Environmental Analysis

Abstract

Cummins Inc. is a global power leader. They have positioned themselves in the market to take advantage of economic conditions as well as regulatory revisions. Knowledge of the cyclic nature of the North American trucking industry has allowed Cummins to make several good business decisions over the past few years. By continuing to expand their understanding of the industry and the market in general, Cummins will have several opportunities to expand their business and market share over the next few years. This paper will discuss these opportunities as well as the underlying macroeconomic forces in play.

Environmental Analysis

Industry Environment

Cummins Inc. is a $12 billion company based in Columbus, Indiana. The company consists of a core engine manufacturing business and several complimentary business units. The power generation, filtration, emissions solutions, turbo and marine business units are all designed to support our products. The engine business unit manufactures engines from 31 horsepower vocational engines to 3500 horsepower industrial mining and marine engines. For the purpose of this paper, I will focus on the North American heavy duty over the road trucking engines. These engines are installed in class 8 tractor trailers. The main competitors in this market are Caterpillar, Mercedes, Detroit Diesel, Mack and Volvo. For the last several years Cummins has provided engines for about a third of the market, Caterpillar another third with the rest split among the other competitors.

Remote Environment

Several macroeconomic variables have a great affect on the North American trucking industry and Cummins Inc. New equipment is expensive. For trucking companies to be able to invest in new equipment, the economic climate needs to support decisions to spend a large amount of capital. Interest rates need to be low enough to encourage borrowing for durable goods. GDP needs to be high enough to indicate the industry will continue to have revenue to support the investments. The historical affect of these macroeconomic variables can be seen in the stock price of companies like Cummins.

Interest rates will have a direct affect on the willingness of a consumer to borrow money and invest in equipment to support his business. In the 1990s, the strength of Cummins as indicated by their stock price, has been somewhat aligned with interest rates. As rates fall, Cummins stock price increases. In recent years Cummins stock has risen with interest rates. This is due to a globalization of Cummins. Cummins has invested heavily in emerging markets. Income from foreign investments has offset the decline in North America accompanied with the higher interest rates(Officer, 2007).

GDP has a direct correlation with truck engine sales in North America. For a company to make a long-term investment in new equipment, they must believe that there industry will continue to prosper and revenue will be sufficient to pay for investments. GDP is an indicator of the current economic condition. The slowing of growth in GDP would indicate a recession and would make industry consumers slow to make large investments. The decline in GDP in 2000 was accompanied by a decline in Cummins’s profitability and a decline in stock price(Johnson, 2005).

Another factor affecting the