Econ. 532

Spring 2000

Business Economics

Instructor Class time and place

David A. Hennessy Tuesday and Thursday 2:00­3:25 pm

478B Heady Hall 160 Heady Hall

Phone: 294-6171

E-mail: hennessy@iastate.edu

Office hours: M, Tu, W, Th, F 10:00­11:00 am

or by appointment. Please feel free to use e-mail

when you find it more convenient than a meeting.

Course Objectives

This course is concerned with strategic management for businesses. Strategic management is a primary task of the manager/entrepreneur, the person responsible for the success of the business as a whole. This course will present and discuss economic concepts and frameworks that should be useful to the manager/entrepreneur in formulating, analyzing, and implementing strategy. The intended outcome of the course is to enhance a flexible, thought-based approach to tackling business problems. The student who completes this course should be able to apply to business situations the economic approach to posing and analyzing problems. More concretely, the student should

• Understand how markets work, how they affect the overall economic welfare of society, and why they may sometimes fail to do so.
• Appreciate the role of prices as incentive mechanisms.
• Apply graphical analysis when posing problems faced by strategic managers.
• Understand the impacts of supply-side, demand-side, and institutional/legal constraints on the level and distribution of economic welfare.
• Identify the boundaries of the firm; that is, a) the size of the firm, and also b) which activities the firm chooses to do for itself and which it leaves to others to do.
• Understand and analyze the determinants of the boundaries of the firm, including the importance of economies of scale and scope in shaping the size of a firm and the breadth of its operations.
• Describe the structure of a market, and the manner in which its member firms compete.
• Perform an analysis of industry profitability and identify major forces that contribute to firm conduct, firm performance, and market performance.
• Analyze how incentive structures may affect industry profitability.
• Assess the strategic positioning of a firm in its marketplace concerning production and pricing decisions, and commitment timing policies.
• Understand some of the main implications of information structures on strategic decision making.
• Conduct studies of how changes in the legal and regulatory environment might affect the profitability and optimal actions of a business.

Required Texts

Michael R. Baye. 2000. Managerial Economics and Business Strategy (3^rd edn.). Irwin, The McGraw-Hill Companies, Inc., Chicago.

Suggested Text

David Besanko, David Dranove, and Mark Shanley. 2000. Economics of Strategy (2^nd edn.). John Wiley & Sons, Inc., New York. (BDS).

James A. Brickley, Clifford W. Smith, Jr., and Jerold L. Zimmerman. 1997. Managerial Economics and Organizational Architecture. Irwin, McGraw-Hill, Boston. (Like Baye and BDS).

James R. McGuigan, R. Charles Moyer, and Frederick deB. Harris. 1999. Managerial Economics: Applications, Strategy, and Tactics, 8^th edn. Southwestern College publishing, International Thomson Publishing, Cincinnati. (Like Baye and BDS).

Edwin Mansfield. Managerial Economics, Theory, Applications, and Cases, 3^nd edn. Norton, New York. (More of an econometrics/data analysis approach)

William F. Samuelson and Stephen G. Marks. 1999. Managerial Economics, 3^rd edn. Dryden Press, Harcourt Brace College Publishers, Fort Worth. (Like Baye and BDS).

Maurice Thomas. 1999. Managerial Economics, 6^nd edn. Irwin, McGraw-Hill, Boston. (Like Baye and BDS).

Wall Street Journal (useful for debate materials)

Economist Magazine (useful for debate materials)

Supplemental Readings

To be given out in class as required.

Class Periods

Class will be used to present lecture materials, and to discuss assigned readings, homeworks, and relevant current events. Please complete your reading assignments and homeworks on time. During the course of the semester, class participants will be asked to debate topical issues concerning strategies that specific firms have adopted or are contemplating adopting. Please see the attached relevant document.

Written Assignments

There will be approximately four written assignments (homeworks) involving open-ended essay-type and quantitative/graphical questions about materials covered in class and/or in assigned readings. Homework due dates are given in an attached semester timetable.

There is also a class project requirement whereby students analyze a firm-level strategic management problem.

Also, students will participate in debates as debaters, panelists, and questioners from the floor. A timetable with debate responsibilities will be drawn up in the near future. Please see the attached relevant documents on the class debates and the class project.

Except for very unusual circumstances, no credit will be given for late assignments.

Exams

There will be a midterm exam and a final exam. The midterm is set for Thursday, March 2^nd. Exams will include problem-solving as well as essay-type questions. Further details will be provided during the semester.

Scholar Evaluation

Evaluation will be on the basis of examinations, homework performance, class participation, and performance in the class project. Weightings are as follows:

Task Weight (%)

1. Homework assignments 11%
2. Class debate 7%
3. Class participation 6%
4. Class project 16%
5. Midterm Exam 27%
6. Final Exam 33%

100%

Class Project

Each student will write an 8-10 page (11 or 12 pt font and double spaced) report on strategic decision making by a firm.

Part A of the report shall present an overview of the business and business environment, and shall be 4-5 pages long. Part B shall discuss a specific problem faced by the business, and shall be 4-5 pages long. Possible solutions to the problem shall be discussed and critiqued. Where relevant, please discuss any measures the firm is taking to address the problem.

The company must be a fairly large firm, and can be engaged in any legitimate business activity. You are encouraged to choose a company that you may be interested in working for, or that may be an important market player (e.g., a competitor, an input supplier, or a downstream firm) in a market you are thinking of participating in.

Part A of the paper will include

a) a brief industry introduction to historical evolution, structure, and performance

b) an overview of the company in question in terms of

n history

n organization

n objectives

n products and services

n customers and suppliers

n strategies

n profitability

n reputation

c) a discussion on external opportunities and threats

d) a discussion on internal strengths and weaknesses

Part B of the paper will involve an analysis of a selected management problem using the principles developed in this course. Topics could include

n vertical coordination

n mergers, acquisitions, and divestments

n internal re-organization

n pricing strategies

n compensation management

n quality management

n strategies for sustaining competitivity

n investment decision making

n risk control and information management

n opportunities and threats arising from regulations and laws

n other issues

Examples might include how the internet has altered the input procurement environment for Ford and GM, how Monsanto or DuPont are dealing with consumer resistance to GMOs, how Sears is managing its credit card loan risks, how a firm investigates entry into a new market, how railroad companies or cooperatives approach mergers, etc.

Data and information sources might include annual reports, business analysis reports (e.g., Valueline and Barrons, which are available in the library), Information obtained directly from the company, newspaper articles or trade journals, company interviews, and information on corporate or other websites

Project Timetable

Date Must have done

Class time on Thursday, February 10 Choose a company and a management problem. Hand in a typed paragraph explaining the proposal. Have the proposed project approved by the instructor.

Class time on Thursday, April 13 Final written report due.

Class Debate

• A timetable will be drawn up whereby class member will be paired off. Each pair will identify a (perhaps pending) business decision that has been widely reported on in recent business pages. The pair will explain the business problem, and then will debate the appropriateness of a certain line of action. One will take the role of advocate and the other will oppose the decision. The advocate will initiate the debate.
• Overheads are encouraged as part of the debate presentation.
• The team will then answer questions posed them by a panel of two class members, and will also address questions from the floor.
• The problem might pertain to firm restructuring, pricing decisions, investment, incentives structures, the effects of regulations, the impacts of innovations, etc. Do not be afraid to tackle unusual problems, so long as the debating pair feels that it has something worthwhile to say about the issue.
• Needless to say, good manners will be maintained at all times.
• Teams should e-mail to me a summary (circa 200 words) of the problem and the points that will be raised both for and against the decision made. This summary should be in the form of an e-mail, and not as an attachment. In the past, I have found that attachments often do not go through as planned.
• For teams that debate on a Tuesday, this summary should be e-mailed to me no later than 5 pm on the preceding Thursday. For teams presenting on a Thursday, the summary should be e-mailed no later than 5 pm on the preceding Saturday.
• This summary will then be distributed to the class. The summary should be a good indicator of the debate content because it will be used by the panel of questioners (and the floor) to formulate questions. It is the collective responsibility of the team members to coordinate their activities and to meet the submission deadline.
• The debate team has 4 minutes in total to explain the problem context and to outline the pros and cons. Of this, 30 seconds should be adequate to outline the problem. The remainder of the time should be split equally (1 minute and 45 seconds) between advocating and opposing the line of action. Time limits will be enforced, so please do not run over time.
• A further 1.5 minutes is being set aside for questions from the panel (a timekeeper will be appointed). Then the debate is opened to the floor.
• Grading: The debate grade will be based on both the presentation and the summary provided earlier. Because I cannot reliably ascertain the relative contributions of the team members, the team will be graded as a unit. Please take the report seriously as it is weighted at 7% of overall grade. It would be wise to study carefully recent prior presentations so as to identify the approach that best suits your needs and to avoid repetition of strategy themes.
• Please practice the presentation beforehand. The standard of reporting should rise through the semester as students observe approaches adopted by others. Therefore, the standard of reporting is expected improve as the semester progresses. Also, information is cheap in a world where we are saturated with it. There will be a premium for insightful analysis.

Provisional Course Outline

Week	Date	Topic	Reading Assignment
1	1/11	Managerial Economics: The Basics	Baye Ch. 1, BDS Introduction
1	1/13
2	1/18	Introduction to Market Analysis	Baye Ch. 2, Mansfield Ch. 1-2 and Ch. 4
2	1/20
3	1/25	The Evolution of the Modern Firm	BDS Ch. 1
3	1/27	Concepts in Demand Analysis	Baye Ch. 3
4	2/1	Consumer Behavior	Baye Ch. 4
4	2/3	Concepts in Supply Analysis	Baye Ch.5
5	2/8
5	2/10	Internal Structure of the Firm	Baye Ch. 6, BDS Ch. 2-5
6	2/15	Firm Make or Buy Decisions	Baye Ch. 6, BDS Ch. 2-5
6	2/17	Strategic Management of Taxation	Class Notes
7	2/22
7	2/24	Industry Analysis	Baye Ch. 7, BDS Ch 6 and 11
8	2/29	Competition in Markets other than Oligopoly	Baye Ch. 8, BDS Ch.7
8	3/2	Mid-Term Exam
9	3/7	Competition in Markets other than Oligopoly, cont'd	Baye Ch. 8, BDS Ch.7
9	3/9
10	3/14	Spring Break
10	3/16	Spring Break
11	3/21	Competition in Oligopoly Markets	Baye Ch. 9, BDS Ch. 7
11	3/23
12	3/28	Game Theory in Oligopoly Analysis	Baye Ch. 10, BDS Ch. 7-8
12	3/30
13	4/4
13	4/6	Selected Topics on the Implications of Laws and Regulations for Managers and Entrepreneurs	Baye Ch. 13
14	4/11
14	4/13	Marketing Strategies	Baye Ch. 11
15	4/18
15	4/20	Decision Analysis under Uncertainty	Baye Ch. 12
16	4/25
16	4/27	More on Strategic Management of Risk (if time allows)	Class notes
17	5/2	Finals Week
17	5/4	Finals Week

Homework hand-out and turn-in dates

Week	Date	Event
2	1/20	Graded homework #1 to be handed out
3	1/25
3	1/27	Graded homework #1 to be turned in
4	2/1
4	2/3	Nongraded homework #1 to be handed out
5	2/8
5	2/10
6	2/15
6	2/17	Graded homework #2 to be handed out
7	2/22
8	2/29	Graded homework #2 to be turned in
8	3/2	Exam
9	3/7
9	3/9	Nongraded homework #2 to be handed out
10	3/14
10	3/16
11	3/21
11	3/23
12	3/28	Graded homework #3 to be handed out
12	3/30
13	4/4	Graded homework #3 to be turned in
13	4/6
14	4/11	Nongraded homework #3 to be handed out