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Sustained Competitive Advantage

Goutam Hari Tulsiyan

200901082

Corporate Strategy – Monsoon 2011

Table&of&Contents &

Introduction

2 !

Contributions/to/the/SCA/concept

3 !

Defining/SCA

4 !

Sources/of/SCA

6 !

Relationship/of/SCA/to/other/Strategic / Conc epts

10 !

Case/study/of/Dell®/Computer/Corporation

10 !

Conclusion

12 !

Bibliography

13 !

!

Introduction &

Jack Welch has said, “If you don't have a competitive advantage, don't compete.” Why should people do business with you -- and not with your competitors?

Success for any business is tricky in the current economy. For a business to remain viable, it has to weather the storms of competition. The firm has to be able to beat the ferocious market forces and overcome volatility. In other words, the firm needs competitive advantage and it must be sustainable and able to endure the test of time.

Competitive advantage is defined as the strategic advantage one-business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high-grade ores or inexpensive power, or access to highly trained and skilled personnel human resources or superior use of information technology.

But the question is how can this competitive advantage be sustained? Some competitive advantages are fleeting, while others can be long lasting. In resource- based logic, a firm is said to have a sustained competitive advantage when it is creating more economic value than the marginal firm in its industry and when other firms are unable to duplicate the benefits of this strategy. In short, SCA is an advantage that enables business to survive against its competition over a long period of time.

Understanding the sustainable competitive advantage period should be the most important focus in understanding any business. Without a competitive advantage, a corporation has limited economic reason to exist. A firm’s competitive advantage is the only reason that it can achieve excess returns for its shareholders. Ultimately, when the competitive period ends for a business, the return on invested capital falls to their cost of capital or worse! Thus, each firm aims to extend its competitive advantage period as long as possible.

The purpose of this paper is to trace the origins of the SCA concept, provide a conceptual definition of SCA and discuss how it has been applied to theories and ideas related to marketing strategy. This paper is organized in the following manner:

First, a review of the literature pertaining to the concept of "SCA" is presented. Early contributors to the topic are cited, and a conceptual definition and potential sources of SCA are presented. Then, the construct is linked to other concepts that exist in the strategy field, including market orientation, customer value, relationship marketing,

and business networks. A theoretical model of practices/strategies that can help achieve SCA is also discussed along with some examples and a case study.

Contributions&to&the&SCA&concept & &

Authors (Year)

Article / Book title

 

Main Contributions

Alderson (1965)

 

"The Search for Differential Advantage"

Precursor to SCA; proposes three bases for differential advantage: technological, legal, and geographical; four strategies for achieving differential advantage: segmentation, selective appeals, transvection, and differentiation.

Hall (1980)

 

"Survival Strategies in a Hostile Environment"

Successful companies will achieve either the lowest cost or most differentiated position.

Henderson (1983)

"The Anatomy of Competition"

Continues discussion of those unique advantage(s) of one firm over competitors; those who can adapt best or fastest gain an advantage over competitors.

Porter (1985)

 

Competitive Advantage:

Introduces idea of the "value chain" as the basic tool for analyzing the sources of CA.

 

Creating and Sustaining Superior Performance

Coyne (1986)

 

"Sustainable Competitive Advantage: What It Is, What It Isn’t"

Explanation of the conditions needed for an SCA

 

to

exist; idea of capability gaps.

Ghemawat (1986)

"Sustainable Advantage"

Discussion of those advantages that tend to be sustainable: size in the targeted market, superior access to resources or customers, and restrictions

on

competitors’ options.

Day

and

Wensley

"Assessing Advantage: A Framework for Diagnosing Competitive Superiority"

Potential sources of advantage are superior skills and superior resources; in assessing ways to achieve SCA, both competitor and customer perspectives should be considered.

(1988)

Dierickx

and

Cool

"Asset Stock Accumulation and Sustainability of Competitive Advantage"

Sustainability of a firm’s asset position is based on how easily assets can be substituted or imitated.

(1989)

Hamel and Prahalad

"Strategic Intent"

A

firm should not search for an SCA, it should

(1989)

learn how to create new advantages to achieve global leadership.

Prahalad and Hamel

"Core Competence of the Corporation"

SCA results from core competencies; firms should consolidate resources and skills into competencies that allow them to adapt quickly to changing opportunities.

(1990)

Barney (1991)

 

"Firm Resources and Sustained Competitive Advantage"

Discusses four indicators of the potential of firm resources to generate SCA: value, rareness, inability to be imitated, and imperfect substitution.

Conner (1991)

"A Historical Comparison of Resource-Based Theory and Five Schools of Thought within Industrial Organization Economics: Do We Have a New Theory of the Firm?"

With a resource-based view, to achieve above-

average returns, a firm product must be distinctive

in

the eyes of buyers, or the firm selling an

identical product in comparison to competitors must have a low-cost position.

Peteraf (1993)

"The Cornerstones of Competitive Advantage: A Resource-Based View"

Discusses four conditions which must be met for SCA: superior resources (heterogeneity within an industry), ex poste limits to competition, imperfect resource mobility, and ex ante limits to competition.

Bharadwaj,

 

"A Framework Linking Intangible Resources and Capabilities to Sustainable Competitive Advantage"

Identifies various intangible resources (including assets and competencies) that allow firms to possess relevant capability differentials which result in SCA

Varadarajan,

and

Fahy (1993)

Day and Nedungadi

"Managerial Representations of Competitive Advantage"

A

firm’s use of strategy and reaction to the

(1994)

environment depends on its orientation (customer-oriented versus competitor-oriented); CA is based on this orientation.

Hunt

and

Morgan

"The Comparative Advantage Theory of Competition"

Compares neoclassical theory and comparative advantage theory of the firm; comparative advantage in resources can translate into a competitive advantage in the marketplace; offers categorization of resources.

(1995)

Oliver (1997)

 

"Sustainable Competitive Advantage: Combining Institutional and Resource- Based Views"

Proposes a model of firm heterogeneity, which suggests that both resource capital and institutional capital are indispensable to SCA.

Srivastava, Shervani, and Fahey

"Market-Based Assets and Shareholder Value: A Framework for Analysis"

Delineates market-based assets into two primary types: relational and intellectual. Largely intangible, these assets may be leveraged to achieve SCA if they can add unique value for customers.

(1998)

Defining&SCA &

According to Barney (1991), sustainable competitive advantage arises when the firm’s resources are valuable (the resources help the firm create valuable products and services), rare (competitors do not have access to them), inimitable (competitors cannot easily replicate them) and appropriate (the firm owns them and can exploit them at will). Acquiring and preserving sustainable competitive advantage and superior performance are a function of the resources and capabilities brought to the competition (Aaker, 1989; Barney, 1995).

Based on the definition of "competitive" (relating to, characterized by, or based on competition (rivalry)), SCA should be viewed by a firm from an external perspective. Competition is based on rivalry between two or more parties; thus, the focus of SCA should be how long a firm can keep competitors at bay. A firm who approaches the achievement of SCA from an internal perspective is missing the point. A particular strategy based on firm resources irrespective of what competitors are doing certainly could be sustained. However, it is the external focus – the focus on competitors – that allows a firm to recognize and/or create unique resources. This uniqueness is what gives a firm the advantage. The advantage (or superiority) is sustained (or prolonged) as long as the unique strategy provides added value to customers, and as long as competitors cannot find a way to duplicate it.

First, unlike the concept of competitive advantage, sustained competitive advantage does not focus exclusively on a firm’s competitive position vis-à-vis firms that are already operating in its industry. Rather, following Baumol, Panzar, and Willig (1982), a firm’s competition is assumed to include not only all of its current competitors, but also potential competitors poised to enter an industry at some future date.

Second, the definition of sustained competitive advantage adopted here does not necessarily depend on the period of calendar time during which a firm enjoys a competitive advantage. One indicator that a firm may have a sustained competitive advantage is that it has a competitive advantage that lasts a long time (Porter 1985; Jacobsen 1988). However, in some industry settings, a sustained competitive advantage may not last a long period of calendar time. In such settings, it may be possible for a firm to have a competitive advantage that lasts for a relatively short period. But if that advantage is not competed away through other firms duplicating the strategy of the firm with a competitive advantage, then that advantage may still have been sustained.

Therefore, the following formal conceptual definition is offered: "SCA is the prolonged benefit of implementing some unique value-creating strategy not simultaneously being implemented by any current or potential competitors along with the inability to duplicate the benefits of this strategy." (Hoffman, 2000)

However, that a firm has a sustained competitive advantage does not mean that its competitive advantage will last forever. Changes in technology, demand, and the broader institutional context within which a firm operates can all make what used to be a source of sustained competitive advantage no longer valuable.

These kinds of changes have been called ‘Schumpeterian Shocks’ by several authors (Schumpeter 1934, 1950; Rumelt and Wensley 1981a; Barney 1986c). Such shocks redefine which of a firm’s resources are valuable and which are not. Some of these resources, in turn, may be sources of sustained competitive advantage in the newly defined industry structure (Barney 1986c). However, what were resources in a

previous industry setting may be weaknesses, or simply irrelevant, in a new industry setting. A firm enjoying a sustained competitive advantage may experience these major shifts in the structure of competition and may see its competitive advantages nullified by such changes.

However, a sustained competitive advantage is not lost through the efforts of other firms to duplicate the bases of these advantages. Rather, this sustained competitive advantage is replaced when alternative technologies, changes in demand, or other changes take place.

Sources&of&SCA &

Barney (1991) contributed to the discussion by exploring the link between a firm’s resources and SCA. He stated that not all firm resources hold the potential of SCAs; instead, they must possess four attributes: rareness, value, inability to be imitated, and inability to be substituted.

Today is the era of hyper-competition. Hyper-competition is a key feature of the new economy. New customers want it quicker, cheaper, and they want it their way. The fundamental quantitative and qualitative shift in competition requires organizational change on an unprecedented scale. Today, a sustainable competitive advantage should be built upon corporate capabilities and must constantly be reinvented.

According to the new resource-based view of the company, continuously developing existing and creating new resources and capabilities in response to rapidly changing market conditions achieve sustainable competitive advantage. Among these resources and capabilities, in the new economy, knowledge represents the most important value-creating asset.

The opportunity for a company to sustain its competitive advantage is determined by its capabilities of two kinds - distinctive capabilities and reproducible capabilities - and their unique combination it creates to achieve synergy. Its distinctive capabilities - the characteristics of a company, which cannot be replicated by competitors, or can only be replicated with great difficulty - are the basis of its sustainable competitive advantage. Distinctive capabilities can be of many kinds: patents, exclusive licenses, strong brands, effective leadership, teamwork, or tacit knowledge. Reproducible capabilities are those that can be bought or created by competitors and thus by themselves cannot be a source of competitive advantage.

Every business can own one or several competitive advantages - the difficulty is figuring out what they are. Market leading companies have figured out the importance of owning their competitive advantage in order to get fast to market and sustain speed.

Building on Core Competencies and Accessing Missing Ones – As a leader, one must focus firm’s resources on what it does best and what creates competitive advantage. Some technical and business competencies can be in short supply however. The

leader can address these missing competencies by using three approaches: internal development, acquisition of an outside firm, and partnering.

Corporate Culture as a Fundamental Competitive Advantage – The strength of an organization's culture is one of the most fundamental competitive advantages. If the organization can build and preserve an innovation-adept culture, a culture of commitment, and one where employees passionately pursue organization's cause and mission, the firm will be better positioned for success. The sustained superior performance of firms like Dell, IBM, McDonald’s, and Southwest Airlines may be, at least partly, a reflection of their organizational cultures. A firm’s culture is one of several attributes that differentiate firms one from another. It is in these sustainable differences between firms that explanations of sustained competitive advantage must be sought (Demsetz 1973: 2). It is often not easy to describe what it is about some firms that makes them more successful than others. Precisely because an organization’s culture is hard to describe, socially complex and causally ambiguous; because the common sense of managers is taken for granted; and because even if a culture can be described, it is difficult to change; a firm’s culture can hold promise for sustained competitive advantages for some firms. Case of Dell computer Corporation – "I wish it were possible for me to interact with everyone at Dell as I used to. But it's not possible to scale the number of interactions to be consistent with the growth of the company", says Michael Dell, Chairman and CEO of the Dell Computer Corporation. "We've found there are, however things you can do to bridge the distance between you and your people in a larger organization, and develop the fast-paced, flexible culture that's a source of competitive advantage.

Human resource as a Fundamental Competitive Advantage – A firm’s technologies, products and structures can be copied by competitors. No one, however, can match its highly charged, motivated people who care. People are firm's most important asset and, the same time, its most underutilized resource. People are firm's repository of knowledge and skill base that makes a firm competitive. Well coached, and highly motivated people are critical to the development and execution of strategies, especially in today's faster-paced, more perplexing world, where top management alone can no longer assure firm's competitiveness. The resource-based analysis of human resources has shown that HR executives have a key role in nurturing, developing, and managing the set of HR resources (e.g. human capital skills, employee commitment, culture, teamwork, and so on) that are most likely to be sources of sustained competitive advantage for their organizations. The ultimate quest should be for the HR function to provide the firm with resources that provide value, are rare, and cannot be easily imitated by other organizations. This quest entails developing employees who are skilled and motivated to deliver high-quality products and services, and managing the culture of the organization to encourage teamwork and trust.

Trust as a Source of Competitive Advantage – Trust, both between individuals and organizations, is at the core of and delivers significant benefits in today's complex

and rapidly changing knowledge economy. Trust-based working relationships are an important source of sustainable competitive advantage because trust is valuable, rare, imperfectly imitable, and often non-substitutable. "Trust elevates levels of commitment and sustains effort and performance without the need for management controls and close monitoring." Trustworthy firms have also competitive advantage when it comes to forming and using cooperative strategies. Corning seems to be able to manage joint ventures more effectively than, say, TRW (Sherman 1992). Toyota seems to be able to manage complex supply relationships more effectively than GM (Womack, Jones, and Roos 1990; Dyer and Ouchi 1993).

Information technology as a Source of Competitive Advantage – Using IT to gain sustained competitive advantage is not likely to be easy. Indeed, if it was relatively simple for firms to use IT in this way, then IT would not be imperfectly mobile and therefore not a source of sustained competitive advantage. The fact that it is often difficult to develop IT managerial skills, relationships between the IT function and other business functions are often slow to evolve, and the technical orientation of many of those in the IT function can clash with the business orientation of others in a firm is good for those firms who have been able to develop these IT managerial skills. This implies that other firms will have a difficult time imitating these skills, and therefore they can be a source of sustained competitive advantage.

Leveraging opposite forces – A firm can find a strategic competitive advantage in an organizational and cultural context by seeking to leverage, rather than diminish, opposite forces. "An important but widely overlooked principle of business success is that integrating opposites, as opposed to identifying them as inconsistencies and driving them out, unleashes power. This is true on both a personal level and on organizational level as well." To be successful in today's complex, rapidly changing and highly competitive world, you must embrace and manage critical opposites. Case of Hewlett-Packard: To create an organization that could sustain its competitive advantage regardless of marketplace whims and what their competitors were building, HP founders based their corporate culture on the integration and reinforcement of critical opposites. This became known as the Hewlett-Packard Way. HP has achieved "what appears to be the greatest dichotomy: creating an environment that celebrates individualism, but at the same time one that is also wholly supportive of teamwork. Although HP people are taught to engage in cross- functional teams, they are also rated on the performance of decentralized business units and personal achievement."

Dynamic strategy as a Source of Competitive Advantage In today's fast pace, effective self-management and opportunism create a competitive advantage. To be successful in today's world of rapid change, corporate strategy must be dynamic. Executives of fast-moving companies reassess their strategy continuously to ensure that it reflects the changes in the business environment, the company, and its goals. The source of sustainable competitive advantage is the pursuit of an evolving strategy that cannot be easily duplicated by competitors.

Moving with Speed - Staying Ahead of Your Competition In the new economy where everything is moving faster and it's only going to get faster, the new mantra is, "Do it more with less and do it faster." If a firm wishes to stay ahead of its competition, it should learn how to move with speed and build four main fast- moving competencies: fast thinking, fast decision-making, getting to market faster, and sustaining speed. Case of GE: "My job today is ten times faster than it was five years ago. A hundred times. The pace is enormously quicker because of technology. So everyone has to gear themselves to a faster pace, to more competitiveness, to more intellectual capital. That's the game," said Jack Welch, the legendary former CEO of GE, in 1997. Welch summed up his prescription for winning in three words:

Speed, simplicity, and self-confidence. In his 1993 Letter to Share Owners, the CEO talked more about speed and boudarylessness than any other topic. He gave some examples of GE's speed: There was a new product announcement at GE Appliances every ninety days - unthinkable years ago. The GE90, the world's most powerful commercial jet engine, was designed and build in half the normal time.

Leveraging the Power of Knowledge Market champions keep learning how to do things better, and keep spreading that knowledge throughout their organization. Learning provides the catalyst and the intellectual resource to create a sustainable competitive advantage. "The desire, and the ability, of an organization to continuously learn from any source, anywhere - and to rapidly convert this learning into action - is its ultimate competitive advantage", says Jack Welch, CEO, GE.

Apart from these, tacit knowledge or implicit knowledge, Leadership, innovation, intellectual property, right competitive strategy could also provide the SCA.

No matter what type of business, firms may succeed in establishing an SCA by combining skills and resources in unique and enduring ways. By combining resources in this manner, firms can focus on collectively learning how to coordinate all employees’ efforts in order to facilitate growth of specific core competencies.

Brands

Coke

Low cost alternatives exist but customers have a high brand loyalty making entry difficult.

Technology

Microsoft

Customers are trained and learn on the product diminishing the likelihood of change.

Patent

Pfizer

Patents protect the product from being replicated by others, at least for some fixed period.

Protection

Location

Starbucks

By picking locations near bus stations and train stations they promise to be the first coffee location that consumers encounter.

Cost

of

Safeco

By removing the insurance agent and dealing directly with customers costs are kept significantly lower than the competition.

Production

Distribution

Tesco

With one of the most advanced supply chain systems in the world they are able to deliver the right product to the right store at the right time in a cost effective and timely manner.

System

Relationship&of&SCA&to&other&Strategic & Conc epts & &

Concept

Relationship to SCA

Branding

Branding is what differentiates a product from competitors; brand equity is a potential source of SCA.

Market orientation

Market orientation is an intangible resource, which involves a dual focus on both customers and competitors and can contribute to SCA.

Organizational

The management of information is an asset used to gain SCA; SCA lies in the ability to learn faster than competitors.

learning

Innovation

CA may result from those innovations, which are consistent with the firm, both socially and technologically, and provide some distinct value to customers, either directly or indirectly.

Customer value

The provision of customer value is a source of SCA; customers’ desired value changes, firms should monitor these changes via continuous learning about customers

Relationship

The building of trust and commitment make relationship marketing rare and difficult to imitate, thus rendering it a potential source for SCA.

marketing

Networks

Networks involve technology transfer and informational exchange; trust fosters network relationships; networks allow for core competencies to be strengthened, resulting in SCA; network relationships should be a part of strategic planning.

Case&study&of&Dell®&Computer&Corporation &

During the heyday of the technology boom throughout the 1990’s many companies experienced enormous success for a few years, however without creating a solid internal framework many of these companies did not survive. An exception to that business trend is Dell, which was able to address its problems associated with rapid growth, and build itself into a lasting profitable company. Dell was able to create this lasting profitability with three essential ingredients: 1. “Virtual Integration” 2. Real value customer service features 3. Tailoring Manufacturing to customer needs.

In 1993 Dell reached a point where it had grown too large, without making the necessary internal improvements to stay profitable. Dell reached a “Eureka” moment in 1993 when its cash flow sank to $20 million, net income was negative $40 million, and its market share had shrunk considerably. By bringing in several seasoned managers to focus on specific aspects of the business Michael Dell hoped that Dell could become a synchronized, efficient, and profitable business again. These improvements lead to Michael Dell’s breakthrough concept of “virtual integration,” which goes a step further than traditional integration by connecting the right parts together in the business.

From this concept three key integrations formed: 1. A symbiotic relationship between Dell and its suppliers; 2. Customers linked directly to manufacturer; and 3.

End user were linked to proper customer service assistance. Each one of these measures enabled costs cuts; quicker deliver time, and a more reliable finished product. For instance, with this new symbiotic relationship with its suppliers allowed Dell to trim the number of suppliers it used from 204 to 47 in their Austin facility between 1995 and 1998. These integrations caused the number of days a PC sat in inventory from 32 days to 7 days. By customizing orders the customer received a product tailored to their desires while Dell saved money and time on manufacturing.

Hoping to gain a competitive advantage, the firm started to sell PCs via the Internet in 1996. It became possible for customers who previously had placed custom orders via the telephone to place them on Dell's Web site. Customers could select configuration options, get price quotes, and order both single and multiple systems. The site also allowed purchasers to view their order status, and it offered support services to Dell owners. Within a year, Dell was selling roughly $1 million worth of computers a day via the Internet. Even more importantly, nearly 80 percent of the online clients were new to Dell. With the more automated Web-based PC purchasing process, Dell found itself able to handle the growing sales volume without having to drastically increase staff. Cost savings also were achieved as the firm's phone bill began shrinking. Dell's business model, which allowed for easy tracking of customer purchases, also allowed the firm to keep inventory at a minimum.

Tailoring manufacturing to a customer's specific needs allowed Dell to integrate production schedules with sales flows, assemble all parts of the PC on site, and install the specific software that the customer requested. These manufacturing interactions sped up the final products completion time to thirty-six hours. The swiftness of the manufacturing process added value to the customer by quickening the delivery time. As well suppliers wanted to do business with Dell because there inventory levels rarely pilled up. The advantages in this chain of integrations added value to the customer’s product, while also adding value to Dell as a corporation. Dell's corporate value made it one of the best investments in the 1990’s.

Dell did something else other PC companies were not doing; strategically targeting only the customers they wanted. By defining their customer as a ‘knowledgeable PC user’ Dell made their task of providing a PC easier. Their customers did not need to go to a retail store to gain knowledge about their product. This enabled the ‘Direct Model’ for purchasing PC’s to work.

Dell further expanded its ability to meet customers needs by classify customers into specific categories. Customers were categorized into Relationship buyers, large businesses and institutions, and Transaction buyers, small business and home PC users. The Relational buyers made up a significantly larger portion of Dell’s business but also had different needs than Transaction buyers. Every relational buyer was assigned a representative who guided the business and institution through each stage of the buying experience. By integrating both Relational and Transaction buyers into

their business system repeat purchases were quick and easy, purchasing history could be consulted, and follow up customer service was able to be more effective.

Dell’s business structure of “virtual integration” allowed it to excel in an incredibly competitive industry. It's competitiveness in the industry resulted from a highly efficient business model that sought out every opportunity to work more productively without compromising the quality of their product. Production efficiency lowered cost which in turn provided Dell with larger profit margins. As Porters Five Forces demonstrates, when bargaining power of buyers is high, the potential for price battles increases. Dell combated failing into the trap of a price battle by making a PC that was a better product than the competitors, yet near their competitor’s price. There costs were able to stay competitive while delivering an exceptional product because their business kept internal costs low, thus showing the effectiveness of “virtual integration.” Like Honda, Dell was able to provide a technologically superior product at a reasonable price. As well, Dell was able to evade a price war because its customers were aware of the technological value in a Dell PC.

In 2001, Dell usurped Compaq Computer Corp. as the world's largest PC maker.

Conclusion & &

Warren Buffet was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage". Establishing a sustainable competitive advantage is not quite as simple as just doing things differently. Moreover, a competitive advantage may be temporary or short-term as competitors tried to emulate the more successful companies and change their own technology and strategy. Sustainable competitive advantage allows for the maintenance and improvement of a company’s competitive position in the market. It is an advantage that enables your business to survive against its competition over a long period of time. The advantage comes from your company’s unique skills and resources working together to implement strategies that competitors cannot implement as effectively.

Above writings signify competitive advantage, as the ability to stay ahead of present or potential competition, thus superior performance reached through competitive advantage will ensure market leadership. Also it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating competitive advantage.

Bibliography &

For this paper I have referred the following sources:

An Examination of the "Sustainable Competitive Advantage" Concept: Past, Present, and Future - Nicole P. Hoffman “Academy of marketing science review”, 2000

Jay B. Barney and Delwyn N. Clark “Resource based theory – creating and sustaining competitive advantage”

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