Mechanical Engineering

KATIUSCIA LAVORATORI

Knowledge and understanding

The course deals with the decision making processes of firms. In particular, students are expected to learn the basic principles of
• microeconomic analysis of the firm,
• firm technology strategy,
• economic evaluation of investment projects,
• financial accounting

Applying knowledge and understanding

Students will be able to apply basic methods and models of microeconomics, organization theory and corporate finance in order to:
• identify the determinants of firms’ strategic choices,
• analyze the relationship between technological change in the industry and firms’ strategies
• evaluate the profitability of investment projects
• analyze the financial statement of a company

Making judgements
Lectures, practical exercises and problem-solving sessions will provide students with the ability to assess the main strengths and weaknesses of theoretical models when used to identify firms’strategies.

Communication
By the end of the course, students are able to discuss ideas, problems and solutions provided by the microeconomics of the firm and corporate finance both with a specialized and a non-specialized audience. These capabilities are tested and evaluated in the final written exam and possibly in the oral exam.

Lifelong learning skills

Students are expected to develop those learning skills necessary to undertake additional studies on relevant topics in microeconomics and corporate finance with a high degree of autonomy. During the course, students are encouraged to investigate further any topics of major interest, by consulting supplementary academic publications, specialized books, and internet sites. These capabilities are tested and evaluated in the final written exam and possibly in the oral exam, where students may have to discuss and solve some new problems based on the topics and material covered in class.

Objectives
Knowledge and understanding
The course deals with the decision-making processes of firms. In particular, students are expected to learn the basic principles of
• microeconomic analysis of the firm,
• firm technology strategy,
• economic evaluation of investment projects,
• financial accounting

Applying knowledge and understanding
Students will be able to apply basic methods and models of microeconomics, strategy and corporate finance in order to:
• identify the determinants of firms’ strategic choices,
• analyze the relationship between technological change in the industry and firms’ strategies,
• Understand how managerial and corporate design choices shape innovation, growth, and performance,
• evaluate the profitability of investment projects,
• analyze the financial statement of a company

Making judgements
Lectures, practical exercises and problem-solving sessions will provide students with the ability to apply and assess the main strengths and weaknesses of theoretical models when used to identify firms’ strategies.

Communication
By the end of the course, students are able to discuss ideas, problems and solutions provided by the microeconomics of the firm, strategy and corporate finance, both with a specialized and a non-specialized audience. These capabilities are tested and evaluated in the final written exam.

Lifelong learning skills
Students are expected to develop those learning skills necessary to undertake additional studies on relevant topics in microeconomics, strategy and corporate finance with a high degree of autonomy. During the course, students are encouraged to investigate further any topics of major interest by consulting supplementary academic publications, specialized books, and internet sites. These capabilities are tested and evaluated in the final written exam, where students may have to discuss and solve some new problems based on the topics and material covered in class.

Basic knowledge of economic problem analysis and demand and supply analysis.

PART I
1. Prerequisites: Analyzing Economic Problems; Demand and Supply Analysis

2. Technology
Technological sets and production function. Total, average and marginal productivity. Isoquants and marginal rate of technical substitution. Elasticity of substitution and types of technology. Long run vs short run. Returns to scale and returns to varying proportions. Elasticity of scale. Technological Progress. High-tech labour vs low-tech labour.

3. Costs
The cost function and isocosts. Price and output elasticity of input demands. Expansion path. Short-run vs long run cost functions. Total costs. Variable, fixed and quasi-fixed costs. Sunk costs. Average and marginal costs. Economies of scale and the minimum efficient scale. Economies of scope and learning curves.

4. The Horizontal and Vertical Boundaries of the Firm
What firms do internally vs. through markets. Make vs. buy decisions (economic logic). Vertical integration and specialization. Technology and transaction costs

5. Markets, Entry and Exit, and Industry Analysis
Market definition and structure. Entry barriers and technological advantage. Monopoly, oligopoly, perfect competition and differentiated competition. Market structure and innovation incentives.

6. Innovation
Product innovation vs process innovation. Drastic innovation. Willingness to pay for innovation. Innovation and market structure.

PART II
1. Management and corporate strategy
Corporate Advantage: business vs. corporate strategy, sources of corporate advantage, technology as a shared resource. Diversification: Make, Buy, or Ally. Divestiture and outsourcing. Organizational Structures, centralization vs. decentralization, organizational design as innovation architecture.

Part III
1. Financial accounting
The Balance Sheet and Account Categories: Assets, Liabilities, Owners 'Equity. The Income Statement: Revenues, Cost of Sales, Gross Margin, Expenses, Net Income. Relation between Balance Sheet and Income Statement. The Statement of Cash Flows. Misconceptions about Depreciation. Sources and Uses of Cash. Working capital flows. Analysis of the Cash Flow Statement.

2. Value
Future Values and Present Values. Net Present Value. Risk and Present Value. Present Values and Rates of Return. Calculating Present Values when there are multiple cash flows. The opportunity cost of capital. Perpetuities and annuities. Real and nominal rates of interest. Calculating the Present Value of an investment.

3. Investment Decisions
Net Present Value and Other Investment Criteria. Discounted payback. Internal Rate of Return. Making investment decisions with the Net Present Value. Relevance of cash flow. Estimation of cash flows on an incremental basis. Treating inflation. Investment timing. Equivalent annual cash flows and inflation. Equivalent annual cash flow and technological change.

6 CFU students: PART I + Part III
9 CFU students: PART I + Part II + Part III

Part 1: Besanko, D., Dranove, D., Shanley M., and Schaefer, S. (2013). Economics of Strategy. Wiley, 6th Edition. (Selected chapters, see lecture slides.
Part 2: Puranam, P., & Vanneste, B. (2016). Corporate Strategy: Tools for Analysis and Decision-Making. Cambridge (UK): Cambridge University Press. (Selected chapters, see lecture slides).
Part 3: Brealey, R. A., Myers, S. C., Allen, F., Principles of corporate finance (12th Edition). Mc Graw Hill. (Selected chapters, see lecture slides).

Lectures and tutorials.

Contacts:
Room A112, DIAG Via Ariosto, 25, 00185 Roma
e-mail: katiuscia.lavoratori@uniroma1.it

Office hours: by appointment via email (we can also schedule it through Google Meet)

In person, not mandatory.

The course is assessed by a single written examination consisting of exercises, theoretical questions and/or business cases (business scenarios).

6 CFU students: 1 open question on Part 1 content (1/2) + 1 applied exercise on Part 3 content (1/2) - 90 minutes
9 CFU students: 1 open question on Part 1 content (1/3) + 1 open question on Part 2 content (1/3) + 1 applied exercise on Part 3 content (1/3) - 120 minutes

Each question carries equal weight.

Assessment items:
Part 1: One open-ended (essay) question
Part 2: One open-ended (essay) question based on short hypothetical case scenarios
Part 3: 1 applied exercise

Examples of open questions for Part 1
- Using concepts from the lectures and examples discussed in class, explain Williamson’s concept of the fundamental transformation and discuss its
implications for governance decisions. (maximum one page, single-sided)
- Using concepts from the lectures and examples discussed in class, explain the hold-up problem and discuss the role of contracts in addressing it. (maximum one page, single-sided)

Examples of open questions for Part 2
1. Clara is a successful fashion retail chain with a large network of retail stores around the world, some of which are licensing arrangements and others are fully owned
stores. The Clara brand is well known for its combination of attractive design and good value for money, and it enjoys high customer loyalty among 16-34 female and
male shoppers. However, the rise of online shopping has led to a decline in the number of customers buying clothes directly from Clara’s high street stores. The
CEO of Clara is contemplating what new businesses the company might be able to enter. A candidate has emerged from internal discussion: the homeware business.
Homy Inc., an experienced player in the homeware business, is available for collaboration. If Clara were to decide to enter the homeware business with Homy
Inc., which mode should they choose: non-equity alliance, equity alliance, or full acquisition? Why? Justify your answer using concepts from the module.
(maximum one page)

Esemples for Parte 3
Problem 1
A firm spent 300.000€ for the development of an innovative assembly system. The firm has to decide whether to abandon the project or to invest today additional 100.000€ in order to have a cash flow of 20.000 each year and for 10 years (real values). No externalities will realize if the firm will pursue the investment. Shall the firm continue to invest? Assume that the firm’s (real) opportunity cost of capital is r=10%.
Problem 2
A firm owns a land which is rented to at 3.000€ monthly. The firm has to decide whether to address the use of the land towards farming for 3 years. An initial investment (50.000€, 0 resale value, straight line method) in equipment is needed and the expected operating income from farming is 6.000€ per month.
a) Should the firm pursue the investment? All values are real values. Assume that the monthly opportunity cost of capital is 8% (real value). Abstract away from any variation in net working capital. Abstract away from taxes (i.e., tax rate is 0).
b) Assume a tax rate equal to 40%. Should the firm pursue the investment? All values are real values. Assume that the monthly opportunity cost of capital is 8% (real value). Abstract away from any variation in net working capital. What is the tax benefit of depreciation in each year?

Additional examples will be provided during lectures and tutorial sessions.

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