A reflective-type photonic displacement sensor has been proposed and realized by taking advantage of a compact optical sensing head that incorporates a micro-optic beam shaper in conjunction with a rotary scale. The miniature beam shaper, which includes a pair of aspheric lenses, plays the role of optimally focusing a light beam emitted by a VCSEL source onto a rotary scale by utilizing efficient collimating optics. The focused beam is selectively reflected by a periodic grating pattern relevant to the scale; the beam then arrives at the photodetector (PD) receiver. Hence, an arbitrary displacement, encoded by the scale, could readily translate into an output signal available from the receiver. The proposed sensor was thoroughly designed through ray tracing based simulations and then analyzed in terms of the alignment tolerance for the VCSEL and code scale. The slim beam shaper was cost effectively constructed using plastic injection molding, and it was precisely integrated with the VCSEL and PD in a passive alignment manner, in order to complete the optical sensing head. In order to construct the displacement sensor, a code-wheel type scale containing alternate patterns of high- and low-reflection, was integrated with the optical head. The sensor was primarily characterized with respect to the evolution of generated beams for single-mode (SM) and multi-mode (MM) VCSELs, taking into consideration that the modulation depth of the output signal is elevated with decreasing focused beam size. For an embodied displacement sensor based on an SM VCSEL, leading to a focused beam spot of ~30 μm, a well-defined output with a modulation depth of 7% was obtained in response to the displacement of the rotary scale engraved with a grating of 10-μm pitch. The linear and angular resolutions were accordingly estimated to be better than 5 μm and 0.02°, respectively.