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DRPS : Course Catalogue : Business School : Business Studies

Undergraduate Course: The Economics of Corporate Strategy (BUST10021)

Course Outline
SchoolBusiness School CollegeCollege of Humanities and Social Science
Credit level (Normal year taken)SCQF Level 10 (Year 3 Undergraduate) AvailabilityAvailable to all students
SCQF Credits20 ECTS Credits10
SummaryThe Economics of Corporate Strategy provides a basis for the analysis of the economic roles and interactions of the stakeholders of the firm, and so it is an essential aid to the development of strategy, and a guide to tactics. Within this framework we will consider the use of economics to help managers make decisions with regard to: cost and demand, pricing including optimal mark-ups and price discrimination; product differentiation or cost based strategies; strategy in relation to rival firms; the make or buy decision and vertical integration; diversification and the implications of mergers, and the sustainability of profits. There will be an emphasis on the problems created by lack of information and how this affects contracts and hence control of suppliers or distributors (and their management).

The first part of the course analyzes strategy at the business unit level, introducing tools of industry analysis and competitive positioning. The later part of the course considers corporate strategy, examining the economic logic for firms to diversify across businesses and for vertical integration and innovation decisions.
Course description This course provides students with knowledge of the economic aspects of strategic issues in business:
1. foundations of competitive advantage and the analysis of business strategy with differentiated products;
2. generic product and cost strategies and their profitability; the sustainability of profits in the face of competition and imitation;
3. innovation as a tool for sustaining firm┐s profitability;
4. vertical integration and the role of incomplete contracts and relational contracts;
5. competition models among rival firms, strategically reaction to tricky situations;
6. incentives and agency problems within the firm.

The course therefore provides greater detail on some of the topics covered in Strategic Management, and complements that course.


1. Strategic Positioning for Competitive Advantage:
Competitive Advantage and Value-Creation: Analytical Tools and Conceptual Foundations; Strategic Positioning: Cost Advantage and Differentiation Advantage Targeting and Market Segmentation; Methods of analysis of cost and differentiation.

2. Sustaining Competitive Advantage:
How hard is it to Sustain Profits? Sustainable Competitive Advantage; Imperfect Imitability and Industry Equilibrium.

3. Innovation:
Creative Destruction; Incentives to Innovate; Competition in Innovation; Dynamic Capabilities; Innovative Environments; Evidence.

4. Vertical Boundaries: Transaction Costs and Vertical Integration:
Make versus Buy; Benefits of Using the Market; Cost of Using the Market; Contracts and Market Exchange; Transactions with Relationship-Specific Assets; Technical versus Agency Efficiency; Vertical Integration and Asset Ownership; Alternatives to Vertical Integration.

5. Agency Problems and Incentives:
Principal-Agent Framework; Agency Costs; Pay, Performance and Risk; Efficiency Wages; Tournament & Promotion Incentives; Managerial Power, Reputation Concern.

6. Game Theory: the Analysis of Strategic Interaction.
'Getting into the rival's Mind'; Bertrand & Cournot Competition; Prisoner's Dilemma Games; Repeated Games, Bayesian Games, Reputation concern
Entry Requirements (not applicable to Visiting Students)
Pre-requisites Students MUST have passed: Business Economics (BUST08005) OR Economics 1A (ECNM08005) OR Economic Principles and Applications (ECNM08002)
Prohibited Combinations Other requirements Pre-requisite: Business Studies Honours entry.
Information for Visiting Students
Pre-requisitesVisiting students should have at least 3 Business Studies/Management courses at grade B or above (or be predicted to obtain this). We will only consider University/College level courses.

Course Delivery Information
Academic year 2014/15, Available to all students (SV1) Quota:  None
Course Start Semester 2
Timetable Timetable
Learning and Teaching activities (Further Info) Total Hours: 200 ( Lecture Hours 20, Summative Assessment Hours 2, Programme Level Learning and Teaching Hours 4, Directed Learning and Independent Learning Hours 174 )
Assessment (Further Info) Written Exam 60 %, Coursework 30 %, Practical Exam 10 %
Additional Information (Assessment) Assessment will be by degree exam (60%), 1500-word essay (30%) and in-class practical activities (10%).

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Exam Information
Exam Diet Paper Name Hours & Minutes
Main Exam Diet S2 (April/May)2:00
Learning Outcomes

Knowledge and Understanding
On completion of the course students should:
a) Be able to describe
- What determines the internal structure of the firm in relation to vertical integration and diversification;
- How both of these are largely determined by transactions costs;
- The factors that determine the type of pay structure for senior management;
- How transactions costs explain the decisions relating to franchising;
- The underlying factors affecting strategy in relation to differentiated products or cost advantage, and the implications for management style of these two directions;
- The factors which enable firms to remain profitable for relatively long periods, and those which give only temporary advantage;
- The issues that affect the speed and direction of innovation;
- And the way in which information asymmetry and the structure of the firm, in terms of vertical or horizontal integration, affects the managerial structure of the company.

Cognitive Skills
On completion of the course students should
a) be able to evaluate the rationale of the economic hypotheses behind corporate decisions, including being able to
b) detect assumptions, identify inconsistency in arguments and interpret empirical evidence;
c) be able to evaluate the appropriateness of the arguments to different situations;
d) be able to effectively and concisely communicate their ideas;
e) be able to efficiently read academic articles and synthesise the contents of a collection of references.
Reading List
The course follows the textbook:
D. Besanko, D. Dranove, M. Shanley, S. Schaefer, Economics of Strategy, 6th Edition, Wiley, 2013. (Students are strongly advised to buy a copy of this outstanding text.)
Other useful reading:
1. Sharon M. Oster ( 1994 ) Modern Competitive Analysis, OUP, Oxford;
2. M. Porter (1985) Competitive Advantage, Free Press, New York;
3. H. Simon (1996) Hidden Champions, Harvard Business School Press, Boston Mass;
4. R. Simons (1994) Levers of Control, Harvard Business School Press, Boston Mass.

Additional Information
Course URL
Graduate Attributes and Skills 1. Interpersonal skills arising from practice in classroom activities and discussion;
2. Articulate convincing arguments in writing;
3. Develop self-awareness through active written reflection.
Course organiserDr Tong Wang
Tel: (0131 6)51 5551
Course secretaryMs Patricia Ward-Scaltsas
Tel: (0131 6)50 3823
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