Bucking the Typical Corporate Mindset - and Winning

Fortune profiles diesel engine maker Cummins, who quickly went to work to improve their engines when EPA formulated clean-air rules, and they've been reaping the rewards since:

Miller’s legacy was put to the test in 1997, when the Environmental Protection Agency began investigating whether special shutoff switches in the company’s engines could be used to disable emissions controls. They could, apparently to the surprise and dismay of Cummins engineers. The next year the EPA forced Cummins and several other manufacturers to agree to reprogram the devices and sign an $83.4 million consent decree, the highest civil penalty in environmental enforcement to date. The EPA then moved forward the deadline for new, lower-emission engines from 2004 to October 2002.

Some at Cummins wondered whether a company built on dirty, heavy-duty diesel could survive the EPA’s order, says Freeland, the president and COO, who has been with the company since 1979. Cummins’s leadership considered suing, but eventually cooler heads prevailed, and rather than fight the EPA, Cummins decided to work with it. “We said we’d double down, because we thought there was a way to be different,” Freeland says. Cummins was, after all, the leader in diesel technology. If it could quickly meet the EPA’s new standards, it stood to reap enormous benefits.

Under Theodore M. Solso, who was chairman and chief executive from 2000 to 2011 and is now chairman of General Motors, Cummins set out to become the first diesel company to hit the EPA targets. “The whole industry said there was no way anyone could meet it,” Solso now recalls. But Solso made meeting the goal a centerpiece of a bigger internal revolution. In the early 2000s he implemented Six Sigma management systems and ended the wildly popular (but profit-reducing) practice of offering discounts on most sales. Above all, he poured money into research and development, traditionally a weak spot for diesel makers. From 2002 to 2007, Cummins boosted annual R&D spending by 60%, to $321 million, with almost a quarter dedicated to meeting future EPA engine standards. That emphasis yielded important new technologies, including advances in “deep spray” injection, a process that reduced engines’ emissions without sacrificing efficiency by pushing fuel farther into the cylinder.

Cummins did indeed hit the EPA’s standards first, and saw it pay off almost immediately. By 2010, Caterpillar CAT -0.82% and Detroit Diesel, its two largest domestic rivals, had bowed out of the on-highway heavy-duty diesel market, which Cummins now dominates with a 39% share. Annual revenues have more than tripled since 2002, when that EPA deadline kicked in, and experts within and outside the company say Cummins’s early commitment to a low-emissions strategy will help it maintain its lead as regulations ratchet up over coming decades.

“The on- and off-highway emissions standards were the best thing that ever happened to Cummins,” says Mike Brezonick, editor-in-chief of Diesel Progress magazine. “They make such better engines now. It was the equivalent of the Manhattan Project.” The company also controls about 41% of the North American market for after-market components that lower emissions on other companies’ engines, a huge new source of revenue. “You hear in the news that pollution controls are hurting jobs,” says John Wall, the chief technology officer. “For us it’s the exact opposite.” Last year the components business brought in $5.1 billion, or a little over a quarter of total revenues.

Cummins continues to work closely with the EPA on the next generation of standards. Wall, coincidentally, had been meeting with agency officials the day before giving an interview to Fortune. “We’ll take [regulators] through technologies being developed, explain how long it will take to get them to market,” Wall says, hoping that the industry’s needs are on their minds when the rules are finally written. That kind of cooperation has made Cummins a poster child for emissions controls; Solso and his successor, current CEO Tom Linebarger, have both stood beside President Obama as he announced rounds of clean-air standards.

Wow, whodathunk research and development for cleaner, more efficient engines would pay off? Obviously not Detroit Diesel or Caterpillar, who no longer have to worry about making on-road diesel engines.  And gosh, what company worth it's salt would cooperate with EPA?  I am amazed about how backward-looking and trapped in groupthink most business leaders are.  It's nice to see some folks who think outside of the typical corporate mindset get a little recognition.