974, p.1124) in simple terms this is when someone tries to predict the probability of an unknown event by comparing it to a known event and assuming the probabilities will be similar. This can and usually does lead to errors as practitioners may over or underestimate the probability, and also may misjudge the comparative example which in turn will lead to errors.

The second heuristic is that of “availability of instances or scenarios, which is often employed when are asked to assess the frequency of a class or the plausibility of a particular development,”(Tversky and Kahneman, 1974, p.1131) in simple terms they have described a way in which individuals are more inclined to assess the frequency of an event by the ease in which instances of the events can be brought to mind.

The third heuristic is that of “adjustment from an anchor, which is usually employed in numerical predication when a relevant value is available”(Tversky and Kahneman, 1974, p.1131) in simpler terms they have described how an individual will use an initial piece of information and then any other piece of information gained thereafter will encounter a bias based on the initial information. This leads the practitioner to hold on to their initial beliefs in regard to the scenario and leads to an inaccurate reading of the situation resulting in errors.

These are heuristics, which are mental-shortcuts which, through a lack of adequate mental analysis and evaluation, lead to an inaccurate reading of the situation, leading to a misjudgement. These heuristics are important as they began to form reasons why financial practitioners’ are prone to make mistakes, which in-turn lead to market inefficiencies and in the area of investment cause stock-prices to deviate from their fundamental value.

From this point, Tversky and Kahneman went on to produce another article in 1979 They discovered that people tended to value losses greater than equivalent gains; “An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.”(Tversky and Kahneman, 1979, p. 263). This was named Prospect Theory. This was an important development as it showed further irrational behavioural of practitioners and put greater emphasis on the study of how human errors do affect the financial markets, something that was held in contrast to popular belief at the time, it also contributed further to the study of how practitioners deal with the evaluation of money.

Then, in 1985, Werner De Bondt and Richard Thaler published an article that discovered that “most people tend to ‘overreact’ to unexpected and dramatic news events.. The empirical evidence… is consistent with the overreaction hypothesis… market inefficiencies are discovered.”(De Bondt and Thaler, 1986, p.793). This discovery, aided by the previous advancements of the better part of a century’s worth of research effectively formed the start of what has become known as behavioural finance and was of great importance and the field now had empirical evidence which backed up theory to suggest that psychological errors contributed to market inefficiencies thereby putting into question historical theories which had once been considered valid.

To summarise, over the course of the 20th century there has been significant research within the field of psychology and then a merging of psychological research with the field of finance. Many consider Amos Tversky and Daniel Kahneman to be the pioneers with the vast amount of research they conducted in the field, which lead to Werner De Bondt and Richard Thaler producing empirical evidence, with the use of psychologically based background, in their paper; “Does the Stock Market Overreact?”which proved that at times there exists inefficiencies within the markets.

How it has Affected Historical Theories

The birth of Behavioural Finance has had many implications within the fields of finance and investment. One of its greatest and most important impacts is calling into question the rationality of financial practitioners, this notion that practitioners are rational provided an assumption which formed the foundation on which some of the most influential economic and financial hypothesis were created.

To analyse the full impact of behavioural finance as a topic is something that cannot be achieved within this essay, instead it will discuss its effect on Efficient Market Hypothesis (EMH), a theory put forth by Eugene Fama in 1970 titled “Efficient Capital Markets: A Review of Theory and Empirical Work,”(Fama, 1970) . Within the document Fama describes an efficient market as “a market in which prices always ‘fully reflect’ available information,”(Fama, 1970, p. 383) in order for markets to fully reflect available information an assumption is made that the markets and the investors within them are rational, this is one of the assumptions that provides a foundation for Efficient Market Hypothesis;

This notion of rational markets and investors has been seriously questioned by the development of ‘Behavioural Finance’ and due to the research that has been conducted and empirical evidence which proves that at times the markets both over and under react to information which results in inefficiencies; it can be stated that the Efficient Market Hypothesis isn’t entirely correct. This is important as since the theories inception; financial practitioners accepted it as valid and began to develop ideas, models and other theories with EMH as a foundation. Other theories such as Capital Asset Pricing Model have been put into question as they were developed and “buil[t] on the assumptions of EMH.”(Bell, 2010).

The development of ‘Behavioural Finance’ and the findings from various researches which put into question market efficiencies, it can now be stated that long held beliefs and theories about the way markets and financial practitioners operate can be considered false. It has also brought about an idea named ‘Adaptive Market Hypothesis (AMH)’ which was put forth in 2004 by Andrew Lo, he argues that “the emerging discipline of behavioural economics and finance has challenged [EMH], arguing that markets are not rational… [he] propose[s] a new framework that reconciles market efficiency with behavioural alternatives.”(Lo, 2004). This new hypothesis seems to make more sense and is in conjunction with behavioural finance issues and while we wait for it to be solidified by long-term empirical evidence, it seems that the future is more AMH than EMH.

Its implications for Investment

Since the development of ‘Behavioural Finance’ and the psychological aspects that are at play within the world of finance and within the investors psyche have been seen to “lead to unhelpful or even hurtful decisions. As a fundamental part of human nature, these biases affect all types of investors,”(Byrne and Utkus, 2013, p.4) and often lead to misjudgements and errors, the implications for this are that each and every investor will make use of these heuristics and inevitability will make mistakes. The world of investment has now recognised that this area of study is of great importance and can help explain not only investor behaviour, but also the behaviour of markets. One of the intentions of ‘Behavioural Finance’ is to identify these errors and their causes so that investors are in a position to work around them or profit from other investors’ mistakes.

There are now many heuristics and biases which have been discovered and have an impact on financial practitioners decision making ability and in turn have implications for markets, some of these are as follows; Availability Bias, Representativeness, Gamblers Fallacy, Frame Dependence, Mental Accounting, Loss Aversion and Overconfidence to name just small amount. One of these biases, ‘Overconfidence’, “has found that humans tend to have unwarranted confidence in their decision making. In essence, this means having an inflated view of one’s own ability.”(Byrne and Utkus, 2013, p.4). In terms of investment this can lead some investors to have placed an overestimation on their own investment choices and ability and as such, at times, disregard the overall external factors which have an impact on the market. Another affect that overconfidence may have on certain investors is in relation to trading, for example, too much confidence is placed within their own ability to trade. “Professors Brad Barber and Terry Odean studied US investors with retailed brokerage accounts and found that more active traders earned the lowest returns.”(Byrne and Utkus, 2013, p.6).

Another bias is that of the ‘loss aversion’ where “behavioural finance suggests investors are more sensitive to loss than to risk and return,”(Byrne and Utkus, 2013, p.8) where traditional finance theory tended to focus solely on the relationship between risk and return. Two professors, Hersh Shefrin and Meir Statman, developed theories put forth by Tversky and Kahneman in a paper titled “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence”where they found evidence to suggest that investors “sell winners too early and hold losers too long.”(Shefrin and Statman, 1985, p.777). This can negatively affect investor returns and depicts some form of short-termism within investors’ psychology down to the bias of loss aversion.

Conclusion

To conclude, ‘Behavioural Finance’ is a field that has had profound effects on the world of finance and investment, so much so it has put into question previous theories that were once considered valid and used as a foundation for most economic and financial hypotheses such as EMH and CAPM. As the field has developed practitioners have taken more notice of their own and others’ irrational behaviour, which is important considering prior to the introduction of psychological issues most were of the belief that themselves and others were rational. This can now be considered to be false, and as the dynamic nature of the financial work-environment induces mental and behavioural short-comings it is likely that the field will see further developments.

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Introduction

The intention of this essay is to explain how Bank of England monetary policy has affected inflation rates within Great Britain, we will take data for the time period 2009-the present, the reasoning for this is this was the time-period that ‘Quantitative Easing’ was introduced. It will state recent developments in regard to interest rate policies and highlight what ‘Quantitative Easing’ is and how it forms part of monetary policy. It will use recent data in regard to the setting of interest rates and inflation and how inflation and interest rates affect businesses and individuals.

What is the Bank of England?

The Bank of England is the Central Bank of the United Kingdom. The mission of the bank is “to promote the good of the people of the United Kingdom by maintaining monetary and financial stability”; she is sometimes referred to as the “Old Lady of Threadneedle Street” and was founded in 1694 (Bank of England, 2015).

A Central Bank “is nowadays primarily an agency for monetary policy. It usually also has important financial stability functions, and those become more prominent during times of financial turmoil,” (Ortiz and Yam, 2009, pp.17) and although it has many differing functions dependant on which country the central bank operates in “one could infer that the objective underlying all functions was “for the economic interests of the nation, consistent with government economic policy”” (Ortiz and Yam, 2009, pp.18).

The Bank of England is engaged in all of these functions, however the purpose of this essay is to highlight monetary policy and inflationary matters; as such we will now concentrate on the monetary policy function of the Bank of England.

What is Monetary Policy?

Monetary Policy has been defined as “the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side of economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity” (Economic Times, 2015). Within the United Kingdom, the Bank of England has a Monetary Policy Committee (MPC), “The MPC sets an interest rate it judges will enable the inflation target to be met,” (Bank of England, 2015) this target is “defined by the Government set inflation target of a 2 per cent year-over-year increase in the Consumer Prices Index” (Bank of England, 2015).

Monetary Policy is important as it is used to maintain and engineer stable prices and confidence in the currency through the setting of interest rates, again this is defined by the government’s inflation target. A central bank has two tools it can use to try to influence the economy in terms of monetary policy; the setting of interest rates and the expansion and contraction of the money supply.

One of the key elements of monetary policy is how a central bank tries to keep the supply and demand for goods in some form of equilibrium by changing its official interest rate. This is known as the ‘Base Rate’ or ‘Bank Rate’, and it signals and attempt to influence the overall level of activity in the economy. “When demand for goods and services in the economy exceed supply, inflation tends to rise above the Bank’s target rate of 2%. On the other hand, when supply exceeds demand, inflation tends to fall below the Bank’s 2% target” (Bank of England, 2015). By changing the interest rate the bank is able to influence other banks and building societies in their borrowing and lending activities and therefore affect spending in the economy. It does this in an attempt to keep inflation in line with its pre-determined target of 2%. “A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can also affect consumers’ and firms’ cash-flow – a fall in interest rates reduces the income from savings and the interest payments due on loans.” (Bank of England, 2015)

Another, more unconventional, form of monetary policy is that of “Quantitative Easing”. This is when a “Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target.” (Bank of England, 2015) This was first used in the UK in March 2009 and involves the “cash injection [which] lowers the cost of borrowing and boosts asset prices to support spending and get inflation back to target. If inflation looks like being too high, the Bank of England can sell these assets to reduce the amount of money and spending in the economy.” (Bank of England, 2015) Considering the current state of the British economy with a transition from a majority of full-time to part-time workers (see Fig.2), a decrease in the real wage growth (see Fig.3) and a decrease in real average weekly earnings (see Fig.4) it can be stated that the Bank’s current monetary policy is acting against its own interests; “Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability” (Bank of England, 2015).

(Fig.2)

(Fig.3)

(Fig.4)

What is Inflation?

Inflation has been defined in a number of ways, one of these definitions is that it “is the rate of increase in prices for goods and services [and] there are a number of different measures of inflation in use. The most frequently quoted and most significant one [is] the Consumer Prices Index (CPI)” (BBC, 2015)

CPI is “the speed at which the prices of the goods and services bought by households rise or fall. Consumer price inflation is estimated by using price indices. The price index estimates changes to the total cost of this basket. Most ONS price indices are published monthly. (ONS, 2013)

Inflation is of great significance as it affects the prices of all goods and services, and as mentioned above it has an effect on real wages and their growth, its affects on businesses and therefore their employment policies i.e. full time as opposed to part-time employment, consumption and an ability to save.

Recent Monetary Policy

We have established that Monetary Policy consists of a setting of an Interest Rate or ‘Bank Rate’ and also a relatively new form of monetary policy called ‘Quantitative Easing’. Since ‘Quantitative Easing’ is new and was first introduced in 2009 we will use policy and the relevant interest rates relating to this time-period.

The following is an extract taken from the Bank of England’s website: “The previous change in Bank Rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A programme of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The previous change in the size of that programme was an increase of ?50 billion to a total ?375 billion on 5 July 2012.” (Bank of England, 2015) As we can see the Bank has kept its interest rate policy at a constant for the last 6 years, a record-low.

Recent Inflation

Using the same time-period as above we can show the inflation rate and how it has fluctuated:

(Fig 1.)

As can be seen from the graph above the level of inflation began to appreciate with the setting of the 0.5% interest rate which is in conjunction with economic theory as individuals tend to borrow therefore spend more which leads companies to raise prices. However, during 2012 other factors came into effect and we have seen depreciation in inflation. Of late one such factor could be the decrease in oil prices which has lead “to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.” (BBC, 2015). This is of importance as consumers use oil and other natural resources and it makes up part of their essential consumption, for example, if oil prices decrease then the cost of travelling, heating and lighting becomes cheaper.

As can be seen from the graph and the monetary policy that has been implemented by the Bank of England we can see the bank has entered into an unknown territory in that it has encountered an inflation level very close to 0% and also have an interest rate policy close to 0%. The level of inflation is below its desired target of 2% and therefore they, ideally, would like to be in a position to lower the interest rate to generate an increase in inflation, however, should the Bank of England begin to increase interest rates we would see an increase in the payments of debt. This remains true for governments also, with Britain’s debt rapidly increasing as a percentage of GDP (see Fig.5) this would ensure if not increase the probability of the government itself defaulting on its debt. With many other factors such as lowering oil prices, high unemployment, and a decrease in consumers’ disposable income aiding in the depreciation of inflation it will be interesting to see the Bank of England’s next change in monetary policy and to observe its implications.

(Fig.5)

The Effects of Inflation

Inflation has many different effects on a variety of different practitioners such as businesses and individuals. For businesses high levels of inflation can lead to higher sales revenue and therefore higher profit margins, however, this can be a short-lived occurrence as the cost of sales will also be affected increasing business costs and lowering profit margins. It is also likely that employees will at some-point request an increase in wages to keep pace with the raising costs of goods and services. Business will also need to be aware of the changing conditions within central and commercial banks as if inflation is raising beyond a pre-determined level then the central banks will alter their interest rate to ensure they meet their targets. This in turn will affect commercial banks and therefore the general cost of borrowing; this can also effect debt repayments and eventually profit-margins.

Low levels of inflation can also lead to higher sales revenue as customers take advantage of an increase in purchasing power and are therefore more likely to make rapid purchases, however, when inflation levels are low this suggests that interest rates are high and therefore saving becomes more attractive however this is not always the case. This could then lead to lower sales revenue as consumers will tend to favour savings over spending.

For individuals, high levels of inflation mean that prices of goods and services are increasing therefore individuals on a fixed income are proportionately spending a larger amount of their income on essentials, leading to a lower amount of disposable income. This means that interest rates are low and therefore saving becomes unattractive leaving consumers at the behest of the macroeconomic environment. However, dependant on the levels of inflation it is quite likely that the central banks will adjust interest rates accordingly and raise them, allowing consumers to benefit from the possibility of saving.

There are some other external factors which are out of the control of the Bank of England which also have an effect on British consumers and inflation such as “currency exchange rates, other countries interest rates and oil prices.” (Ramady, 2009, pp.10)

Conclusion

In conclusion, we have discussed the Bank of England and its monetary policy and how the setting of interest rates has an effect on inflation and how this in turn affects businesses and individuals. We have seen that there are numerous different ways in which interest rates and inflation can be adjusted given the economic environment and how the central bank and commercial banks control monetary policy to meet a pre-determined inflationary target – this target is 2% within the United Kingdom.

We have also used data and recent policy to illustrate the affects, which has brought us to an interesting point in economic history in that the central bank, commercial banks, businesses – large and small – and consumers have entered into a predicament in that we have a situation where both inflation and interest rates have reached near or exactly 0%. The central banks, various other large financial and political institutions must now create and adapt to a different strategy as it seems they have exhausted the use of their monetary policy tools and although ‘Quantitative Easing’ tends to boost the economy short-term, we have still seen this new tool used on multiple occasions.

It seems that if their current strategy was working, why all around the world are we continuing to observe economic instability in various forms such as high unemployment, highly volatile inflation – and deflation in some areas -, a reduction in real wages and a shift from mainly full-time to part-time working hours, these different negative economic consequences of a policy that results in more instability whilst the stated of objective of the institution is “Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability”(Bank of England, 2015).

Bibliography
Bank of England. (2015). “About the Bank”. Available at: http://www.bankofengland.co.uk/about/Pages/default.aspx
Bank of England. (2015). “Bank of England maintains Bank Rate at 0.5% and the size of the Asset Purchase Programme at ?375 billion.” Available at: http://www.bankofengland.co.uk/publications/Pages/news/2015/004.aspx
Bank of England. (2015). “How does monetary policy work?” Available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/how.aspx
Bank of England. (2015). “Monetary Policy Committee (MPC).” Available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/overview.aspx
Bank of England. (2015). “Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability” http://www.bankofengland.co.uk/Pages/home.aspx
Bank of England. (2015). “What is Quantitative Easing?” Available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx
Bank of England. (2015). “What we do.” Available at: http://www.bankofengland.co.uk/about/Pages/onemission/default.aspx
BBC. (2015). “Falling Oil Prices: Who are the winners and losers?” Available at: http://www.bbc.co.uk/news/business-29643612
BBC. (2015). “Q&A: Inflation Explained.” Available at: http://www.bbc.co.uk/news/business-12196322
Economic Times. (2015). “Definition of ‘Monetary Policy’”. Available at: http://economictimes.indiatimes.com/definition/monetary-policy
Ortiz, S. And Yam, J. (2009). “Issues in the Governance of Central Banks”, Central Bank Governance Group, pp.17, [PDF]. Available at: http://www.bis.org/publ/othp04.pdf
Telegraph. (2015). “Inflation: RPI, CPI and RPIJ explained.” Available at: http://www.telegraph.co.uk/finance/economics/9792480/Inflation-RPI-CPI-and-RPIJ-explained.html
Bank of England. (2015). “QE – Quantitative Easing (QE) – Injecting Money Into The Economy.” http://www.bankofengland.co.uk/education/Documents/resources/postcards/qecomp.pdf
Office of National Statistics (ONS), (2013). “Consumer Price Indices – A Brief Guide” http://www.ons.gov.uk/ons/guide-method/user-guidance/prices/cpi-and-rpi/consumer-price-indices–a-brief-guide.pdf
Bank of England. (2015). “Quantitative Easing (QE) – Injecting Money Into The Economy” [PDF] http://www.bankofengland.co.uk/education/Documents/resources/postcards/qecomp.pdf
Ramady, M. (2009). “External and Internal Determinants of Inflation: A Case Study of Saudi Arabia,” Middle East Journal of Economics and Finance, pp.10 [PDF] Available at: http://faculty.kfupm.edu.sa/FINEC/ramadyma/articles/External%20&%20Internal%20Determinants%20of%20inflation-A%20Case%20Study%20of%20Saudi%20Arabia.pdf
Illustrations

Figure 1. United Kingdom Inflation Rate (1915) [Image] Available at: http://www.tradingeconomics.com/united-kingdom/inflation-cpi

Figure 2. Three month average for the percentage of people working full and part time respectively, September-November 2000 to September-November 2013 [Image] pp.9 Available at: http://www.ons.gov.uk/ons/dcp171766_351467.pdf

Figure 3. AWE real wage growth and the range of real wage growth estimates using other ONS wages and price series, Q1 2001 to Q3 2013, per cent change on the same quarter a year ago [Image] pp.5 Available at: http://www.ons.gov.uk/ons/dcp171766_351467.pdf

Figure 4. Real Average Weekly Earnings and Real Average Hourly Wage, Index 2005=100 [Image] pp.8 Available at: http://www.ons.gov.uk/ons/dcp171766_351467.pdf

Figure 5. UK National Debt % GDP [Image] Available at: http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/

This work was produced by one of our professional writers as a learning aid to help you with your studies

Introduction

Sports Direct Plc is a profitable and successful with an immense potential for growth as indicated by the Price Earning ratio of 27.73 times (Appendix 1).

The purpose of this essay is to analyse the financial performance of Sports Direct Plc based on the calculation of the profitability, liquidity, efficiency, solvency and investor ratios. Thereafter, the essay will compare the financial performance and position of Sports Direct Plc with that of JD Sports Fashion Plc. Subsequently, the essay will provide a recommendation to the investors regarding the investment in Sports Direct’s shares. Finally, the essay will conclude by assessing the limitations of the financial analysis carried out based on the accounting ratios.

Analysis of the financial performance of Sports Direct Plc and Comparison to a competitor – JD Sports Fashion Plc

Sports Direct Plc’s revenue has grown by 23.8% from GBP 2,706m in 2013 to GBP 2,185.6m in 2014 (Sports Direct Plc, 2014). This success is underpinned by Sports Direct’s core strategy of expanding their product base (Sports Direct Plc, 2014). Sports Direct has not resorted to price cutting strategies in order to achieve this growth. This is evident by the improvement in its gross margin from 40.94% in 2013 to 42.68% in 2014 (Appendix 1). The product mix of Sports Direct is improving with its premium category products gaining greater acceptance in the market (Sport Direct Plc, 2014). Operating and net margins have witnessed a modest fall because the new stores that have opened to support the growing premium lifestyle divisions are performing slightly below the capacity (Sports Direct Plc, 2014).

Sports Direct Plc has significantly outperformed JD Sports Fashion Plc in terms of the overall profitability despite of JD Sports Fashion Plc having a better gross margin (Appendix 1 and Appendix 2). The sales channel mix of the two businesses is the key driver of the overall profitability. Although online sales grew for both the businesses, the growth in online sales was higher for Sports Direct Plc compared to JD Sports Fashion Plc contributing to the improved operating profit and net profit margin for Sports Direct Plc. Online sales typically attract lower overheads compared to the retail sales and can significantly contribute to improving profitability of a company (ICAEW, 2012).

Current ratio and liquidity ratio are identified as key indicators of liquidity in a business (Robertson, 2007). The current ratio of Sports Direct Plc has fallen from 1.64 in 2013 to 1.06 in 2014 (Appendix 1). The fall in the current ratio for Sports Direct Plc is not reassuring and the absence of cash is worrying. Furthermore, weak quick ratio of 0.35 is indicative of weak liquidity position and could be indicative of inability of Sports Direct Plc to meet its short-term liabilities in the future. JD Sports Fashion Plc has a better current and quick ratio compared to that of Sports Direct Plc. One of the important factors contributing to a poor liquidity position in Sports Direct Plc is the consumption of cash to facilitate expansion through opening new stores (Sports Direct Plc, 2014). Furthermore, higher inventory turnover days of 133 days for Sports Direct Plc compared to inventory turnover days of 105 for JD Sports Fashion Plc has also contributed to lower liquidity in Sports Direct Plc compared to the liquidity in JD Sports Fashion Plc (Appendix 1 and Appendix 2).

The purpose of calculating gearing ratios is to analyse the financing structure of the business (ICAEW, 2012). Gearing ratios reflect the level of risk attached to the company and the sensitivity of earnings and dividends to changes in profitability level (Grewal, 2014). The statements of financial position of the two businesses are significantly affected by their different capital structures. JD Sports Fashion Plc is more geared compared to Sports Direct Plc. Lower gearing compared to competitors for Sports Direct Plc can enhance its ability to raise more debt to fund future expansion. Sports Direct Plc inclination towards leasing assets and reliance on overdraft facilities contributes to its relatively low level of gearing. This may allow Sports Direct plc to have flexibility in operations and reduce its risk. Furthermore, the value of non-current assets in Sports Direct plc accounts is higher than the value of non-current assets in JD Sports Fashion Plc accounts (Sports Direct Plc, 2014: JD Sports Fashion Plc, 2015). This is indicative of its ability to raise capital through debt market to fund the future expansion.

The purpose of calculating interest cover ratio is to assess the ability of a company to meet its interest obligations out of profits (Goyal and Goyal, 2012). Although the interest cover ratio for Sports Direct Plc has fallen from 22 times to 13 times and is lower than the interest cover ratio of JD Sports Fashion Plc, it is still reflective of a healthy interest cover ratio and is indicative of Sport Direct Plc’s ability to meet the interest obligations out of its profits.

The purpose of calculating efficiency ratios is to analyse the management’s effectiveness in running the business efficiently (Grewal, 2007). Efficiency ratios reflect management’s ability to reduce the working capital requirement for a given level of activity (ICAEW, 2012a). Receivables collection days of 16 days highlight low level of credit sales, which is consistent with the retail nature of the business and enables Sports Direct Plc to manage its working capital efficiently. The increase in payables payment period from 48 days in 2013 to 56 days in 2014 further contributes to efficient working capital management (Appendix 1). This reflects Sports Direct Plc’s ability to negotiate better payment terms with its suppliers. Furthermore, this is also indicative of efficient management, as the gap of twenty-seven days in the payables payment period between the two companies in the prior year has been narrowed down to a gap of two days. The inventory turnover days are 133 days and 105 days for Sports Direct Plc and JD Sports Fashion Plc respectively (Appendix 1 and Appendix 2). Furthermore, the inventory turnover days has increased by seven days from 2013 for Sports Direct Plc (Appendix 1). This is reflective of increased inventory holding cost for Sports Direct Plc. Rapid innovation of new products contributes to making previous product lines obsolete (ICAEW, 2013). This can impact the future margins because of the net realisable value for these products may drop significantly below its production cost (ICAEW, 2013). Management needs to invest more time in clearing up stock and improving the inventory turnover days because it can contribute to increasing the working capital requirement in the future.

The purpose of calculating investor ratios is to enable investors to assess the level of future returns and growth (ICAEW, 2012). Earning per share reflects the level of profit allocated to each outstanding share. Price earning ratio is one of the most commonly used ratios by the investors and reflect their level of confidence in a business (ICAEW, 2012). Increase in price earning ratio from 17.51 times in 2013 to 24.19 in 2014 reflects investors expectations of significant future earning growth and their willingness to pay a large multiple of historic earnings (Appendix 1). Price earning ratio of Sports Direct Plc is 24.19 times compared to price earning ratio of 14.33 times for JD Sports Fashion Plc. Lower price earning ratio is indicative of lower growth expectations by the investors (ICAEW, 2012).

Advice to the investors regarding the purchase of Sports Direct Plc shares

Investors principal concern in respect of the investment in the shares of a company is to be able to earn a good rate of return. Sports Direct Plc is fundamentally a profitable business. Furthermore, a price-earning ratio of 24.19 is reflective of the investor’s faith in the growth potential of the company (Appendix 1). However, the sales growth in the third quarter of 2015 is short of the comparable growth in the third quarter of 2014 (Ficenec, 2015). The slowdown in the growth rate and no dividend offered on the shares may make it an expensive buy in the short term. Furthermore, investment in Sports Direct may be prone to the cyclical risk as the clothing industry is directly linked with the macro economic cycles (ICAEW, 2012a). Nonetheless, slower growth in the current year is impressive given the macro economic environment in the United Kingdoms and England’s early exit from the world cup (Guardian, 2014). Furthermore, the company has invested heavily in the expansion of its product base and its margins have improved despite of competitive environment and challenging macro economic environment (Sports Direct Plc, 2014). This investment in constant innovation has the potential to translate into benefits for the investors in the long term. Favourable capital structure of Sports Direct Plc as highlighted by the gearing ratios calculated in the appendix one also makes it an attractive investment. Based on the considerations above, the essay acknowledges that there are risks associated with the investment in the shares of Sports Direct Plc, nonetheless future returns from the investment is expected to outweigh the risks. Thus, the essay recommends investors to purchase the shares of Sports Direct Plc.

Weaknesses of Ratio Analysis

Although there are a lot of advantages of ratio analysis, it is not without weaknesses (Goyal and Goyal, 2012). One of the key weaknesses of ratio analysis is that the calculation of the ratios is contingent on the figures contained within the financial statements of a company. Thus, the results of the ratio analysis would be distorted if the underlying numbers in the financial statements are inaccurate (Grewal, 2014).

Furthermore, seasonality in a business could limit the usefulness of ratio analysis (ICAEW, 2012). To illustrate this better, consider a toy retailer with a 31 December year-end. Majority of its sales is likely to be made in the last quarter of the year leading up to the Christmas. As a result, the inventory levels at the year-end might be at its lowest point throughout the year. Thus, calculating the relationship between inventory and cost of sales at the year-end to analyse management’s efficiency in managing inventory levels would be misleading (ICAEW, 2012).

Financial statements of different companies are affected by different estimates and assumptions made by the management (Whittington, 2007). Furthermore, accounting standards also may permit different companies within the same industry to apply different accounting policies (Whittington, 2007). This may impair the comparability of accounting ratios of different companies and limit its usefulness.

Ratio analysis is historic in nature, while users of the financial statements are more concerned about the future (Gracia, 2007). It is common for businesses to have both good and bad ratios, which makes it difficult for the users of the financial statements to assess if it’s a good or a bad company (Grewal, 2014).

Lastly, non-existence of ideal level of ratio makes it difficult for user of the financial statements to assess whether a particular trend is good or bad (Grewal, 2014). For example, a company with high current ratio may be interpreted as a good sign, however it could also be indicative of lack of growth potential for a company as a result of which it is holding large reserves of cash (Grewal, 2014).

Conclusion

Sports Direct Plc has witnessed a significant growth over the past two years and has been profitable. However, declining profit margins in the past two years should be a key concern for the management of Sports Direct Plc. Nonetheless, despite the fall in the profit margin of Sports Direct Plc, it still outperforms the profit margins of its competitor – JD Sports Fashion Plc. The management of Sports Direct Plc should strive to strike a balance between achieving growth and improving the profit margins of the business.

Inefficient inventory management should be another key concern for the management of Sports Direct Plc. The inventory turnover period of 133 days seems to be high for a business in the fashion industry and could be indicative of aged obsolete inventory. The management should take immediate steps to clear up old stock to improve the working capital management.

Lastly, the essay recommends the investors to purchase the shares of Sports Direct Plc because high PE ratio, sales growth and expansion into new products are likely to translate into attractive returns for the shareholders in the future.

References
Ficenec, J., 2015, Questor share tip: Sell Sport Direct as growth slows, Telegraph. http://www.telegraph.co.uk/finance/markets/questor/11424054/Questor-share-tip-Sell-Sport-Direct-as-growth-slows.html
Gracia, L., 2007, Introduction to Financial Accounting, Harlow: Pearson.
Grewal, T., 2014, Analysis of Financial Statements, New Delhi: Sultan Chand.
Goyal, V., and Goyal, R., 2012, Corporate Accounting, 3rd edn. New Delhi: PHI Learning Pvt. Ltd.
Guardian, 2014, Who should take the blame for England’s early World Cup exit? http://www.theguardian.com/football/2014/jun/24/blame-england-world-cup-exit
ICAEW, 2013, Financial Accounting and Reporting Study Manual, Exeter: Polestar Wheatons.
ICAEW, 2012, Financial Reporting Study Manual, 6th edn. Exeter: Polestar Wheatons.
ICAEW, 2012a, Financial Accounting Study Manual, 6th edn. Exeter: Polestar Wheatons.
JD Sports Fashion Plc, 2015, Share Price. http://www.jdplc.com/investor-relations/share-price.aspx
JD Sports Fashion Plc, 2015, 2015 – Annual Report. http://www.jdplc.com/investor-relations/reports.aspx
Robertson, J., 2007, Financial Ratio Analysis, 3rd edn. Lancaster: John Robertson.
Sports Direct, 2015, Share Price Chart. http://www.sportsdirectplc.com/investor-relations/share-information/share-price-chart.aspx
Sports Direct Plc, 2014, Annual Report 2014. http://www.sportsdirectplc.com/~/media/Files/S/Sports-Direct/annual-report/Annual%20Report%202014.pdf
Whittington, G., 2007, Profitability, Accounting Theory and Methodology, New York: Routledge
Appendix 1 – Sports Direct Plc
S.no.RatioYear End 27th April 2014Year End 28th April 2013
1Gross Profit Margin42.68%40.94%
2Operating Profit Margin9.21%9.75%
3Net Profit Margin6.64%6.94%
4Current Ratio1.061.64
5Quick Ratio0.350.60
6Interest Cover Ratio13.06 times22.39 times
7Financial Gearing8.15%41.52%
8Equity Gearing25.93%23.89%
9Earning per share32.1p26.9p
10Price Earning Ratio24.19 times17.51 times
11Receivables Collection16.6 days16.1 days
12Payables Payment Period56.35 days48.06 days
13Inventory Turnover Period133.07 days126.39 days

(Source: Sports Direct Plc, 2014)

Note:

The formulas used to calculate the ratios above are included in Appendix 3.
Share prices used for calculating price earning ratios are 776.50 pence and 471.1 pence for the year-end 27th April 2014 and 28th April 2013 respectively (Sports Direct, 2015).
Appendix 2 – JD Sports Fashion Plc
S.no.RatioYear End 31st Jan 2015Year End 1st Feb 2014
1Gross Profit Margin48.6%48.7%
2Operating Profit Margin6.1%6.4%
3Net Profit Margin3.5%3.4%
4Current Ratio1.221.15
5Quick Ratio0.540.50
6Interest Cover Ratio33.24 times48.46 times
7Financial Gearing19.9%18.05%
8Equity Gearing27.2%16.6%
9Earning per share35.17p29.08p
10Price Earning Ratio14.33 times13.88 times
11Receivables Collection Period12.9 days20 days
12Payables Payment Period58.1 days75.1 days
13Inventory Turnover Period104.9 days108.8 days

(Source: JD Sports Fashion Plc, 2015)

Note:

The formulas used to calculate the ratios above are included in Appendix 3.
Share prices used for calculating price earning ratios are 503.00 pence and 403.50 pence for the year-end 31st Jan 2015 and 1st Feb 2014 respectively (JD Sports Fashion Plc, 2015).
Appendix 3 – Formulas
S.no.RatioFormula
1Gross Profit MarginGross Profits/Revenue * 100
2Operating Profit MarginProfit from Operations/Revenue*100
3Net Profit MarginNet Profit/Revenue * 100
4Current RatioCurrent Assets/Current Liabilities
5Quick Ratio(Current Assets – Inventory)/Current Liabilities
6Interest Cover Ratio(Profit before interest Payable + Investment Income)/Interest Payable
7Financial GearingLong term liabilities/capital employed * 100
8Equity GearingNet Debt/Equity * 100
9Earning per share(Net Profit – Dividend on preference stock)/ No. Of shares
10Price Earning RatioMarket Value of Share/ Earning per share
11Receivables Collection PeriodTrade Receivables/Revenue*365
12Payables Payment PeriodTrade Payables/cost of sales*365
13Inventory Turnover PeriodInventory/Cost of Sales * 365

(Source: ICAEW, 2012)

Note: Capital Employed = Equity + Net Debt, where net debt = interest bearing debt (non-current and current) minus cash and cash equivalents

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Introduction

The essay intends to cover the development of capital structuring theory over the course of the 20th Century. It will highlight the different theories put forth by researchers, primarily Franco Modigliani and Merton Miller and their work during the 1950’s and 1960’s, and describe the differences in the theories and their implications and impact in the world of business and finance.

Background of Theory

In 1952, David Durand produced an article titled “Cost of Debt and Equity Funds for Business: Trends and Problems of Measurement” (Durand, 1952), for the National Bureau of Economic Research. Within this publication he created what is now known as a ‘Traditional View’ of capital structuring which “according to this view, the value of the firm can be increased or the cost of capital can be reduced by the judicious mix of debt and equity capital” (Chand, 2015). This implies that the market valuation of a corporation can be altered depending on the capital structure used to finance the organisation.

The ‘Traditional View’ assumes that as debt capital increases the overall cost of capital decreases and thus the market valuation of a company can be increased through the benefit of a “Tax-shield of Debt” that is apparent when a company decides to finance through debt (FT Lexicon, 2015). This is due to the fact that interest payments on debt capital are treated as tax-deductable therefore a company will obtain more profit and shareholders are more inclined to accept a certain amount of debt finance. However, as leverage begins to increase beyond a certain amount – an optimal point – then shareholders are aware of bankruptcy risks, resulting in an increased cost of capital to compensate an increase in risk, lowering company market valuation. Furthermore, as you increase debt capital you are at the whim of some macro-economic factors, such as the setting of interest base-rates by the country’s central bank which of course would increase debt payments, perhaps beyond an efficient level, again increasing risk.

However, in 1958 Franco Modigliani and Merton Miller published a conflicting article in The American Economic Review titled “The Cost of Capital, Corporation Finance and the Theory of Investment” (Modigliani and Miller, 1958). Within this article they put forth different propositions in relation to how capital structuring affects the market value of a corporation and they criticised David Durand’s “assumption that the cost of equity remains unaffected by leverage up to some reasonable limit” as in their view the cost of equity is an increasing function of debt capital (Chand, 2015). This is likely to be because as bankruptcy risks are increasing shareholders are more inclined to request an increasing amount of returns to compensate, therefore the cost of equity will increase.

Within the 1958 article Modigliani and Miller had the view that an organisation’s weighted average cost of capital is not affected by changes in its capital structure. Modigliani and Miller also published an article in 1963 titled “Corporate Income Taxes and the Cost of Capital: A Correction” for the American Economic Association (Modigliani and Miller, 1963). Within this article they had back-tracked on statements made within their first article published in 1958 and now were stating that “among other things, that the tax advantages of debt financing are somewhat greater than we originally suggest and, to this extent, the quantitative difference between the valuations implied by our position and by the traditional view is narrowed” (Modigliani and Miller, 1963, pp.434). This modification leads Modigliani and Miller to “admit that tax relief on interest payments does lower the weighted average cost of capital.”(ACCA, 2012, pp.314)

Development of Theory

As we have stated, David Durand’s’ theory – the traditional view – is of the belief that a company can alter its market valuation by finding an optimal capital structure point which in turn would lower the Weighted Average Cost of Capital (WACC) and thus increase market valuation. This theory has been created on the basis of certain assumptions which are as follows;

“The company pays out all its earnings as dividends”
“The gearing of the company can be changed immediately by issuing debt to repurchase shares or by issues shares to repurchase debt. There are no transaction costs for issues.”
“The earnings of the company are expected to remain constant in perpetuity and all investors share the same expectations about these future earnings”
“Business risk is also constant, regardless of how the company invests its funds”
“Taxation, for the time being, is ignored”

(ACCA, 2012, pp.310-311)

This theory was used as a basic backdrop to the issues of debt and equity costing and finance. Durand had put forth a Net Income (NI) and Net Operating Income (NOI) in his article “Cost of Debt and Equity Funds for Business: Trends and Problems of Measurement” (Durand, 1952). The combination of these ideas formed the basis of the ‘Traditional View’. That was until the creation of a publication in 1958, Modigliani and Miller put forth propositions which had built upon the theory created by David Durand in 1952 which assumed certain initial assumptions. The assumptions for the first proposition are as follows;

“A world without taxation”
“A world without transaction costs”
“A world without bankruptcy costs”
“A world without growth opportunities”
“A world without asymmetric information between insider and outsider investors” i.e. a perfect capital market exists
“A world where there are differences in risk between different firms and individuals”

(Frentzel, 2013, pp.13)

Within this theory Modigliani and Miller had rejected the idea put forth within the ‘Traditional View’ and they had believed “that the firm’s overall weighted average cost of capital is not influenced by changes in its capital structure” (ACCA, 2012, pp.310). This is likely to be because, in the absence of taxation, an organisations market value is determined by only two factors; i) The total earnings of a company and ii) the level of business risk attached to those earnings.

The WACC would then be determined “by discounting the total earnings at a rate that is appropriate to the level of operating risk” (ACCA, 2012, pp.312). Therefore capital structuring would be deemed to be of irrelevance, thus the name of this theory was deemed “Irrelevance Theory”.

However, after receiving large amount of criticism due to the unreasonable assumptions, mainly that of an omission of taxation, Modigliani and Miller had to produce a correction paper in 1963 – as mentioned earlier. This theory – a second proposition – had included corporation tax in their model and they had then concluded that capital structuring does affect WACC and therefore market valuation. The reason for their conclusion arises after “they [had] identified taxation as the primary reason why the combination of financing sources does matter because interests on debt may be deducted from the firm’s income and thereby reduces the net taxable earnings. As a result, this tax saving that constitutes an additional advantage to using debt capital lowers the effective cost of debt capital” (Frentzel, 2013, pp. 15-16), this is known as the ‘Tax Shield’. This would suggest a firm would benefit from funding their organisation entirely out of debt as they would lower their tax liability due to the savings incurred from interest payments that are tax-deductable.

This notion of a firm funding itself entirely out of debt in practice seems illogical considering; a) shareholders would deem the company a risky investment should it be completely funded by debt and would request a higher return to compensate and b) the bankruptcy costs and increased likelihood of insolvency should a company fund itself entirely out of debt even though the model rejects the idea of bankruptcy costs, in reality we know there are such costs.

This then brings us onto the next theory which has been named “Trade-Off Theory”. This theory arose out of the controversy surrounding the second proposition put forth by Modigliani and Miller which implied a company can and should fund itself entirely out of debt due to the benefits of the ‘Tax Shield’. This of course does not make sense and sounds extreme due to the reality of bankruptcy costs and therefore an off-setting mechanism is needed which comes in the form of “the tax advantages of borrowed money and the costs of financial distress when the firm finds it has borrowed too much” (Shyam-Sunder and Myers,1998, pp. 210).

This seems to make more sense in that an optimal point between equity and debt financing can be reached as well as including assumptions previously omitted from earlier theory such as the effects of corporation tax and that of bankruptcy.

The final theory highlighted in this essay is named “Pecking-Order Theory” and it has been developed as an alternative to ‘Traditional’ Theory. It made an appearance in an article titled “The Capital Structure Puzzle” (Myers, 1984) within the Journal of Finance and suggested that there exists a particular pecking order of funding which, put one way, is that “Firms prefer internal finance [retained earnings]…If external finance is required, firms issue the safest security first. That is, they start with debt, then possibly hybrid securities such as convertible bonds, then perhaps equity as a last resort. In this story, there is no well-defined target debt-equity mix, because there are two kinds of equity, internal and external, one at the top of the pecking order and one at the bottom” (Myers, 1984, pp. 581). Put in simpler terms, “adverse selection implies that retained earnings are better than debt and debt is better than equity” (Murray and Vidhan, 2005, pp.19).

The “Pecking-Order Theory” is an “explanation of what businesses actually do, rather than what they should do” (ACCA, 2012, pp.315). This theory does not provide us with an optimal mix of finance but does provide us with a preferred method of funding for numerous reasons, for example, it is easier to use retained earnings as you have no external expectations set upon the company, there are also no issuing costs with retained earnings, issuing debt provides a signalling effect which is better than issuing equities. This final reason is because should a company start to issue equity, it could be sign that the managers believe that their equities are overvalued and are trying to cash in on the equities before they return to fundamental value, there is also a fixed income in regard to issuing debt whilst having a priority on liquidation.

Conclusion

In conclusion, there have been some productive developments concerning the area of capital structuring. In just over half a century various different hypothesis have developed which have contributed largely to the field, from an initial period where capital structuring was questioned to have any relevance at all to a view-point where a mix of debt and equity finance can achieve an optimal point of capital structuring. The importance of this cannot be underestimated as achieving an optimal point can lower the Weighted Average Cost of Capital so that a discount factor used in investment appraisals can lead a company to increase or decrease its market valuation. Reaching the optimal point is a case of trial and error for a company however once a company has reached this point the benefits can be profound, should a company increase its market valuation it may attract a different kind of investor or increase the possibility of a merger or an acquisition. Achieving the optimal point will allow a company to have a greater understanding of its Weighted Average Cost of Capital and therefore a discount factor; once this is achieved certain investment opportunities that may once have been out of reach may now be an acceptable possible idea to pool company resources or capital. This in turn may allow a company to enter into investment opportunities that it once thought it couldn’t, perhaps leading to the entrance into new markets, the development of new technology, or an avenue to achieve re-engineered growth, all leading the company to a position to move forward and most importantly keeping the current and possibility new shareholders content with the current business model and situation.

Bibliography
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Shyam-Sunder, L. And Myers, S. (1998). “Testing Static Tradeoff against Pecking Order Models of Capital Structure,” Journal of Financial Economics, 51, pp. 219-244 [PDF] Available at: http://pages.stern.nyu.edu/~eofek/PhD/papers/SM_Testing_JFE.pdf
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This essay will define and explore the inception and development of auteurist approaches to cinema – the conceit that a film may be said to have an individual author in the manner of a book or a stage play, and that such authorship should be ascribed to the film’s director. Two directors will be used as case studies to illustrate the points being made: Martin Scorsese, and Stephen Frears. Scorsese’s work will be analysed to better understand how auteur status might be aligned with a director, as well as probing the possible limitations of such an approach, and Frears will be invoked as a significant British film director who has worked extensively in both UK and Hollywood cinema, who is critically and commercially successful, yet refutes the concept of auteurism.

Authorship became an intellectual consideration initially with the politique des auteurs developed by French film critics in the immediate post-Second World War years. It developed largely in the pages of the influential film periodical Cahiers du Cinema. The politique, less a fully-conceived theory of popular film than a concordance of critical opinion, sought to position film in line with literature, theatre and classical music by identifying with an “essentially literary and Romantic conception of the artist as the central, even the sole source of meaning in a text”, as Stoddart (1995, p. 39) indicates. Theorist Alexandre Astruc’s 1948 article “The birth of a new avant-garde: la camera-stylo” outlined, as Stoddart (1995, p. 39) goes on to summarise, three important considerations for the approach:

First, that cinema has obtained an equivalence to literature, or any other art form of ‘profundity or meaning’.
Second, that it is constituted through a new and unique language; and,
third, that this situation affords directors a means of personal expression.

Francois Truffaut developed this in his 1948 Cahiers article ‘Une certain Tendence du Cinema Francais’. Truffaut here identified the main problems he saw with French film. Dismissing it as le cinema de papa, and of pursuing a tradition de la qualite, he “accused it of being script-led, redolent of safe psychology, lacking in social realism and of being produced by the same old scriptwriters and film-makers whose time was up”, as Hayward (1996, p. 14) indicates.

The politique advocated a refocus onto mise-en-scene, the visual aspects of cinema, rather than the verbal aspects privileged to date. Following this approach, it would be possible to make both aesthetic judgments about the film, and assign to directors an authorial signature. The politique drew a distinction between auteurs, directors who demonstrated their own creativity and personal stylistic and thematic voice, particularly within the constraints of the Hollywood production system, and those who functioned only as competent practitioners of the technical and organisational aspects of film direction, dubbed metteurs-en-scene. These latter directors, as Stoddart (1995, p. 40) shows “were seen as craftsmen rather than artists, (William Wyler and Fred Zinneman are cited)”. Recognised auteurs included “the likes of Alfred Hitchcock, Howard Hawks, John Ford and Sam Fuller” (Hayward, 1996, p. 15).

Among American film directors, Martin Scorsese may be seen as one who is auteurist. Phillips (2007) deconstructs the 1977 Scorsese-directed New York, New York as a case study of the applicability of a range of theoretical approaches to cinema. For Phillips (2007, p. 17), the “Scorsese auteur structure is assembled deductively from the films Martin Scorsese has directed”; in other words, generalities across a career are deduced, then applied retrospectively back to the individual film text.

Scorsese has collaborated extensively with leading actor Robert de Niro, who is the male lead of New York, New York. Scorsese’s movies typically deal with Italian-American experience and with New York as a setting; elements that are reflected in this text. Many Scorsese-directed films are inflected with crime and gangster genre elements (other Scorsese crime genre films include Mean Streets, Goodfellas, Casino, The Departed); though New York, New York is also generically a musical, there is this thematic subtext to the film too.

Phillips (2007, p. 19) identifies a range of thematic concerns common to other Scorsese-directed films that appear in New York, New York, including: a strong focus on masculinity, on awkward male attitudes towards women, on Catholic guilt, on violence as a flawed solution to problems. Phillips (2007, p. 19) also notes the use of formal aspects of cinema that recur across Scorsese’s films: a quasi-documentary mode of representation, the use of mobile cameras, the interplay of popular music and visuals to create meaning and mood. These kinds of observations may be “amplified by reference to biographical information concerning Martin Scorsese” (Phillips, 2007, p. 19). These include “his Catholic background provid[ing] useful corroborating evidence, and … personal statements such as that in which he says that as a boy he wished to be either a priest or a gangster” (Phillips, 2007, pp. 19-20).

By the early 1960s, the politique des auteurs had fallen out of cachet in France (partly a direct effect of former Cahiers writers like Truffaut, Claude Chabrol and Jean-Luc Godard having turned to direction themselves) , though it was continued in Anglo-American criticism, in British periodical Movie, and significantly, by American critic Andrew Sarris. Sarris developed the French position into what he termed an auteur theory. Sarris sought a “meaningful coherence” between directors as artists and their work (Stoddart, 1995, p. 42). Directorial ability was seen as being comprised of what Sarris saw, according to Mast, Cohen and Braudy (1992, p. 587) as “three concentric circles: the outer circle as technique; the middle circle, personal style; and the inner circle, personal meaning”. These corresponded to the director as technician, as stylist, and as artist respectively. Over time, a director could move through these circles, in either direction, and their status thus diagnosed. Sarris constructed a pantheon of great American directors, among which he listed John Ford, Orson Welles, D W Griffith and Howard Hawks.

Auteurist theories as expressed above are significant in that they examined popular cultural forms with serious scrutiny, though this was done not to understand the popular but what Lapsley and Westlake (1988, p. 107) understand to attempt to “elevate one small section…to the status of high art”. The consideration of mise-en-scene is important in that it laid the ground work for studies of the specifically cinematic. However, as Lapsley and Westlake (1988, p. 109) conclude, there is something perhaps trivial about auteurism, which is both faddish and elitist. There seems to be little engagement with social realities, any examination of cinema’s engagement with the real world is replaced by questions of ranking and relative worth of directors. Questions of the collaborative nature of cinema, of the industrial aspects of commercial film production and exhibition are not dealt with. Similar omissions are made with regard to the role of the audience. At best, auteur theory here sees two types of spectator: the mass audience member who receives the director’s intent without question, and the aware cineaste, who both perceives the intent, and relishes the ways it is conveyed cinematically. Sarris, for example, was criticised (Stoddart, 1995, p. 43) for constructing little more than a personal list of favourites, employing a quasi-rational system that made little objective sense.

Hayward (1996) usefully breaks author-based theories into three phases. The first phase, as outlined above, conceives the author-role as that of the director, and this as being central to the production of meaning. Hayward’s second phase is that of the interaction of auteur theories with structuralism in the 1960s. Hayward identifies a third phase, that of 1970s post-structuralism, which is discussed in the section below.

Author-based theories were allied with French structuralism in the mid-1960s. As Hayward (1996, p. 16) points out, this impetus came not from within film, but from the attentions of semioticians and structuralists, and it was “unquestionably their work that has legitimated film studies as a discipline”. Theorists such as Christian Metz sought to invoke the rational approach of structuralism to counter the romantic subjectivity of auteur theory to this point. The grande syntagmatique that Metz set out in his Essais sur la signification au cinema attempted a totalizing structural theory of cinema. Using Saussure, Metz perceived cinema as a langue, and each individual film as parole. Hayward (1996, p. 16) reminds us that such an all-encompassing theoretical perspective irreversibly overshadows the texts being examined. In addition, aspects outside the theory get ignored, such as “the notion of pleasure and audience reception, and what occurs instead is a crushing of the aesthetic experience through the weight of the theoretical framework” (Hayward, 1996, p. 16). As Cook (1985, pp. 61-2) reminds us, contemporary revisions in both Cahiers du Cinema and the British film periodical Movie sought to refocus the author as one of several structures to be considered in establishing the meaning of film, alongside stars, the industry, linguistic concerns, and social factors. Still unexamined, though, were questions of audience and of ideology.

The third phase Hayward identifies, that of the influence of 1970s post-structuralist thought on the study of cinema, again demonstrates the extent that understanding of film is indebted to theorists from outside film using the medium to exemplify and examine their approaches. Key to this is Roland Barthes’ 1968 declaration of the death of the author. The text, Barthes declared, as King (2002, p. 110) quotes, is:

“not a line of words releasing a single “theologial” meaning (the “message” of the Author-God) but a multidimensional place in which a variety of writings, none of them original, blend and clash. The text is a tissue of quotations drawn from the innumerable centres of culture”

This definitive rebuttal of the romantic ideal of the director as author has been accompanied by a plurality of theories variously combining, according to the individual theorist. Lacanian psychoanalytic, semiotic, Althusserian Marxist, feminist and deconstructivist approaches have all been applied in combination to this end. As King (2000, p. 111) states, an “implicit auteurism remains a convenience for journalism and other film writing and criticism [and] the name of the director remains a potentially useful marketing tool”.

Phillips (2007) examines Scorsese’s filmmaking through three main approaches; auteurist, genre and audience studies, concluding that, in order to most fully understand a film and a director’s work, a range of tools need to be used: “the critical approaches outlined here and applied to New York, New York need to be supplemented by others which explore the relationship between image, sound and their impact on the spectator at more ‘micro’ levels.”

British director Stephen Frears is vocal on the subject of auteurism. Fraser (2010) notes how Frears is reticent to see himself as an auteur, preferring instead to have himself seen, as Fraser reports on BBC executive Alan Yentob’s description of Frears as “the ultimate hired gun”. Fraser (2010) goes on to question if one may “really speak of a coherent style or, indeed, vision, from the man who made, amid some disasters, successful films as various as The Grifters, Dangerous Liaisons, The Deal, and now Tamara Drewe?” The interest for Frears is in the making of films presented to him, rather than exploring personal themes and finding or creating scripts that will permit that exploration. In a recent article (Leigh, 2015) in support of his latest film, the Lance Armstrong biography The Program, this is highlighted, not just by interviewer Danny Leigh, but by Frears as well: “As a young film-maker in the 1960s, [Frears] was amused by the rise of the auteur theory, the idea of directors as visionaries. “I never believed all that rubbish. I haven’t had a vision in my life.””

Auteurist film theories are useful in that they represent a first step towards a theoretical language for cinema, though by themselves they may offer little more than generalities or perhaps an expression of personal preference and taste. The origins of the approach in literature might give auteur theory some initial legitimacy, though it does a disservice to the necessarily collaborative nature of film and of the filmmakers involved in the multiple stages of conceiving, financing, writing, producing editing and distributing a film to its multiple audiences. Though auteurist identifications may be made, and there may be some usefulness in marketing terms to such links, film is perhaps more complicated than this, and required more nuanced study.

Bibliography

Cook, P. (1985) The Cinema Book. London: British Film Institute.

Fraser, N. (2010) Stephen Frears: ‘Audiences aren’t fools – their judgement is crucial’. Available at: http://www.theguardian.com/film/2010/aug/15/stephen-frears-tamara-drewe-interview (Accessed: 4 October 2015).

Dangerous Liaisons (1989) Directed by Stephen Frears [Film]. Warner Bros.

The Grifters (1991) Directed by Stephen Frears [Film]. Miramax.

The Deal (2003) Directed by Stephen Frears [Film]. Granada Productions.

Tamara Drewe (2010) Directed by Stephen Frears [Film]. BBC Films.

The Program (2015) Directed by Stephen Frears [Film]. Working Title.

Hayward, S. (1996) Key Concepts in Cinema Studies. New York: Routledge.

King, G. (2002) New Hollywood Cinema: An Introduction. London: I B Tauris & Co.

Lapsley, R. and Westlake, M. (1988) Thinking About Cinema: An Introduction to Contemporary Film Theory. Manchester, UK: St. Martin’s Press.

Leigh, D. (2015) Interview: Stephen Frears. Available at: http://www.ft.com/cms/s/2/9a1e8f20-6762-11e5-a57f-21b88f7d973f.html (Accessed: 4 October 2015).

Mast, G., Cohen, M. and Braudy, L. (eds.) (1992) Film Theory and Criticism: Introductory Readings. 4th edn. New York: Oxford University Press.

Phillips, P. (2007) Genre, star and auteur critical approaches applied to Martin Scorsese’s New York, New York. Available at: http://cw.routledge.com/textbooks/9780415409285/resources/genrestar.pdf (Accessed: 4 October 2015).

Mean Streets (1973) Directed by Martin Scorsese [Film]. Warner Bros.

New York, New York (1977) Directed by Martin Scorsese [Film]. United Artists.

Goodfellas (1990) Directed by Martin Scorsese [Film]. Warner Bros.

Casino (1995) Directed by Martin Scorsese [Film]. Universal Pictures.

The Departed (2006) Directed by Martin Scorsese [Film]. Warner Bros.

Stoddart, H. (2000) ‘Auteurism and film authorship theory’, in Jancovich, M. and Hollows, J. (eds.) Film Studies: A Reader. New York: Oxford University Press.

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8 1/2

Federico Fellini’s 8 1/2 is one of the early landmarks of postmodernism. (Bondanella, 93-116) If the myth is to be believed, Fellini had signed with producer Angelo Rizzoli to direct something like a sequel to his enormously successful La Dolce Vita. Actors were hired. The crew was ready. And a large set had been built: a rocket launching pad. But where was the story? In early drafts of the scenario, Guido Anselmi (Marcello Mastroianni) had been a writer.

Only when Fellini turned the character into a film director did the elements fall into place. This would be a film about director’s block: about not being able to make a film. About what the scholars call ‘the creative process.’ Weaving together fantasy, flashback, fear, and celebration all orchestrated, as usual, by Nino Rota he achieved an overwhelming international success. (Bondanella, 93-116)

8 1/2 remains the key Fellini movie because it is freer from the tyranny of narrative than anything that came before or since. In the Fifties Fellini had been a storyteller in the neorealist tradition. But that wasn’t his real calling. The meandering plot of La Dolce Vita had given him a more accommodating framework for his collection of gorgeous images, extreme characters, and musical set pieces. In 8 1/2 he is free entirely to organize these quintessentially cinematic tropes in a way that fits the curious logic of cinema (not the demands of narrative.) The film is more like a night at the opera than an afternoon at the movies. (Bondanella, 93-116)

Today, national cinema is on the top. It is producing more and more films based on socio-political circumstances. It’s not the quotes from Rossini and Wagner; its Nino Rota and Fellini. To me, Rota has always been Fellini’s co-auteur. There’s a powerful interplay between Rota’s evocative music and Fellini’s musical images. Both of them use their images and themes over and over, reworking variations in interesting ways. 8 1/2 gives Rota more room to elaborate on Fellini’s visuals than he had had in earlier films. Industrial and economic factors are highlighting major issues in modern films like 8 1/2.

Apart from other international standards, the musical nature of 8 1/2 makes it a perfect candidate for DVD. This is one film, like music, that you want to play again and again. About the only feature missing from this Criterion edition is a random player that would allow you to run through the twenty-six chapters in arbitrary order! I’m not joking: restructuring 8 1/2 would reveal a lot about Fellini’s art. You can see from the DVD’s chapters that the maestro’s unit of thought was the sequence, not the narrative. You could make four smaller films from the material the women, the dreams, the production, the spa. You could reverse the first and last sequences (Guido trapped in the traffic jam, the circus at the spaceship) and it would work, but as a much darker film.

Aside from that random player, not much else is missing from this typically rich and careful Criterion production. It’s a minicourse in Fellini that should keep your evenings occupied for most of the week (even if you watch the film only once).

The commentary track skillfully interweaves three different tracks. There’s no indication who wrote the competent essay read by actress Tanya Zaicon, but Antonio Monda teaches film at NYU and Gideon Bachmann was a longtime friend and colleague of Fellini. A telling line from Gideon Bachmann: Everyone loved being used by Federico. Including myself. Their additions make the commentary track less of a lecture, more a discussion. (The Terry Gilliam introduction is just decoration: the premise was that both he and Fellini started as cartoonists.)

The transfer is up to Criterion’s usual high standard, made from “a 35mm fine-grain master made from the original negative.” (Although I still prefer Criterion’s laserdisc edition but that’s another story.)

The ‘extras’ on disc two are remarkable. Fellini A Director’s Notebook is the documentary he made for television in 1969 dealing mainly with his inability to make The Voyage of G. Mastorna several years earlier: a case of life imitating art (except that producer Dino Di Laurentiis sued Fellini for the expense of the sets that had been built). It is cloying and silly but his only chance to amortize the cost of the Mastorna sets.

The documentary on Nino Rota is essential viewing if you believe, as I do, that Fellini would not have been possible without Rota. (This is a film from German television made by Vassili Silovic.) The interviews with Lina Wertmuller (an uncredited Assistant Director on 8 1/2) and cinematographer Vittorio Storaro (who never worked with Fellini) are both worthwhile.

But the real jewel of the extras is a twenty-six-minute monologue by Sandra Milo. (This is one of the interviews apparently shot especially for the DVD.) Milo played Carla, Guido’s mistress, in 8 1/2, and then had a seventeen-year affair with Guido’s alter ego, Fellini. The interview is an eerie mirror of the forty-year-old movie. Milo paints breathless word pictures of life with Fellini. She didn’t want to make the film, at first. One day Fellini arrived at her apartment with cinematographer Gianni di Venanzo, designer Piero Gherardi, camera, and costumes. We’re here to make your screen test, he announced. Her housekeeper dragged her out of bed to meet him.

A few years later he offered her the role of Gradisca in Amarcord. She describes how the two of them worked out the character on a cold, dark soundstage at Cinecitta in the dead of winter. But her husband wouldn’t let her make the film. The role was eventually played by Magali Noel, imitating Milo (imitating Carla). At the end of these stories she puts a period: This is my story with Federico Fellini. But the camera rolls on. After a few seconds she adds: When I go to Fregene I think I see him among the trees. (Fellini died in 1993.)

A few beats. Her smile crumbles; a tear forms; she sways. Sometimes he calls me, and laughing, he asks me to chirp. (She laughs.) As if I were a bird, and could go on the trees, too! Another long pause. Another false ending. But I cannot tell you more. There is a part, a little secret and mysterious, I believe is for me alone.

She blows us a kiss goodbye. It is a strangely moving moment. ‘Felliniesque.’ I’d like to have seen Sandra Milo play Tosca. You can almost hear her singing the great aria Vissi d’arte, vissi d’amore. (I lived for art, I lived for love.)

With its self-referential quantum psychology, 8 1/2 remains a key postmodern work. But it’s more. With hindsight it also shows us the way beyond postmodernism to a time when sentiment such anathema to modernists and postmodernists alike for a hundred years will return. Like his nineteenth-century paisani Verdi, Puccini, and the other maestri, Fellini/Rota understood the transcendence of celebration: feeling together.

In the last scene of 8 1/2 all the characters in Guido’s life descend from the rocket gantry to the circus ring as he orchestrates them. The last words of the film: “Tutti insieme!” “All together!”

If we look into the roots of national cinema then we may find different cultural traditions on its way. Numerous links between locations in films and their condition today are made. Thus, we see the spot where Zampano abandoned Gelsomina in La Strada (near Ovindoli, a small town eighty kilometers from Rome); the courtyard of the Palazzo del Drago in Filicciano (seventy kilometers from Rome) where Guido and Claudia meet in 8 1/2 Cecchignola Military Reserve (some twenty minutes from Cinecitta outside of Rome), where Fellini shot the scene in which Guido imagines his father’s tomb in 8 1/2 and so forth.

(Bondanella, 93-116) These shots, so precious to the specialist, are unfortunately wasted on the neophyte, since they are never clearly identified in the documentary. Indeed, the individuals interviewed by Pettigrew are not identified for the audience until the end of the film, an unfortunate arrangement of his material that presupposes a great deal of knowledge about Fellini that few of Pettigrew’s spectators will possess.

Nevertheless, the numerous clips of Fellini discussing his work and his esthetics (thankfully uninterrupted by endless journalistic questions and accompanied only by pertinent clips from his works or other comments by his collaborators) provide what one reviewer rightly calls a master class on filmmaking, Fellini style.

Among the topics Fellini addresses are the relationship of reality to fiction (the former is mistrusted, the latter is praised); the question of improvisation (Fellini rejects it, declaring that making a film is similar in its attention to detail to the launching of a rocket ship into space; Fellini does believe in what he calls disponibilita or openness to possibilities on the set that have not been envisioned prior to shooting); inspiration (Fellini has no use for waiting for inspiration, believing that creative artists who do so merely waste precious time in relying upon such a Romantic concept); alienation (Fellini asks how a man can be a film director, a vocation that is akin to being a magician, if he or she lacks faith in the future); imagination (for Fellini, film directing involves a combination of the qualities of a simple artisan and that of a medium); imagery (for Fellini, cinema is first and foremost painterly, relying upon light more than dialog); and esthetics (regardless of whether something is beautiful or ugly, culturally sophisticated or simple, Fellini’s only criterion of value is whether a work of art is “vitale” or alive).

I can think of no better examples than Federico Fellini’s 8 1/2 (1963). Fellini is known even in amateur circles as a filmmaker with a distinctly dark and depressive vision. His work is deeply troubled, preternaturally focused on himself and morbidly preoccupied with death.

This film that I have in mind as a definitive representation of how explicitly existentialist ideas can be expressed in film is Federico Fellini’s 8 1/2, which has been analyzed by Jerry Solomon. Given the capable analysis he supplies in his own study, I will only say a few words here about the character of Fellini’s efforts in film and will direct our attention to Bondanella book for the bulk of what needs to be said about 8 1/2 in particular. Fellini’s Italy is a vibrant and rich artificial landscape, in contrast to the natural picturesque and spare visions of Bergman’s Sweden.

Despite the flurry of activity that is always going on in Fellini’s work, there is no activity, even including, as Bondanella (1992) points out, the activity of directing film, that is intrinsically worthy of pursuit. Instead, Fellini’s characters are busily distracting themselves with useless vanities. Again, as Mr. Solomon has noted, there is in Fellini’s work a fixation on the acute need for choice, for some kind of act, without any solid guidelines for choice. Besides 8 1/2, I would personally recommend La Dolce Vita (1961) as one of Fellini’s films that best represents his concern with the futile and arbitrary choices of man.

His films are gloriously photographed, filled with vibrant images of glamorous and exciting people, whose external beauty and grace conceal their internal emptiness and frustration. (Bondanella, 68-149) He is a master of imagery. La Dolce Vita alone is a lush but pruned arrangement of strikingly vivid visual compositions, from the opening shot of a helicopter airlifting a massive statue of Jesus over Saint Peter’s Cathedral to the closing scene in which an abnormally large fish is dragged onto a beach as some kind of eerie signal of the main character’s final confinement in his own despair.

The world of 1960’s Italy, as Fellini depicts it, is hopelessly superficial, exhausting itself in a frenzied hurricane of champagne bubbles, costume parties, gossip and paparazzi’s flash bulbs. Fellini’s mood is bizarre and frantically upbeat where Bergman is obsessive and morbid. Fellini’s experimentation with the extremely surreal will surpass that of Bergman. Yet, these two, despite their divergent styles, stand together as the greats who understood perhaps more fully than any other film makers the implications of existentialist philosophy for their medium.

Their films are “existentialist” not necessarily because they treat existential themes, but because they benefit from the impact of existentialism on popular culture. As has been indicated many times, existentialism, more than any other philosophical movement, would come to pass out of the hands of the privileged elite and would be claimed by the common man. In so far as this movement took place, film benefits, in that as a medium open to the common man, it is able to continue to bear highly conceptual subject matter to a wider thinking community.

Thus while film in the wake of existentialism may not be existentialist, it is often at the least deeply philosophical in a medium accessible to thinking individuals who may not be formal students of philosophy. Whereas the “existential” films prior to Bergman and were inspired not so much by existentialist thought but by post-war shifts in culture, the “existential” films that follow Bergman and Fellini are not necessarily inspired directly by existentialist thought, but are certainly inspired by Bergman and Fellini and by what existentialism in part stands for, namely, the communication of philosophical ideas to all men.

For many audiences, critics, and film historians, 8 1/2 remains the benchmark film by Fellini, the work that justifies his status as a master and continues to reward the spectator after numerous screenings. Besides a host of awards (including an Oscar for Best Foreign Film) received when it first appeared in 1963, a group of thirty European intellectuals and filmmakers in 1987 voted 8 1/2 the most important European film ever made and, on the basis of this work, also named Fellini as the European cinema’s most important director.

The film occupies an important role in the director’s complete works, not only because of its obvious autobiographical links to Fellini’s life but also because it focuses upon the very nature of artistic creation in the cinema. La dolce vita is the last film Fellini made with obvious mimetic intention: It provides a panoramic view of a society gone wild with press conferences, image makers, paparazzi, and celebrities, and in spite of its ability to create stirring images of an unforgettable character (such as the Trevi Fountain scene, which was indelibly etched into the imagination of an entire generation of moviegoers), its subject matter remains steadfastly connected to the society within which Fellini lived. After La dolce vita, however, Fellini turns toward the expression of a personal fantasy world that often, as in the case of 8 1/2, also deals with the representation of cinema itself in a self-reflexive fashion.

References

Bondanella, Peter. (1992). The Cinema of Federico Fellini (Princeton: Princeton University Press), pp.68-149.

Bondanella, Peter. (2002). The Films of Federico Fellini (New York: Cambridge University Press), pp.93-116.

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European film movements are most clearly understood as part of the cinema of periphery in relation to popular Hollywood productions. In consideration of examples from one European country, to what extent is this an accurate view?

This essay will focus on some of the key movements in British cinema, looking at how they relate to the world of Hollywood. Firstly,I shall look at how British films have found their way into the American and world markets via the London-based company Working Title Films, and to what extent these films are integrated into the Hollywood scene. Secondly, There will be an assessment of the tradition of social realism in British cinema,including the New Wave and Brit Grit movements, and their place in international cinema. Next, I shall look at the documentary movement in British cinema, and its impact on the wider world.

One of the most noticeable movements in British cinema in recent years has been the proliferation of the Working Title Films Company. Founded in London by Tim Bevan and Eric Fellner, Working Title has enhanced the profile of British cinema to an unprecedented extent. The screening of Four Weddings and a Funeral in 1994 proved a turning point in the history of British film, proving vastly popular with American audiences,and subsequent productions from Working Title have helped to cement the place of the British Blockbuster in Hollywood. In this way, British cinema has been able to produce films with international mass appeal, and it is probably fair to say that there are more mainstream British films on at the cinema now than there were fifteen years ago.

However, it is important to consider that,although there has been an increase in the commercial success of British film,it is still arguably seen as a satellite of Hollywood. For instance, even successful British films are often labelled as art cinema. In an article on Shekhar Kapur’s Elizabeth, Julian Hill argues that,

Although it does offer entertainment through a fascinating narrative, the film as a whole is presented in a creative way, owing to the amateurish vision of Kapur. (Hill, 2000)

Indeed, its relationship to Hollywood is entirely coloured by its status as an art film, and by implication, its partly British origins. Bordwell and Thompson argue that any British film of this type would be viewed as art cinema in Hollywood, as art cinema is a term,

used by the US film industry to describe imported films of interest the upper-middle class, educated audiences. (Bordwell and Thompson, 1990)

In this respect, British film is still marginalized in relation to Hollywood. Commercial success has been forthcoming, but the very fact that a film is British in origin leads it to be viewed in different terms to those in which a Hollywood movie is viewed. Even the big blockbusters of the Four Weddings ilk are viewed at least partly as foreign curiosities, and crucially they often try to appeal directly to an American audience, for example, containing a token American character.

One area in which British cinema has perhaps demonstrated greater independence from Hollywood is in the field of so-called social realism films. There have been many movements over the different eras which fall into this category, from the New Wave cinema of the 1950s and ’60s, such as Room at the Top (1958), to the what have been called Brit Grit films, like Nil by Mouth (1997), and this recurring idea of kitchen sink realism forms an important part of the British cinema tradition. Indeed,it has been suggested that all of these movements are a tradition in themselves(Thorpe, 1999, cited in Lay, 2002) It is in this area that, for many critics,the real essence of British cinema is found. It has been argued that the aesthetics of British realism are defined in terms of opposition to Hollywood spectacle. Visual and acting styles were to be restrained, the emphasis was to be on ordinary people in ordinary settings. (Cook, 1996)

In this respect, British cinemais not always a mere satellite of Hollywood, as it also tries to be deliberately antagonistic towards Hollywood ideals. Unlike many of the Working Title films, with their quasi-American leanings and their use of a highly stylised Britishness, some social realism has sought to challenge this position. For example, in Trainspotting the audience is introduced to a much darker vision of Britain, and one less obviously palatable to Hollywood audiences, than that which is seen in Four Weddings and a Funeral. At first glance, one could argue that much British realism is so idiosyncratic as to be marginalized in the wider world, but films like Trainspotting and The Full Monty show that it is possible to make a film depicting ordinary British life that has mass appeal.

However, although this form of cinema apparently demonstrates an indifference to Hollywood conventions, as cook notes above, it is actually not indifference but a form of rebellion. In this sense, British social realism as a part of international cinema can be seen as still subservient to Hollywood, albeit in a more subtle way than some of the other blockbusters. In order for it to be deliberately antagonistic toward the ideals of Hollywood, it is necessary that those ideals must exist,and in that sense, social realist films are peripheral to Hollywood as they fulfil the role of a counter-movement.

Alongside realist fiction, a major area of British cinema is the documentary. Arguably Britain’s major contribution to world cinema, its heyday was in the 1930s. The documentary movement was headed by John Grierson, and funded by the film units of the Empire Marketing Board and the General Post Office. Through landmark productions such as Housing Problems (1935), the movement used its state backing, and freedom from commerce, to highlight many of the social problems of its day, and has been identified as the first movement to have a lasting influence on the art of film (Rotha, 1972). Like the fictional forms of social realism, it demonstrated a freedom from, and to some extent an aversion to, the ideals of Hollywood. However, unlike other forms of social realism, it is often criticized for its lack of aesthetics.

There was no consistent artistic theory underlying the movement; the film art was to be used as a means to apolitical end. (Guynn, 1975)

In this sense, then, not only is there the consideration of the documentary movement being antagonistic to Hollywood, but also the fact that it lacks artistic drive means that it can only form part of a balanced view of cinema. The art of film making is certainly able to deliver important views and to comment on the state of the world, but it is ultimately an art, and in this aspect the documentary movement, as we have seen, was lacking. Therefore, it must necessarily be peripheral since it does not engage the full potential of its genre, rather in the way that apolitical pamphlet usually shows less artistic development than a poem or a novel. In the light of this consideration, one could view the documentary movement and its legacy as a marginal aspect of cinema – an important marginal aspect, even a necessary one, but nevertheless something that exists as a useful sub-genre and therefore is secondary to Hollywood.

In conclusion, it does seem that British cinema is to some extent peripheral to Hollywood. Working Title films have in recent years brought British films into the Hollywood mainstream, but many of the films have contained an Americanised element, or have been seen as art cinema. In this way, even hugely popular British films are in a sense marginal. Social realism has provided an avenue in which British cinema has been able to shrug off Hollywood ideals in favour of showing ordinary people’s lives, and many films of this type have been successful overseas. However, in rebelling against Hollywood in this way, such films can be viewed as peripheral to it in an antagonistic sense. Similarly, the documentary movement rebelled against Hollywood to some extent, and the movement’s international importance is undoubted, being described as Britain’s major contribution to world cinema. However, its lack of an artistic aesthetic makes it necessarily marginal in the world of cinema. Film is, at bottom, an art form, and any movement that neglects the artistic element in favour of a political message can only ever be a marginal – if important – part of the whole.

British cinema then, when viewed in an international context, is always peripheral to Hollywood. It is doubtless an important part of world cinema, and has made invaluable contributions to both the art of film and to the tradition of reportage through film, but the dominance of Hollywood in the international scene means that any movement that is outside it is, as a matter of course, a comparatively minor player in world cinema.

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In 2004, the American film-maker Morgan Spurlock made a documentary film “Supersize Me”. Produced in response to the unsuccessful legal suits against McDonald’s fast food, the film brings to light Spurlock’s own experiment with eating fast food and, above all, addresses those Americans who are obsessed with unhealthy fast food. The film-maker conducted the experiment for a month, during which he ate food only from McDonald’s and observed the impact of fast food on his physical and emotional well-being. The more he ate in MacDonald’s, the more side-effects he experienced, including depression, fatigue, sexual problems, headache, and chest pain. The camera captures all emotional and physical changes which occur in Spurlock. The film-maker cooperates with three doctors (a gastroenterologist, a cardiologist, and a general practitioner) who indicate the changes in his physical and psychological state (Sheehan, 2005, p.69). However, the principal idea to which Spurlock constantly returns throughout his documentary is that McDonald’s fast food increases obesity in the United States (Sheehan, 2005, p.68). As is shown in the documentary, the weight of Spurlock before the experiment was 84 kg. In a period of one month, his weight increased up to 95 kg (Lusted, 2008, p.33). In addition to the weight increase, his cholesterol level changed from 168 to 230 (Sheehan, 2005, p.69). Observing such a damaging impact of fast food on patient’s health, the doctors recommended Spurlock to stop eating fast food in McDonald’s.

Although a low-budget documentary (with a budget only $65,000), “Supersize Me” has acquired great popularity among the national and international public due to its crucial social commentary on the issue of increasing obesity (Baym and Gottert, 2013, p.159). Spurlock’s film consists not only of his own reflections and investigations, but also of a series of interviews which he took in the process of experiment (Day, 2011, p.116). Through his interviews with nutritionists, gym teachers, doctors, lawyers, cooks, and other experts, the film-maker attempts to gather diverse views on fast food eating and the fast food culture of modern America. In addition to the interviews, Spurlock also spreads a survey among children and finds out that they know perfectly well who Ronald McDonald is and know nothing about Jesus or George Bush. As is shown by Spurlock, McDonald’s encourages children to eat fast food by organising birthdays and giving children free toys with its Happy Meals. To make his film more vivid, interactive, and factual, Spurlock uses cartoon animation (e.g. when showing how McNuggets are produced), statistics, and graphics (Day, 2011, p.116). Some statistical data are rather disturbing; for instance, the evidence gathered by the film-maker suggests that over 60 percent of Americans suffer from obesity and diabetes because of eating unhealthy fast food (Fazekas, 2005, p.144). Besides, 10,000 fast food advertisements are shown on television annually, attracting attention of not only adults, but also children (Fazekas, 2005, p.144).

Throughout the documentary, the film-maker employs the shock techniques to evoke powerful emotions and reactions in his viewers. For instance, he depicts liposuction surgery, his own vomiting during the second eating of McDonald’s meals, the numerous images of obese Americans, and school children’s addictive ingestion of harmful food. Spurlock also constantly returns to his own fast food addiction, demonstrating that he feels good only when he eats McDonald’s food. While at the beginning of his experiment Spurlock looks and feels healthy, his physical and emotional state becomes worse with the progression of the experiment. Spurlock’s girlfriend acknowledges that he smiles less than before, has sexual dysfunction, and depressive moods. Spurlock also demonstrates his own fears over the health problems which occur during the experiment. For instance, he depicts that one night he wakes up because of his inability to breathe. He is so afraid of this side-effect that he doubts whether to continue the experiment that threatens his life. However, Spurlock decides to finish the experiment even at the expense of his physical and emotional health. At the end of the film, Spurlock shocks his viewers by stating that he restored his physical and emotional health for about 14 months. He also shows a tombstone for the clown Ronald McDonald and asks his viewers: “Who do you want to see go first, you or them?”

In addition to the use of shock techniques, the film-maker also uses comparative techniques. For instance, he contrasts American schools with fast food meals and soda machines to a school for troubled teenagers in Wisconsin where fast food was substituted for natural food (Fazekas, 2005, p.145). As Spurlock demonstrates, this food change has positively influenced children’s emotional well-being and behaviour. The film-maker gathers people’s opinions and visits McDonald’s restaurants not only in Manhattan, but also in other American cities, such as Texas and California. By using both shock techniques and comparative techniques, Spurlock makes an attempt to engage the public into a dialogue on the issue of fast food eating. He also encourages parents to reconsider their children’s eating in McDonald’s and their own responsibility for children’s healthy development. As Spurlock clearly shows in his documentary, parents are responsible for developing healthy eating habits in their children; otherwise, the consequences of their neglect will be detrimental for their children.

In addition to parents’ irresponsibility, Spurlock also speaks against constantly increasing advertising of fast food. Although McDonald’s claims that the company does not bear responsibility for people’s decision to eat fast food, it spends billions of dollars on advertising its products (Fazekas, 2005, p.144). To make things worse, Spurlock compares the amount of money which fast food companies spend on advertisements to the amount of money which healthy food organisations spend on advertisements. The figures he brings to the fore clearly demonstrate that the budget of healthy food organisations is significantly lower than the budget of fast food companies. In addition to his appeals to parents, advertisers, and the general public, Spurlock also appeals to the American government which fully neglects the reasons for people’s visits of McDonald’s and consumption of unhealthy fast food. For instance, he shows the community which has no playground for children; hence, parents go to McDonald’s because it has a playground. In other scenes, the film-maker focuses on school meals, demonstrating that schools often purchase fast foods for children because it is cheaper to buy fast foods than to prepare fresh meals. In view of such limited choices, children have to consume fast food instead of consuming healthy food. All these examples mentioned in Spurlock’s documentary signify that both the government and educational establishments maintain the fast food culture to gain their own profits.

Spurlock’s documentary consists of several sections, each of which brings to light a new factor for his criticism of fast food eating. The film-maker often employs humour and satire in his discussion of a serious issue. On the one hand, this makes his documentary significantly entertaining. On the other hand, Spurlock succeeds in producing a black comedy which heavily relies on the elements of comedy to spread some crucial messages. This is especially evident in the scene when the American family tries to perform the Pledge of Allegiance near the White House, but forgets the words and starts singing McDonald’s song. Although such scenes evoke laugh, they also make people think. Spurlock intentionally introduces funny elements to destroy people’s barriers and encourage them to perceive crucial information. As “Supersize Me” has clearly shown, such a technique is really successful as people tend to create barriers to somebody else’s views and opinions; they tend to perceive these views with caution and distrust. However, when views and opinions are presented in a light, funny, and entertaining manner, people are more willing to accept them and, more importantly, believe the speaker. The film-maker also integrates music (e.g. Fat-Bottomed Girls by Queen) and new phrases (such as McStomach Ache or McTwitches) into his documentary to create appropriate mood and atmosphere. Besides, Spurlock pays great attention to details (e.g. a hair in his food), uses entertaining pictures when changing the scenes, and effectively combines video and graphics. The use of all these techniques signifies that Spurlock attempts to produce not only a reflexive film, but also a highly experimental and dynamic film. Due to a masterful juxtaposition of techniques, Spurlock gradually engages viewers into the discussion.

However, instead of providing a balanced standpoint, the film-maker expresses a significantly biased view on popularity of fast food eating in the United States. As such, the results of Spurlock’s non-scientific experiment can be exposed to some criticism. For instance, Guy Russo, the chief executive of Australian McDonald’s, opposed the view expressed by Spurlock by claiming that people do not eat fast food every day for three times (Gumbel, 2004, n.p.). Russo also criticised Spurlock’s decisions not to do physical exercises and double his usual food intake during the experiment. In his viewpoint, such irresponsible and extreme actions, but not fast food eating had detrimental effects on Spurlock’s physical and emotional well-being (Gumbel, 2004, n.p.). Klosterman (2006, p.65) points at the fact that Spurlock exaggerates the negative impact of fast food on his health because it is impossible to “sell a movie about eating fast food and feeling fine”. Klosterman (2006, p.65) also asserts that instead of putting the blame for eating fast food on an individual person, Spurlock puts the major blame on McDonald’s and the American government. However, in the viewpoint of Klosterman (2006, p.66), McDonald’s only gives “people the product they want”.

Despite the mentioned critical comments, Spurlock has succeeded in producing a very important documentary which questions increasing popularity of fast food eating and makes the public and the American government reflect on the issues of unhealthy food and obesity. The film-maker has taken active steps in recognising a serious problem and in stirring up people’s emotional responses to the problem of unhealthy fast food and obesity. Throughout the documentary, Spurlock tries to convince viewers that fast food is a really bad choice; by bringing to light his recollections of childhood eating habits (e.g. when his family gathered together and ate home-made food), the film-maker demonstrates that such eating habits are significantly healthier and benefit children more than visits to McDonald’s restaurants. As for Spurlock’s biased views on fast food eating, it is necessary to take into account that the film-maker attempts to produce a point of view documentary which draws on the subjective approach and “is strongly skewed toward a certain viewpoint” (Lees, 2010, p.99). According to this distinct viewpoint, it is not only unhealthy menus of McDonald’s and other fast food restaurants that pose a threat to the physical and mental well-being of children and adults, but the impact of fast food culture on people’s values and lifestyles. Spreading fast food culture throughout America, corporations serve their own interests, while fully neglecting the needs and interests of common people.

Although McDonald’s fast food is inexpensive and tasty, the excessive consumption of this food (as Spurlock has clearly shown in his documentary) may be poisonous to the body of an adult, let alone to the body of a growing child. Spurlock’s decision to focus on McDonald’s restaurants does not mean that the film-maker has a personal dislike for McDonald’s. His choice is explained by the fact that McDonald’s is the largest company in the American fast food industry. Hence, by attacking McDonald’s, Spurlock expresses his criticism of the whole fast food industry which manipulates people and makes them develop unhealthy eating habits. Although at times Spurlock turns to exaggerations, his documentary is perceived as a realistic account of the situation with American fast food eating. The film-maker intentionally exaggerates some facts to accentuate the seriousness of unhealthy eating and obesity. In response to Spurlock’s documentary, McDonald’s has diversified its menu with some healthy food and has taken away the supersizing option (Sood, 2004, n.p.; Lusted, 2008, p.34; Baym and Gottert, 2013, p.159). Moreover, McDonald’s has also started to provide information on fat content and calories so that McDonald’s visitors can decide for themselves what to eat. As such, Spurlock’s film has inspired slight changes in the American industry of fast food.

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Klosterman, C. (2006). Chuck Klosterman IV: A decade of curious people and dangerous ideas. New York: Simon & Schuster.

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Lusted, M. (2008). Obesity and food policing. Edina: ABDO Publishing.

Sheehan, M. (2005). Supersize Me: A comparative analysis of responses to crisis by McDonald’s America and McDonald’s Australia. In: C. Galloway & K. Kwanash-Aidoo (Eds.), Public relations issues and crisis management (pp.67-80). Melbourne: Thomson Social Science Press.

Sood, S. (2004). Weighing the impact of Super Size Me. Alternet, 29 June. Available from: http://www.alternet.org/story/19059/weighing_the_impact_of_%26%238216%3Bsuper_size_me%26%238217%3B [Accessed 18 April, 2015]

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Changing image of Asian women – why these changes have occurred and investigate the effect Western fashion imagery has on Asian women.

A recent and rapidly-developing trend among an alarming number of Asian women has become a major focus of attention: the lengths to which they will go in pursuit of beauty or rather, the Western version of it. Growing numbers of Asian women are relying on artificial procedures to alter sometimes temporarily, sometimes permanently their appearances to fit an unrealistic Western ideal.

At one end of the spectrum are quick cosmetic applications which may or

may not have lasting side effects. At the other end are surgical procedures, ranging from minor to major, all of which pose varying degrees of risk. Whatever the procedure from applications of skin-lightening chemicals to permanent changes in tissue and bone structure, one message is very clear: white features continue to be the prevailing ideal, and for many Asian women, achieving this ideal is a goal to be attained at any cost.

All of these processes from the temporary, relatively benign ones to the riskier, sometimes life-threatening procedures are actively promoted by the fashion industry. Ubiquitous advertisements link professional and personal success to women with Western, or Caucasian, features, along with a not-so-subtle message that to succeed, one must follow this Western paradigm.

Furthermore, these procedures are tacitly condoned by a society which allows them to proliferate a society which allows its members to fall victim to these pressures to conform to an ideal of beauty that is unrealistic, unattainable, and of questionable worth.

In their attempts to achieve this goal, Asian women risk physical health, mental well-being, and financial security often to the detriment of the lives of the friends and family who surround them. This dangerous trend must be put to an end, and that will not happen while the fashion industry continues to promote the value of Caucasian features to non-Caucasian individuals, particularly women.

This paper will explore the factors that cause Asian women to feel pressured to conform to the Western ideal of beauty, as well as the cosmetic and surgical procedures they resort to in this pursuit. Finally, it will explore the complex issues raised by these societal pressures, and suggest that the key to change lies within the psyche of the Asian woman.

Body Modification: A Historical Perspective

Modification of the female body is nothing new; women have willed themselves to meet the prevailing modes to satisfy societal standards for years. Body modification has been practiced in a number of ways and for a variety of reasons since ancient times; it has existed on many levels for thousands of years. Historical evidence suggests that, as many as 20,000 years ago, red dye extracted from hematite was used to paint and decorate the body.

After that, archaeological evidence proves that as many as 10,000 years ago, parts of animal bones, animal teeth, and colourful stones were used as adornments. The first hair grooming objects appear to have been combs, the earliest of which date back to nearly 5,000 years ago. As for mirrors, ancient people observed their image as it was reflected in pools of water. This, however, changed when the first mirror is believed to have been invented, approximately 4,500 years ago (Yaghmaie, 49-52).

Society has progressed since those early days. One need only turn on the television or leaf through a magazine to be bombarded with all kinds of advertisements for body modification. Chemical treatments can straighten hair and change skin tone and texture. Surgical procedures can decrease or (more often) augment breast size. Unwanted fat can be removed in any number ways, ranging from dietary changes to liposuction. Some signs of ageing can be temporarily reversed with injections of Botox; others can be permanently altered, again through surgery.

Body Modification Across Cultures

Today in the Western world, body modification is widely practiced in all classes of society, often as a result of societal pressure to achieve perfection. However, this is not an issue unique to Western cultures: physical appearance matters across cultures, across ages, across genders. Hence, we see that Asian cultures are just as immune to societal pressures to conform.

Lisa Takeuchi Cullen points out that in the past, Asia had lagged behind the West in catching the plastic surgery wave, held back by cultural hang-ups, arrested medical skills and a poorer consumer base. However, it is now clear that cosmetic surgery is enjoying increasing popularity. According to Cullen:

In Taiwan, a million procedures were performed last year, double the number from five years ago. In Korea, surgeons estimate that at least one in10 adults have received some form of surgical upgrade and even tots have their eyelids done. The government of Thailand has taken to hawking plastic surgery tours. In Japan, non invasive procedures dubbed ‘petite surgery’ have set off such a rage that top clinics are raking in $100 million a year.

Thus, Asian women, including those living in their native countries as well as those in the Western world, have begun to respond in increasing numbers to the pressures of fashion. As a result, they may subject themselves to a range of procedures, pay exorbitant fees, and suffer both mental and physical pain. As Cullen points out, Asians have always suffered for beauty:

Consider the ancient practice of foot binding in China, or the stacked, brass coils used to distend the necks of Karen women. In fact, some of the earliest records of reconstructive plastic surgery come from sixth century India: the Hindu medical chronicle Susruta Samhita describes how noses were recreated after being chopped off as punishment for adultery.

Current practices embraced by Asian women indicate that pain continues to remain an inherent element in their quest for physical perfection. Phoebe Eng discusses this in Warrior Lessons: An Asian American Woman’s Journey Into Power, explaining that operations like eye-lifts have become as common as root canals: They are the most frequently occurring plastic surgery procedure among Asian women in America.

In fact, Eng notes, eye-lifts are so accepted among Asian women in cultural hubs like Los Angeles that it is not uncommon for women who have had them to let friends know proudly where they got theirs done, and for how much, and by whom (119). The second most common procedure is nose build ups, in which a section of ear cartilage, bone or plastic is surgically inserted to enlarge the nose (Eng,1999, 118-119).

One of the major body issues concerning Western women is weight but this is one issue that plays a subordinate role for Asian women. According to Eng, the more prevalent issues seem to involve the facial features that make us indelible and patently ‘Asian,’ and therefore different. Facial features, asserts Eng, are what most clearly and uncomfortably place Asian women outside the concept of an American ‘norm’ (121). Once outside this norm, the Asian woman is seen as foreign and exotic, and all that implies (Eng 121).

But what lies behind this fixation on physical attributes? Eng asserts that the definition of us as a group, whether we like it or not, bonds us more by our faces than by any particular shared set of perspectives.. She asserts that Asian women are defined, by themselves as well as by others, by a set of common physical features, and that they are define more by physical appearance than by any single set of historical experiences or political agendas (122).

Thus the very features that highlight Asian women, that make them stand out as separate and unique, ultimately end up being divisive and destructive. Instead of celebrating the shared features that draw them together, many Asian women opt to instead modify them. They do this in a number of ways, and with varying success, and often with less than satisfactory results but always start out with the same ultimate goal: to break free of the physical ties to their heritage, and in effect to other Asians, in order to become more acceptable in Western society.

Eng also points out that unlike other minorities such as blacks and Latinas, Asian American women do not have a strong sense of cultural identity that might give them a firmer inner sense of their own beauty and a self-respect that goes beyond appearances (122-123). Lacking this, they are more vulnerable to the over whelming outside pressures of society and of their own strong desires to succeed.

Our solution up till now has been to obliterate the differences either through attempts at assimilation or, more extremely, by cosmetic alteration, asserts Eng. In this way Asian women fail to develop a framework for appreciating physical differences, so that the onus of change is societal rather than individual (Eng122).

Cosmetic Alteration: Skin Tone

Eng followed a survey conducted by an Asian-based lingerie company and reported the results as follows:

Beijing women (already tall by Asian standards) want to be even taller.

Taipei women want to be curvier they seek the classic hourglass figure.

Hong Kong and Singaporean women lean towards breast augmentation.

Bangkok women want wider hips.

Despite these differences, Eng informs us, there was one consistent wish by all Asian sub-groups: everyone wants to be lighter (126).

According to Eng makeup companies in Asia capitalize on deep-seated Light Skin Worship, marketing skin-bleaching products like UV White and Neo white (126).Advertisements for these creams generally feature a Caucasian woman basking in a halo of light, looking upward, saintly and pure (Eng 126). UV White, available only in Asia, is a much sought-after product by Asian women not only those in Asia (where the product is widely available) but also in the U.S. (where it is not).

The desire for lighter skin is so deeply ingrained that it need not be advertised. The text below, from an advertisement for Neowhite, a Fairness Cream by Avon, does not sell the concept of lightening. Rather, it focuses on the advantages of this particular product, assuming the desire to lighten the skin is a given:

Neo white is formulated to whiten skin without the known harmful side effects of lesser brands. . . .There are two Neo white creams Fairness Protection Cream formulated with effective sunscreen (SPF 15) and moisturizers to keep skin fair and soft and Moisturizing Pearl Cream which his a combination of moisturizer and light tint that provides the skin with moisture and a natural, even skin tone. (125).

The language of this advertisement is clearly designed for the upwardly mobile, appealing to their desire to change their appearance while satisfying their concerns about possible harmful effects to the skin.

Despite the price, skin care products that boast whitening properties continue to sell, and advertisements for them are ubiquitous. Consumers will be willing to spend on premium products as long as these products are able to deliver the required results, and at greater convenience, notes Luann Theseira, adding that sales of super premium products remain largely unchanged despite their prohibitive costs.

Eng also points out that whiteness also comes at a price, reiterating the connection between privilege and complexion (127). However, it may be argued that the cost goes far beyond the monetary amount of the product or service purchased; it is impossible to place a price on the physical and psychological pain suffered.

Cosmetic Alteration: Focus on Eyes

Using makeup to enhance one’s eyes is hardly a novel concept. As noted earlier, this practice has been in effect since ancient times.

Skilful use of shading can disguise perceived flaws and accentuate strong points; it can create, or at least enhance, the appearance of desired illusions, even if the effects are fleeting. It is a well-established practice. However, items such as glue and tape are not normally found in the makeup bags of Western women at least not as eye treatments.

Makeup routines for Asian women who want to change the appearance of their eyes to mimic Western eyes will probably contain at least one of these items. Glue, or tape, are often used to hike up the eyelid….the skin stays folded for most of the day. Some Asian teens say they do this to make their eyes look bigger and prettier. Others would simply say it makes them look more Caucasian (Valhouli).

Cosmetic Alteration: Permanent

In Making the Body Beautiful: A Cultural History of Aesthetic

Surgery, Sander Gilman states that Asian-American women, whose ‘blank’ look is equated in American society with ‘dullness, passivity, and lack of emotion, ‘have ‘their eyelids restructured, their nose bridges heightened, and the tips of their noses altered’ (99).

In some Asian cultures, the acceptance of any surgical procedure at all is a relatively recent development. The traditional Chinese prohibition against opening the body limited all forms of surgical intervention until fairly recently (Gilman 99).Modern medicine in China is in many ways Western medicine combined with traditional methods.

In Japan, plastic surgery was not even recognized until 1975, and then only for reconstructive purposes. It was not until 1978 that aesthetic surgery elective plastic surgery was sanctioned as an acceptable subspecialty (Gilman 100). However, procedures to correct the shape of the eye had been performed on a frequent and regular basis since the end of the nineteenth century. These procedures were considered, significantly, to be within the bounds of official medical practice.

In the 1930s,Gilman explains, American surgeon Henry Junius Schireson claimed that the shape of the Japanese eyelid actually impaired proper vision a claim that was totally false. However, it is significant in that it reflects again the view of Asian features as somehow inferior and in need of correction. The claim that the eyelid form has a negative impact on sight is nonsense, asserts Gilman, but he concludes that it was clearly evident that the focus of the surgery was to create beautiful women beautiful according to Western standards (102).

After World War II, with the American occupation of Japan, there was a renewed interest in surgical procedures which would transform Japanese eyes into Western eyes. It was just a matter of time before the number and range of surgical procedures increased throughout Asia to include other types of physical enhancements, particularly breast augmentation. Again, here, as Gilman notes, this responded to the introduction of the Western notion of the larger breast as a sign of the erotic (103).

Dr. Ichiro Kamoshita, director of Japan’s Hibiya Kokusai Clinic, believes that the prevalence of this type of elective surgery is a direct result of the massive advertising efforts of aesthetic salons. The advertising encourages inferiority complexes in Japanese women of all ages in fact, surgical procedures in adolescents are rising in number. There is now a pattern of presenting procedures as gifts from patents to children, especially those seen to be ‘hindered by small eyes, a flat nose or a big face’ (Gilman 104). Use of the word hinder is quite telling here; the notion that Japanese features will impede an individual’s future accomplishments is practically a given.

Cullen notes that in Asia, surgically enhanced beauty is both a way to display wealth and a tool with which to attain it. However, advertisers continue to lure those who are less wealthy. Individuals who have strong aspirations to get ahead often succumb to the promise of upward mobility that is not-so-subtly implied in these advertisements. It is not uncommon for individuals to take out loans or empty savings accounts in order to finance these procedures. The rationale for paying such exorbitant fees is based on their belief that this will help them get ahead. Often they believe this is the only way they will get ahead.

Sexual allure is also part of the advertising package: just as Asian faces require unique procedures, their bodies demand innovative operations to achieve the leggy, skinny, busty Western ideal that has become increasingly universal (Cullen). A surgeon in Seoul, Dr. Suh In Seock, has struggled to find the best way to fix an affliction the Koreans call muu-dari and the Japanese call daikon-ashi: radish-shaped calves.

Liposuction has proven to be ineffective in changing the appearance of the calves of Asian women the way it does for Western women, since the tissue to be removed is mostly muscle, not fat.

Rather than accept thick calves, some Asian women will resort to the type of surgery Suh now performs exclusively. The procedure involves severing a nerve behind the knee; this, explains Suh, will eventually cause the muscle to atrophy, “there by reducing its size up to 40% (Cullen).

The most drastic form of surgery, it may be argued, is a surgical procedure that actually increases the patient’s height. In a Time Magazine feature, it was explained that this procedure originally developed in Russia to help patients with legs disfigured by accidents or birth defects, such as dwarfism (Beech, 2001). Though in Western hospitals the practice is limited to cases in which it is explicitly for medical conditions, in Asian countries it has become a popular and profitable procedure.

Despite the exorbitant fees, the considerable risk, the lengthy recovery time, hospitals and clinics that provide this procedure often have waiting lists of a year or more. The procedure is particularly popular with individuals who aspire to professions for which they do not meet the height requirements. In addition, it is clear that increased height is sought by those with strong drives to get ahead, particularly in Western societies. Yet this may be seen as yet another way and a drastic one at that in which Asians respond to the pressure to appear more Western.

Some who have studied overseas felt inferior because of their lack of stature the article points out. A surgeon at a Beijing hospital explains that for individuals who feel disadvantaged because of their height, “for them, the main purpose of the operation is not to improve their physical health…it is to help their psychological growth [Beech].

However, the value of such drastic surgery as an antidote to feelings of inferiority is fraught with ethical issues. The fact that many will resort to such drastic measures to have an equal footing in society speaks volumes about the tremendous pressure placed on women to meet unrealistic ideals. It is also a telling statement about the power of advertising in not only shaping but reinforcing these beliefs. In the larger framework of society, this has ominous implications for the future.

Social, Legal and Moral Issues of Cosmetic Alteration

Doctors Bennett Johnson and Ronald Moy explain that cultural traditions and resistance often have a profound psychological influence on the non white person who is contemplating cosmetic surgery, and these changes can be far-reaching. Changing ethnic appearance (e.g., ‘Westernization’ of the Asian eye lid or reduction cheiloplasty in blacks) can cause feelings of guilt (Johnson & Moy, 245).

The decision to choose surgical body modification may in fact affect the entire family, particularly older family members who are less willing to understand or accept the need to conform to Western ideals: because elders play a dominant role in many non white societies, their acceptance or rejection of cosmetic procedures has a psychological influence on the ethnic patient (Johnson & Moy 245).

The fact that so many women continue to opt for elective surgery is especially frightening when considering the possible complications. As Johnson and Moy assert:

Complications are not uncommon with blepharoplasty in Asians; up to 10% will require revision procedures. Complications that are of special concern with blepharoplasty in Asians include eyelid asymmetry, loss of the palpebral fold, laxity of pretarsal skin, retraction of the upper eyelid, hypertrophicscars, and excessive fat removal (257).

Eng, too, writes of the side effects, which can sometimes be quite drastic, that can result from botched surgeries or infections. The procedures are more risky and complicated than beauty magazines and friends’ accounts let on, asserts Eng, citing post-surgical infections and permanent scars as the most common. In some cases, operations to re-contour the jaw line can cause the jaw to weaken to the point that it becomes difficult to even chew.

And like any invasive surgery, the months that follow can be uncomfortable and chock-full of antibiotics, as the body attempts to heal (Eng119).

The legal complications that result from surgeries which fail to produce the desired results are incredibly complex. The complexity is further deepened by the murky psychological and social issues involved in both making the decision and following through on it.

Surgeries which not only fail to fulfil expectations, but also result in additional pain and suffering, are even more complicated, as well as emotionally-charged. The financial losses individuals, and sometimes their families and friends, are burdened within the wake of these procedures, are rarely compensated. Part of the problem, notes Cullen, is that, unlike the medical malpractice suits in the West, legal recourse in Asia is much more difficult to obtain. Most Asian lawyers avoid malpractice cases, writes Cullen, since so few result in victory and financial payoff.

Cullen asserts that it is the bargain-hunting instinct that leads patients astray, tempting them to use unqualified cosmetic practitioners. However, bargain rates are still exorbitant sums to individuals who pour their life savings into something they view as an investment in their future, and the future of their children. People who pay high prices in the attempt however misguided to further their success, often disregard the risks that accompany the procedures. Driven to succeed, they are compelled to move on, fully cognizant of and choosing to ignore the risks.

According to Cullen, elsewhere in Asia, this explosion of personal re-engineering is harder to document, because for every skilled and legitimate surgeon there seethes as warm of shady pretenders. As an example, she cites Indonesia, which has a mere 43 licensed plastic surgeons registered yet which somehow manages to perform 400 illicit procedures each week in the capital city.

Another example Is Shenzhen, China, which Cullen describes as a boomtown housing thousands of unlicensed “beauty-science centers.”

These centers cunningly target the upwardly mobile and openly vulnerable to market a new pair of eyes or anew nose as the perfect accessory to their new cars and new clothes. The ease and immediacy of access increase the probability that women will succumb to the pressure to undergo risky procedures in questionably safe environments, and there is little recourse available to them if the procedures fail, or worse, cause additional harm.

Conclusion

These murky legal issues will demand to be addressed eventually. Many believe that strict government regulations, faithfully and consistently enforced, will be the only controls on this highly-profitable industry. However, considering the fact that this industry is so profitable, government regulation will probably be along way off. In the meantime, the government’s inaction suggests a tacit approval. This approval only serves to help the proliferation of unethical, unsafe surgery centers, and it further reinforces the negative messages that women are already bombarded with through advertisements.

Indeed, these issues are far-reaching; steeped in cultural taboos and mired in medical complications, the root of the problem is often obscured. The plain and glaring truth, however, is that risky procedures are continually undertaken by Asian women, often with tragic and irreversible consequences, physical and psychic damage, and considerable financial loss.

Benignly disguised in the language of self-improvement, the fashion industry continually bombards them with the message that this is what they must do to fit in. Essentially, the message that is so powerfully reinforced is that in order to get ahead, they must change who they are…if you are an Asian woman who wants to succeed: this is your last resort.

Large numbers of Asian women continue to cling to this belief that assimilation of Western features will facilitate their advancement in the world; that it will make them sexier, more successful, and of course more content. The lengths to which some of them will go to achieve this are frightening on a number of levels, as demonstrated here. It has also been made clear that selling the concept of Westernization is a profitable business: industries promoting it are largely unregulated by government, resulting in gross abuses and often tragic results.

The key to change, then, lies within the psyche of the Asian woman. More and more Asian women are becoming aware of the manipulative methods and subliminal messages that they are bombarded with on a daily basis. This awareness is what will give them the power to decide not to buy into an unrealistic and unattainable ideal, and to take charge of their bodies and their futures.