NA030

Balancing Stakeholder Interests and

Corporate Values: A Cummins Strategic
Decision
Erica Berte, Indiana University–Purdue University Columbus
Christine Vujovich, Retired, Cummins, Inc.

As it was for almost everyone, 2001 was a difficult and demanding year for Cummins
. . . the worst market conditions in the Company’s 82-year history . . . In our Engine
Business, we made unprecedented decisions over the course of the past year, including
a significant strategy shift in our heavy-duty engine business.1
Tim Solso, Cummins CEO

I
n 1998, the United States Environmental Protection Agency (EPA) and U.S.
manufacturers of heavy-duty diesel engines, including Cummins Inc., signed a
consent decree. The consent decree involved, among other things, implementa-
tion by October 2002 of a new oxides of nitrogen (NOx) emission standard of 2.5
grams per brake horsepower hour (g/bhp-hr) that otherwise would have taken effect
in January of 2004. The fifteen-months-early implementation of the new standard was
technically called a “pull forward” of the standard.
In early 2002 customers and competitors were pressuring Cummins to not follow
the consent decree deadline and instead accept a significant non-conformance penalty.
Other stakeholders such as environmental Nongovernmental Organizations (NGOs),
suppliers, shareholders, and employees had different opinions about whether Cum-
mins should follow the decree.
Cummins Engine Business president Joe Loughrey and his team needed to make a
strategic decision prior to the consent decree taking effect in October 2002. Should they:
A. agree with the competitors’ position and ask the EPA to delay the consent
decree implementation date, and then delay the development and production
of their new engine, thus facing an EPA non-conformance penalty; or
B. implement the terms of the consent decree, launching a new, but more
costly engine that meets by October 2002 the more stringent NOx emission
standards.
Loughrey knew that a wrong decision could put the company’s future at stake, since
the Cummins Engine Business Unit represented more than half of the total company’s
sales. In addition, Cummins had the second largest market share of the total U.S.
heavy-duty engines market. With a major industry player implementing the consent

Copyright © 2014 by the Case Research Journal and by Erica Berte and Christine Vujovich. The authors
thank Cummins members for their contribution to this study. They also thank the CRJ reviewers and
editors for their comments and editorial assistance. An earlier version of this case was presented at the
NACRA 2012 Annual Meeting. The authors thank the conference reviewers’ suggestions.

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 139
 decree, it would be easier for the EPA not to postpone the decree implementation
deadline as Cummins’s competitors were asking. Consequently, Cummins’ decision
could impact the future of other competitors in the heavy-duty engine market.

The Company
Cummins Engine Company, Inc. was founded in 1919 by W. G. Irwin, a bank
owner and industrial entrepreneur in Columbus, Indiana. Irwin’s chauffeur and diesel
mechanic, Clessie Cummins, convinced Irwin to manufacture diesel engines. It took
twenty years for the company to turn a profit, but over time, the company became
the largest independent heavy-duty diesel engine manufacturer in the world. By 2001
Cummins had a presence in over 131 countries. Its Engine Business, Power Genera-
tion Business, Filtration Business, and International Distributor Business collectively
posted revenues of more than $5.6 billion in 2001 (see Exhibit 1).
In 1999, the new Cummins CEO Tim Solso insisted that within his first 100
days as CEO he would establish a new vision, mission, and values statement for the
company. Solso had observed that as the company had grown, multiple visions for the
company had emerged within the organization. These visions differed widely, even in
various facilities in the same town. Solso’s goal was to align Cummins employees, who
were becoming more global, behind a single company culture and purpose. In order
to develop the company’s vision, over several months, they held focus groups at its
locations around the world. The goal was to identify what motivated employees in the
first place to work for Cummins, and what kind of company they wanted to work for
in the future. Afterwards, Solso’s management team worked with consultants to syn-
thesize the information. What emerged from this effort was a vision for the company
and an accompanying mission and corporate values statement presented as the Cum-
mins Code of Business Conduct.2 Cummins’s vision is “Making people’s lives better by
unleashing the Power of Cummins.”
MISSION CORPORATE VALUES
• Motivating people to act like owners working • Integrity—Strive to do what is right and do
together. what we say we will do.
• Exceeding customer expectations by always • Innovation—Apply the creative ingenuity
being the first to market with the best necessary to make us better, faster, first.
products. • Deliver superior results—Exceed expectations,
• Partnering with our customers to make sure consistently.
they succeed. • Diversity—Embrace the diverse perspectives
• Demanding that everything we do leads to a of all people and honor both with dignity and
cleaner, healthier, safer environment. respect.
• Creating wealth for all stakeholders. • Corporate responsibility—Serve and improve
the communities in which we live.
• Global involvement—Seek a world view and
act without boundaries.

In 2000, Solso told employees,

We were looking to carve out a set of principles that would become the foundation
for our actions and behavior in good times and bad—principles that would leave no
doubt what Cummins and its people stood for . . . The goal was to incorporate these
principles into every part of the work we do. It must be a part of our strategies, tac-
tics, policies, processes, behaviors, systems and product design. That’s where our work
begins. It never ends.3

140 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
 Tim Solso could not have known how relevant his words would become in the
coming months as he described the objective he sought with the new vision, mission,
and corporate values in 2000. Employees saw in the vision, mission, and corporate
values statement many of the same sentiments they communicated in the focus groups
and enthusiastically embraced them. Solso also insisted on a performance-driven cul-
ture at Cummins. Relevance was placed not only on what was achieved but how it was
achieved. Thus, an emphasis on integrity was paramount, becoming the way Cum-
mins conducted business with all its stakeholders—employees, suppliers, customers,
governments, etc. Tim Solso addressed employees and stakeholders in the Cummins
Code of Business Conduct affirming “words not supported by actions, however, are
meaningless. Our commitment to doing the right thing demands that we be willing to
enforce all aspects of the Cummins Code of Business Conduct.”4

The Tough Times

In the 1990s the heavy-duty truck engine business at Cummins made profits in only
two of those ten years. In 2000, Cummins faced debts of $1,196 billion (see Exhibit
1). “We had no ability to borrow any more money,” said Solso.5 Shareholders were
worried about Cummins’ low stock price. There were rumors of a Cummins takeover
or bankruptcy. “Cummins shares were worth what they had been in 1972. The North
American diesel engine market was in a slump, and the company’s market share had
fallen from 60 percent in the 1980s to less than 30 percent. By this time, the company
had closed three plants and cut 1,100 jobs.”6 Evaluating Cummins’ 2000 results Solso
said, “. . . the erosion in profit was due to a sudden and pronounced downturn in a
number of markets, reflecting the overall uncertainty of today’s economy.”7
In 2000, the U.S. was suffering from an economic crisis known as the “dot com
crash” which affected not just internet companies, but the entire U.S. economy. Cum-
mins Earnings Before Interest and Tax (EBIT) in 2000 declined by 70 percent, from
$296 million in 1999 down to $89 million.8 Solso explained to shareholders,
Heavy-duty engine shipments in North America fell 39 percent from the first to the
second half of the year. The decline in the heavy-duty engine business also affected
exhaust systems sales in our Filtration Business, which fell 13 percent from the first to
the second half.9
In the 2000 Annual Report, Cummins Engine Business president, Joe Loughrey,
reported to shareholders that the dramatic decline in heavy-duty engines sales was
“driven by an oversupply of new and used trucks and a general economic slow-down.
The falling volumes forced significant reductions in our work force.”10
Engine Business revenue continued to decline in 2001 (see Exhibit 2). Loughrey
said: “The steep drop in Engine Business sales from 2000 to 2001 required a relentless
focus on cost reduction and cash flow improvement.”11 While the Engine Business still
represented 52 percent of Cummins sales in 2001 (see Exhibit 3), the business unit
lost $209 million in 2001 (see Exhibit 4).
Cummins heavy-duty engines, the most important product line in the Engine
Business, was losing market share (see Exhibit 5) and had only reported a profit in
two of the preceding twelve years. Beginning in late 2000 Solso began to say publicly
that the company would abandon the heavy-duty engine business if it could not be
made profitable.12 Overlaid on top of the slowdown in the heavy-duty engine market

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 141
 were effects of the September 11, 2001 terrorist attack on the United States, which
slowed the U.S. economy.

The State of the Industry

The heavy-duty diesel truck industry was driven by two very demanding stakeholders:
the customer who bought the truck and the agency which regulated the engine. Cus-
tomers who bought the truck had many choices. In 1998 six diesel engine producers
supplied engines to four major heavy-duty truck manufacturers in North America.
These diesel engine producers were: Caterpillar, Cummins, Detroit Diesel, Navistar,
Volvo, and Mack.13 The heavy-duty trucking industry was marked by customers who
often specified which diesel engine they wanted in their truck. This was because the use
of the vehicle required certain design and performance characteristics. For example,
Walmart’s fleet of trucks had trucks for long hauls across country, trucks for short route
deliveries, and trucks to move goods from one warehouse to another. This diversity of
needs could result in all six manufacturers supplying engines for trucks purchased by
Walmart. Thus, every diesel engine manufacturer called Walmart its customer. This
was a very common situation in the heavy-duty engine industry.
No matter the choice of engine, its emissions must meet EPA regulations. The
EPA had regulated the NOx emissions from heavy-duty diesel engines since the early
1970s. In the 1990 Clean Air Act Amendments, Congress required the EPA to allow at
least four years of lead time between the time when emission standards were finalized
and when the standards should take effect. Over the years, the EPA had continued to
tighten the NOx standards for diesel engines through a rigorous regulatory process. In
1988 the NOx emission standard for U.S. heavy-duty on-highway engine had been
10.7 grams per brake horsepower hour (g/bhp-hr), and by 2007 it would drop to 0.2
g/bhp-hr (see Exhibit 6).
Having been told by manufacturers that the January 1, 2004 NOx standard would
require radically new technology, the EPA published the final rule in October 1997,
giving manufacturers a full six years to prepare products for the new 2004 NOx stan-
dard of 2.5 g/bhp-hr. Then again in 2000, EPA proposed new standards for 2007.
As noted by Marketing and Environmental Policy vice-president Christine Vujovich,
when manufacturers have this information, they are able to develop technology which
is certainly necessary for meeting near-term standards, and with modification probably
will also work under the future standards.
As manufacturers developed their designs to reduce emissions, they also had to bal-
ance these designs with the requirements of customers. Customers demanded diesel
engines with excellent fuel economy and low operating costs. However, the physics of
combustion is such that as emission technology was developed to control and reduce
NOx emissions to comply with the regulations, fuel economy worsened.

Setting the Stage for a Negotiated Settlement

With the onset of new NOx standards, diesel engines in the late 1990s were designed
with new electronic fuel injection systems, which manage fuel based on the operating
demands of the truck. As is often the case, EPA takes new technology and runs tests
in its own lab to confirm that emission constituents from the test engines are similar
to what the manufacturer certifies them to be. In 1997 EPA learned through its own

142 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
tests that the diesel engines it tested produced different levels of NOx emissions than
what EPA expected. Urban operation was characterized by stop-and-go operation with
relatively low average vehicle speeds (20–40 mph). Rural operation was character-
ized by highway or interstate operation with long periods of steady operations and
relatively high average vehicle speeds (55–65 mph). EPA observed higher NOx under
rural operation and lower NOx under urban operation in the engines it tested. EPA
determined this was the result of a strategy within the on-board electronic controller
which discriminated between urban and rural operation, and adjusted the timing of
fuel injection to optimize fuel economy. The immediate effect of this strategy was that
engines had better fuel economy when they were in rural operation (where truckers
logged most of their miles), and worse fuel economy when in urban operation. Con-
versely, the NOx emissions were somewhat worse in rural operation, but better in
urban operation.
The EPA concluded this inconsistent behavior was likely built into the electronic
control strategies of all the heavy-duty engine suppliers, and considered the use of
the control strategy a “defeat device.”14 The EPA believed the emission control strat-
egy was intentionally designed to permit greater NOx emissions so that better fuel
economy could be achieved under rural operation. As a result, in 1998 EPA threatened
to sue each manufacturer for violation of the regulations. Although the manufactur-
ers believed they were in compliance and their certification tests showed compliance,
they agreed to enter into a negotiated settlement in order to avoid long and expensive
lawsuits. This resulted in a consent decree among the EPA, the Department of Justice,
and the individual manufacturers, including Cummins.15 The consent decree involved
among other things implementing by October 2002 a NOx emission standard of 2.5
g/bhp-hr, that otherwise would have taken effect in January of 2004 (see Exhibit 6).
Christine Vujovich, Cummins vice-president, Marketing and Environmental Pol-
icy struggled to understand EPA’s position:
After all, each engine design had to be meticulously tested, as required by EPA’s regu-
lations. Additionally, manufacturers had to certify that the results of the tests were
representative of the product before the product could be manufactured for sale to the
public. Furthermore, each of the manufacturers had successfully satisfied the require-
ments of the regulations and had received EPA’s certification.

The Consent Decree Challenge

As alleged by EPA in the 1998 consent decree, engines using the fuel injection timing
strategies in question emitted excess NOx. EPA was very concerned with the problems
to health and the environment NOx emissions could cause.
Nitrogen oxides can cause or contribute to a variety of health problems and adverse
environmental impacts, such as ground-level ozone, acid rain, global warming, water
quality deterioration, and visual impairment. Affected populations include children
and people with lung diseases such as asthma. Exposure to these conditions can cause
damage to lung tissue for people who work or exercise outside.16
In settling the dispute, EPA required that the manufacturers compensate for the
excess NOx which was emitted by pulling forward (implementing early) by fifteen
months a new NOx emission standard. Manufacturers were already expected to pro-
duce new engines with greater NOx control by January 1, 2004. The settlement forced
the manufacturers to anticipate the implementation of this NOx regulation to a new

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 143
 date of October 1, 2002. This became known as the “pull forward” feature of the agree-
ment and meant that the deadline for implementation of the regulation was moved to
an earlier date (see Exhibit 6).
Exhaust Gas Recirculation (EGR) technology was the technology Cummins had
decided to use to reduce NOx emissions. EGR recirculates part of the engine’s exhaust
gas back into the cylinders. This has a cooling effect on combustion temperatures and
as a consequence reduces the reaction between nitrogen and oxygen that forms NOx.
This technology was expected to increase the retail price of a heavy-duty engine at least
$3,500.
When truck operators buy a truck they consider the total cost of ownership (TCO)
before choosing a truck brand and its engine. The TCO considered the following costs:
initial purchase of equipment, maintenance cost over the estimated life of the truck,
fuel consumption, and truck resale value. The engine was one of the most important
components in a truck, directly influencing the TCO analysis.
In terms of maintenance cost, a new engine technology by nature was less proven
than an existing engine and more susceptible to failures, which could lead to customer
downtime and business disruption. EPA estimated the average total cost for incre-
mental maintenance of an average truck with an EGR engine to be $460 per year
for scheduled maintenance (e.g., oil change) and $370 per repair for post-warranty
repairs.17 Another $220 should be added to this cost to account for the costs of not
having the truck in operation while it was being fixed (demurrage). Unfortunately,
the EGR made fuel economy worse, increasing fuel consumption by 3% to 5%. For a
truck operator, this was an enormous increase in operating costs. As described by Jeff
Jones, Cummins vice-president Sales and Support,
The typical long haul fleet operates 120,000 miles per truck per year, and uses about
20,000 gallons of fuel per truck per year. A 5 percent loss of fuel economy is 1,000 more
gallons per truck per year, and at $3.50 per gallon this amounts to $3,500 per truck
per year. Over the five year ownership period, this is $17,500 per truck. For Cummins
customers like Walmart, who operate thousands of trucks, the financial impact of the
fuel economy loss and truck price increase was significant.
Nevertheless, as a result of the agreements reached in the consent decree, all the
heavy-duty truck engine manufacturers agreed to EPA’s new regulatory schedule and
to the significant decreases in emissions. The challenge Cummins faced in 1998 to
develop new engine technology to satisfying the EPA consent decree was articulated by
Steve Charlton, who was the director of research for Cummins at the time:
Re-circulating exhaust gas into the intake is a fairly old idea. So the way it worked was
known for quite a long time, but there is still a lot of invention required to take it from
passenger cars, where it started, to a heavy truck, which is very different. So you really
have a lot of invention to do to make it durable, fuel efficient and good at controlling
emissions. So we had to learn an awful lot in a short time if we wanted to develop this
new engine technology.
Meeting EPA standards involved considerable research and development (R&D)
effort, and required several other resources, such as finance, personnel, manufacturing
retooling, supplier development, etc., done much earlier than the pull forward date.
Nonetheless, Cummins had been investing in air handling, fuel systems, combustion
research, and electronic controls technologies for a long time. The integration of these
technologies was required for the development of the EGR solution. Cummins knew
that EGR technology would form the basis for even more rigorous NOx reduction in

144 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
2007. Consequently, after signing the consent decree with the EPA, Cummins contin-
ued to invest in this technology. They wanted to be ready for the “pull ahead” deadline
and the future standards.
All the manufacturers signed the agreement in 1998 with the Department of Jus-
tice and EPA. While the EPA believed that every manufacturer would be ready to meet
the NOx level of 2.5 by October 2002, it made clear that if any of the manufacturers
did not it would impose a non-conformance penalty on the manufacturer.

Disagreement within the Industry

Early in 2002, months before the “pull ahead” standards were to take effect, Caterpillar
reported that it would not be able to meet the NOx standard on time. The Company
needed another year to refine its technology. Caterpillar chose to seek a delay in the
implementation date and took its appeal to members of Congress, the EPA, and the
White House.
In an effort to gain traction for a delay of the EPA deadline, Caterpillar organized
a marketing effort to deter customers from buying the new EGR technology, claiming
it was “untested.” Environmental groups and state air pollution regulators were not
happy with Caterpillar’s approach. A press release published by the environmental
NGO Clean Air Trust said:
Unable to develop a technology in time to meet an October cleanup deadline—and
faced with losing business to its competitors—Caterpillar is urging its customers to
lobby for a delay in the pollution control standards. In a March 27 letter to its custom-
ers, Caterpillar asserted that the clean air requirements “could have a chilling effect” on
the trucking industry and the entire economy. Caterpillar included sample letters to
be sent to members of Congress, the U.S. EPA and the U.S. Chamber of Commerce.18
Further, Caterpillar rallied the support of Detroit Diesel and many large fleet own-
ers to lobby Congress and EPA to delay the “pull ahead” element of the consent decree.
They charged that the technology was not available, and forcing fleets to purchase the
new technology would have a serious financial impact on the industry. They noted
history had shown that fuel consumption and fuel price increases had always been a
harbinger of bankruptcy of fleets, particularly small-to-medium-sized fleets. This effort
culminated in a letter signed by thirty-three legislators appealing to the EPA to delay
the “pull ahead” regulation. The truck fleet customers were not silent either as noted
by Jeff Jones:
While Caterpillar’s campaign raised doubts about EGR technology, the biggest con-
cern from the customer perspective was whether the EGR product would be ready
for launch. . . . Don Schneider of Schneider Transport was the leader of the customer
rebellion against the October 2002 implementation of the new NOx standard. He
used his industry clout to force a vote on a delay by the American Trucking Associa-
tions Executive Committee, which was passed by a large margin.
In the first half of 2002, the American Trucking Associations (ATA) signed up 345
truck fleets to ask EPA and the White House to delay the emission regulations. Their
position was that the new engines were untested, unproven, and posed a threat to the
industry’s ability to continue to move freight.
During the same time, Caterpillar and Detroit Diesel were vigorously pushing EPA
to delay the consent decree “pull ahead” requirement by at least a year. According to
Cummins’ Marketing and Environmental Policy vice-president, Vujovich, while not as

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 145
 politically active as Caterpillar and Detroit Diesel, Volvo and Mack were also hoping
for a delay. The heavy-duty engine industry rarely made national headline news, but
this activity generated a story in the Wall Street Journal. It also drew more attention
from the press-minded NGO Clean Air Trust. Upon learning that Caterpillar and the
American Trucking Associations were lobbying Washington for a stay of the terms of
the consent decree, the Clean Air Trust issued a press release naming the group “villains
of the month:”
Caterpillar and the trucking associations have teamed up to form what might be
described as an “Axle of Evil.” They’ve gone to the White House, they’ve gone to Con-
gress, and they’ve gone to court. It’s a classic case of behind-closed doors Washington
lobbying. The entire national effort to clean up dirty diesel trucks may be at risk.19

An Alternative to Compliance
According to EPA rules, a manufacturer could receive a non-conformance penalty
(NCP) for a period of time until the manufacturer was able to produce a product
which met the new standards. The NCP was designed to pressure the manufacturer
to meet the standards as quickly as possible. An NCP was set at a level determined
to be more costly for a manufacturer than it would be to produce an engine with
the new technology. The NCP allowed EPA to avoid shutting down a company if it
failed to meet the deadline for compliance after making significant efforts, while not
financially penalizing those who were in compliance. According to the EPA regulatory
announcement:
Use of them (NCPs) is optional; manufacturers have the flexibility and will likely choose
whether or not to use NCPs based on their ability to comply with emissions standards.
Manufacturers that choose to make use of the NCPs will incur those costs, which are
based, in part, on the cost of complying with the emission standards. Without NCPs, a
manufacturer that has difficulty meeting the standards has only two alternatives: fix the
non-conforming engines, perhaps at a prohibitive cost, or do not produce/sell them.
The availability of NCPs provides manufacturers with a third alternative, yet protecting
the manufacturer that has chosen to incur the costs of complying with the standards.20
The size of the penalty changed depending on how serious the noncompliance was.
For example, EPA set the NCP penalty at $3,640 per engine if engines were shipped
after the “pull forward” date at a NOx level of 3.0 g/bhp-hr, and $6,946 for a NOx
level of 3.5 g/bhp-hr; a 0.5 and 1.0 g/bhp-hr higher than the 2.5 g/bhp-hr regulated
standard respectively (see Exhibit 7).
In 2001, 146,000 heavy-duty engines were sold in the U.S. Market share for
Cummins and Caterpillar were 24 percent and 29 percent respectively.21 Cummins’
heavy-duty truck sales were $940 million,22 which represented 30 percent of the com-
pany’s $3.1 billion engine business.23 In contrast, Caterpillar’s heavy-duty truck sales
were approximately $1.1 billion,24 which represented approximately 16 percent of the
company’s $6.9 billion engine business.25
Although Caterpillar said it could not meet the “pull forward” date, it knew it could
bring out a product by October 2002 with improved emissions. This engine, however,
would not be in full compliance with the new standard. This new engine was expected
to meet a NOx level of 3.1g/bhp-hr versus the standard of 2.5g/bhp-hr. This modified
product—or “bridge” engine as Caterpillar called it—would have a fuel economy pen-
alty of only 1–2 percent as compared to a 3–5 percent loss in fuel economy which the

146 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
other engine companies’ products (including the Cummins engine) would experience
with the new EGR technology.
Instead of meeting the NOx standard by the effective date, Caterpillar decided to
accept a NCP and produce this “bridge” engine. Caterpillar believed its customers
were better served by using the traditional technology and experiencing better fuel
economy. Given that the engines of other manufacturers would increase in cost, Cater-
pillar could easily pass on the cost of the NCP to its customers and still be competitive.
Caterpillar claimed that, over the life of the engine, its engine would be more cost
effective for the customer than the competitors’ technology, including EGR being
developed by Cummins.

Cummins Dilemma
In early 2002, Cummins was asked by its competitors and customers to join in the
movement to seek a delay in the EPA consent decree deadline. This posed a dilemma
for Cummins, whose EGR engine was far along in development with a record number
of tests logged for a new technology: 6.4 million of miles of road test, and 115,000
hours of lab tests. Further, Cummins had earlier told EPA they expected to meet the
“pull forward” standard on time.
The delay was appealing to some at Cummins. With a delay Cummins could have
more time to develop the technology, and perhaps gain the trust of its customers by
providing a more reliable technology. The executive team was challenged by its con-
fused and worried customers. Cummins’ Engine Business was confronted with the
need to make a decision. They had several questions to answer:
• Should Cummins renege on its commitment and join the rest of the manu-
facturers who had asked to EPA to delay the consent decree?
• Should Cummins delay the production of the new engine, and choose a non-
conformance penalty instead?
• Should Cummins go into production with the new, more costly technology?
• Would Cummins lose customers if it went into production?
• What would be the financial consequences of each of these possible directions?
Cummins had to make a final decision by April in order to have time to meet
schedule production dates. If Cummins decided to comply with the consent decree the
new engine needed to be launched by October 2002. In addition, Cummins needed to
evaluate the financial consequences of launching a new product that would cost more
for customers, and thus affect sales. If Cummins decided not to comply, the Engine
Business would have to determine how to redirect the supply chain, modify manu-
facturing plans, and develop a plan to cope with the non-conformance penalty costs.
In addition, Cummins needed to be ready to present and defend with all its major
stakeholders the position it would take.
In preparation for making its decision, the Engine Business management team,
headed by Loughrey, reviewed the launch schedule for the new EGR engine tech-
nology, reliability projections, and progress of actual product cost versus cost targets.
Loughrey wanted to review all the relevant data to determine whether Cummins could
meet the compliance date. Like many of the engineers, he too wondered whether a
delay in the new standard deadline would be prudent, allowing more time to launch
the technology. Loughrey formed several study groups to provide information to sup-
port Cummins decision. Loughrey affirmed:

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 147
 We did a very massive study. The questions we were trying to look at were: What did
we agreed to in the consent decree? How much we would spend with an NCP in case
we opt for it? What would be the impact on profitability for the company? What was
the right thing to do? Could we even hit the date of the pull forward? In case we can,
what was going to be the quality of the product (e.g., reliability and fuel economy)? We
were trying to understand what was going on with customers. What would happen if
our customers did not support us? What their reaction would or would not be?
The team considered the financial impact of potential lost sales from disgrun-
tled customers as well as other costs associated with whatever decision they made.
Cummins manufacturing plants were already beginning the change-over to the new
designs. Suppliers were prepared to provide the new parts. Some customers had made
the decision to convert their fleet to the new engine design. Other customers warned
Cummins that if Cummins decided to go ahead with the EGR technology they would
not buy from Cummins. Compounding all the cost considerations was the knowledge
that Cummins’ engineers were certain the EGR technology was necessary to achieve
further NOx reductions required by future 2007 emission standards.
Loughrey asked his executive team to lay out all possible risks from launching of
the EGR product and the consequences of a delay, so that whichever direction was
taken, mitigation plans would be ready if needed. The Cummins’ Washington office
kept its eye on industry lobbying activities.
When April 15, 2002 arrived, Loughrey met with his team to make a final decision.
He wanted to make sure that he and his team in the Engine Business were aligned. The
stakeholder interest in this matter was not consistent. Each stakeholder group had a
strong opinion on a variety of fronts.
Cummins vice-president of Marketing and Environmental Policy, Vujovich,
recalled what the head of maintenance at a major fleet had said to her: “I have an
environmental conscience, but it goes only so far when it affects my company’s bot-
tom line.” She as well as the other members of Loughrey’s team were worried about
the decision they needed to make. She affirmed, “Being charged with balancing the
stakeholder interest and corporate values posed a very difficult challenge for us.”
Cummins Engine Business executives closed the meeting room door knowing that
when they came out of the meeting they would have made a decision to either:
1. join competitors’ in asking EPA to delay the consent decree implementa-
tion date, delaying the development and production of the new engine,
and facing a non-conformance penalty, or;
2. comply with the EPA consent decree, launching a more costly engine by
October 2002.
Either decision would impact Cummins, and the future of its engine business.

148 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
Exhibit 1: Five Year Financial Summary

$ Millions, except per share amounts 2001 2000 1999 1998 1997
Net sales $5,681 $6,597 $6,639 $6,266 $5,625
Cost of goods sold 4,660 5,338 5,221 4,925 4,345
Special charges – – – 92 –
Gross margin 1,021 1,259 1,418 1,249 1,280
Operating expenses:
Selling and administrative expenses 728 776 781 787 744
Research and engineering expenses 220 244 245 255 260
(Income) expense from joint ventures and alliances (10) (9) 28 30 (10)
Other (income) expense, net –- (1) 8 (13) (26)
Restructuring, asset impairment and other charges 125 160 60 125 –
Earnings (loss) before interest and income taxes (42) 89 296 65 312
Interest expense 76 86 75 71 26
(Benefit) provision for income taxes (42) (19) 55 4 74
Minority interest 15 14 6 11 –
Dividends on preferred securities of subsidiary trust 11 – – – –
Net earnings (loss) $(102) $8 $160 $(21) $212
Net earnings (loss) per share:
Basic $(2.66) $0.20 $4.16 $(.55) $5.55
Diluted (2.66) 0.20 4.13 (.55) 5.48
Net sales
Basic 38.3 38.2 38.3 38.5 38.2
Diluted 38.3 38.2 38.6 38.5 38.7
Cash dividends per share $1.20 $1.20 $1.125 $1.10 $1.075
Shareholders’ investment per share 26.66 34.90 37.44 33.11 37.05
Working capital $665 $607 $866 $805 $655
Property, plant, and equipment, net 1,405 1,598 1,630 1,671 1,532
Total assets 4,335 4,500 4,697 4,542 3,765
Total debt 945 1,196 1,215 1,227 654
Shareholders’ investment 1,025 1,336 1,429 1,272 1,422
Property, plant, and equipment additions $206 $228 $215 $271 $405
Depreciation and amortization 231 240 233 199 158
Shareholders of record 4,600 4,800 4,800 5,200 4,700
Number of employees 24,900 28,000 28,500 28,300 26,300

Source: Cummins Inc. 2001 Annual Report.

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 149
 Exhibit 2: CumminsExhibit  
Inc. Annual Revenue
2  -­‐  Cummins   byRBusiness
Inc.  Anual   evenue    by  Business  

4500  
4000  
3500   Engine  

Revenue  $  millions  
3000  
2500   Power  GeneraAon  
2000  
FiltraAon/  Other  
1500   Bus.  
1000   DistribuAon  
500  
0  
1999   2000   2001   Year  

Source: Cummins Inc. 10K form for fiscal year ending Dec. 31, 2001.

Exhibit 3: 2001 Cummins Sales by Business Unit

Exhibit  3  -­‐  2001  Cummins  Sales  by  Business  Unit  

Distribu'on     Filtra'on/Other  
9%   Business  
15%  

Power  Genera'on  
24%  

Engine  
52%  

Source: Cummins Inc. 10K form for fiscal year ending Dec. 31, 2001.

150 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
Exhibit 4: Cummins Inc. EBIT by Business—2001
Exhibit  4  -­‐  Cummins  Inc.  EBIT  by  Business  -­‐  2001  
100   76  
65  
50   26  
EBIT  $  millions  

0  

-­‐50  

Engine  
-­‐100  
Power  GeneraFon  
-­‐150   FiltraFon/Other  Bus.  

-­‐200   DistribuFon  
-­‐209  
-­‐250  

Source: Cummins Inc. 10K form for fiscal year ending Dec. 31, 2001

Exhibit 5: Cummins Exhibit  

Heavy-duty Truck
5  -­‐  Cummins   MarketTruck  
Heavy-­‐duty   Share by SYear
Market   hare  by  Year    

35%  
31%  
30%   28%  
24%  
25%  
%  Market  Share  

20%  

15%  

10%  

5%  

0%  
1999   2000   2001   Year  

Source: Cummins Inc. 10K form for fiscal year ending Dec. 31, 2001.

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 151
 Exhibit 6: Heavy-duty Emission Standards
Exhibit  6  -­‐  Heavy  Duty  Emission  Standards  
NOx  
12  
10.7  
10  
EPA NOx EPA NOx

NOx  (g/bhp-­‐hr)  
8   deadline deadline
6   after the before the
6   5  
4   consent consent
4  
[VALUE]  
2  
0.2  
0  

1/1/1989  
1/1/1990  
1/1/1991  
1/1/1992  
1/1/1993  
1/1/1994  
1/1/1995  
1/1/1996  
1/1/1997  
1/1/1998  
1/1/1999  
1/1/2000  
1/1/2001  
1/1/2002  
1/1/2003  
1/1/2004  
1/1/2005  
1/1/2006  
1/1/2007  
1/1/2008  
Year  

Source: Adapted from http://www.epa.otag/standards/heavy-duty. Emission Standards Reference

Guide.

Exhibit 7: Heavy-heavy-duty Penalty Rates

Exhibit  7  -­‐  Heavy-­‐Heavy  Duty  Penalty  Rates  

$14,000.00  

$12,000.00   $12,210.00  

$10,000.00  
$9,052.00  
Penalty  

$8,000.00  
$7,999.00  
$6,000.00   $6,946.00  

$4,000.00   $3,640.00  
$2,000.00  

$0.00   $0.00  
2.5   3.0   3.5   4.0   4.5   6.0  
Compliance  Level-­‐  g/bhp-­‐hr  

Source: Non-Conformance Penalties for Heavy-Duty Diesel Engines, August, 2002. Retrieved from
http://www.epa.gov/otaq/regs/hd-hwy/ncp/f02025.pdf.

152 Case Research Journal • Volume 34 • Issue 3 • Summer 2014
Notes
1. Cummins Inc. 2001 Annual Report.
2. Cummins Code of Business Conduct 2010.
3. Hanafee, Susan. (2011). Red, Black and Global: The Transformation of Cummins
1995–2010. Page 73.
4. Cummins Code of Business Conduct 2010. Cummins internal document.
5. Ladwig, B. (2012, April 1). “Transition at Cummins.” The Republic (Columbus, IN).
6. International Directory of Company Histories, 2001. St. James Press, v. 40.
7. Cummins Inc. 2000 Annual Report, p. 2.
8. Cummins Inc. 1999 and 2000 Annual Report.
9. Cummins Inc. 2000 Annual Report, p. 2.
10. Cummins Inc. 2000 Annual Report, p. 11.
11. Cummins Inc. 2001 Annual Report, p. 5.
12. Ladwig, B. (2012, April 1). “Transition at Cummins.” The Republic (Columbus, IN).
13. During the course of this case, Renault purchased Volvo Trucks which subse-
quently purchased Mack Trucks.
14. Navistar was excluded from this group as it neither manufactured large tractor
trailer engines, nor did its smaller engines use such control strategies.
15. “United States of America and Cummins Engine Company Inc.” EPA Consent
Decree. Retrieved from: http://www.epa.gov/compliance/resources/cases/civil/
caa/cummins-cd.pdf.
16. United States EPA. “Cummins Inc. Settlement.” www2.epa.gov/enforcement/
cummins-inc-settlement.
17. United States EPA, (2002). “Final Technical Support Document: Nonconfor-
mance Penalties for 2004 Highway Heavy Duty Diesel Engines.”
18. Clean Air Trust. “Clean Air Trust Assails Caterpillar Lobbying to Roll Back
Clean-Air Controls.” Press Release. Retrieved from: http:// www.cleanairtrust.
org/release.040902.html.
19. Clean Air Trust. “American Trucking Associations, Caterpillar Named Clean
Air ‘Villains of the Month.’” Press Release. Retrieved from: http://www.clea-
nairtrust.org/villain.0702.html.
20. EPA Regulatory Announcement EPA420-F-02-025 (August 2002). “Non-
Conformance Penalties for Heavy-Duty Diesel Engines.” Retrieved from http://
www.epa.gov/otaq/regs/hd-hwy/ncp/f02025.pdf.
21. Cummins internal marketing document (2001), based on WardsAuto (auto-
motive industry, news, data, and statistics).
22. Cummins Inc. Form 10K. Annual report pursuant to section 13 for the fiscal
year ended Dec. 31, 2001. Internal document.
23. Cummins Inc. 2001 Annual Report, p. 5.
24. Caterpillar heavy-duty engine sales estimates assume Caterpillar heavy-duty
engine prices are similar to those offered by Cummins.
25. Caterpillar 2001 Annual Report, p. 3.

Balancing Stakeholder Interests and Corporate Values: A Cummins Strategic Decision 153