Profit maximization dominates operations management, but the pursuit of this criterion diminishes the financial value of the firm when the Miller-Modigliani (MM) conditions are violated. Violations include imperfect capital markets and frictions such as taxes, bankruptcy costs, agency costs and asymmetric information. Although the MM conditions are often conspicuously violated, profit is the criterion in most of the operations management literature. Little is known about bread-and-butter operations management to optimize financial value when the MM conditions are violated. This talk starts to bridge the gap by considering a firm that is financed entirely by equity (and momentary obligations to its workers and suppliers), so its financial value is achieved by coordinating operations and finance to optimize net payouts (such as dividends). The framework is a dynamic stochastic model with operational and financial variables and a generalized criterion in which value and profit criteria are extremes on an axis. It turns out that the primary difference between formulas for the value and profit criteria is their scaling of revenues. As consequences, (a) optimal operating policies for the two criteria have the same structure (but different parameters), (b) existing profit-optimizing algorithms identify value-optimal operating policies, and (c) it is optimal to separate the management of operations from the management of finance. The talk applies the results to a model of capacity management.
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