Abstract
Empirical literature suggests that the adoption of the lean management paradigm substantially improves operations performance of manufacturing companies. Nonetheless, conventional producers exist in parallel with lean firms, even in the same markets. Moreover, the empirical literature does not consistently show that the superior operational performance of lean firms, including lower production costs, translates into better financial performance. This paper offers resolutions to both of these apparent paradoxes. In a model with two companies and stochastic demand shocks, it is shown that lean and conventional management approaches can be strategic substitutes, i.e., if one firm is lean, its competitor prefers to be conventional, and vice versa. This result implies that in a market with many companies, there will be both lean and conventional companies in equilibrium and the profits of both types of firms will converge.