Professional Documents
Culture Documents
Evaluating a Company's
Resources, Cost Positio n,
and Competitive Stre n gth
LOl.
LOz.
LO3.
LO4.
Chapter
4,
1.
2.
Question
Strategry Working?
The two best indicators of how well a company's strategy is working are
(1) whether the company is achieving its stated financial and strategic objectives and (2) whether the company is an above-average industry performer.
Persistent shortfalls in meeting company performance targets and -,t'eak performance relative to rivals ae eliable warning signs that the company suffers
from poor strategy making, less-than-competent strategy execution, or both.
Other indicators of how n,ell a company's strategy is working include:
.
.
o
.
.
.
.
with customers.
The stronger a company's current overall performance, the less likely the
need for radical changes in strategy. The n'eaker a company's financial performance and market standing, the more its current strategy must be questioned. (A compilation of financial ratios most commonly used to evaluate a
company/s financial performance and balance sheet strength is presented in
the Appendix on pages 240-247).
the past decade, thereb been considerable research into the role a companV's resources
and competitive capabilities play in crafting strategy and in determining company profitabllty.
The findings and conclusions have coaLesced into what is caLted the resource-based view of the
firm. Among the most insightful publications on the topic are Birger Wernerfelt, 'A ResourceBased View of the Firm," Strategc Monagement lournd Septem ber-October 1984, pp. 1/1-180;
lay Barney, "Firm Resources and Sustained Competitive Advantage," lournol of Monagenent 17,
no. r (199r), pp. 99 1,2oi Margaret A. Peteraf, "The Cornerstones of Competitive Advantage: A
Resource Based View," Strategic Monogement Journdl, March ry93, pp. r7g-rgt Eirger
Wernerfelt, "The Resource-Based View of the Firm: Ten Years After," Strotegic Monogement
Journal 16 (r99S), pp. 171-77 + )ay B. Barney, "Looking Inside for Competitive Advantage,"
Academy of Management Executive 9, no. 4 (Novembet \995J, pp.49 1; Christopher A. Bartlett
and Sumantra Ghoshal, "Building Competitive Advantage through People," MIT Sloon Monogement Review 43, no 2, (Winter zooz), pp.34-411 Danny MilLer, Russell Eisenstat, and Nathanel
Foote, "Strategy from the Inside 0ut: Buitding CapabiLity-Creating 0rganizations," Californio
Monogement Review 44, no. 3 (Spring zooz), pp. )7-54; and Jay B. Barney and DeLwyn N. CLark,
Resource-Based Theory: Creoting and Sustann9 Competitive Advontage (New York: Oxford
Unversity Press, 2oo7).
Situation Analysis
ldentiffing
Com
petitively lmportant
.
.
.
dealers.
.
.
resources is how
powerful they are in the marketplace. The competitive power of a resource is
measured by how many of the following four tests it can pass:3
'1. ls the resource really competitiaely oaluable? Al1 companies possess a collec-
2.
than theirs.
3.
Is the resolrrce hard to copy or imitate? The more difficult and more expensive
it is to imitate a company's resource or capability, the greater its potential
competitive value. Resources tend to be difficult to copy when they are
unique (a fantastic real estate location, patent protection), when they must
built over time (a brand name, a strategy suppi;rtive organizational culture), and when thev carrv big capital requirements (a cost-effective plant
to manufacture cutting-edge microprocessors). Walmart's competitors
have failed miserably in their attempts over the past two decades to match
its state-of-the-art dishibution capabilities.
be
4.
Cnn the resource be trumped b'r substitute resource strengths and competitae
cnpnbilities? Resources that ae competitively valuable, rare, and costly to
imitate lose their ability to offer competitive advantage if rivals possess
ChapteFl
the size of the s\ 'oosh, stitching patterns, sole color and tread pattern, and
insole design. About 400 models are approved by the committee each year,
which are souced from contract manufacturers and
marketed in more than 180 countries. The bundling of
Comoanies that lack a stand-atone resource
Nike's professional endorsements, R&D activities, that is competively powerful may nonetheless
marketing research efforts, styling expertise, and man- develop a competitive advantage through
agerial know-how has become an important source of
bundled resources.
the company's competitive advantage ar-rd has allowed
it to remain number one in the athletic footwear and apparel industry for more
than 20 years.
Resource-based strategies can also be directed at eroding or at least neutralizing the competitive potency of a particular rival's resourccs and capabilitics
by dentifying and developing substitute resources to accomplish the same
purpose. For examplc, Amazon.com lacks a big netr,r'ork of retail stores to compctc with those operated by rival Barnes & Noble, but Amazon's much larger,
readily accessible, and searchable book inventory-coupled with its short
deliverv times and free shipping on oders over $25are more attractive to many busy consumes than visit- Rather than try to match the resources and
ing a big-box bookstore. In other words, Amazon has capabilities possessed by a rival company, a
carefully and consciously developecl a set of competi- company may develop entirely different
trvely valuable resources that are proving to be effec- resources and capabilties that substitute for
tive substitutes for competing head-to-head against the sbengths of the rival.
Barnes and Noble without having to invest in hundreds
of brick-and-mortar retail stores. Whereas manv cosmetics companies sell their
products through department stores and specialty retailers, Avon and Mary
Kay Cosmetics have substituted for the lack of a retail dealer netr'r'ork by
assembling a direct sales force numbering in the hundreds of thousancls-their
sales associates can personally demonstrate products to interested buyers
in their homes or at parties, take orders on the spot, and deliver the items to
buvers'homes.j
'1. A competence is an internal activity an organization performs with proficiency. Some competencies relate to fairly specific skills and expertise
(like just-in-time inventory control or picking locations for new stores)
and may be performed in a single department or organizational unit.
4 For
a more detailed discussion, see George Stalk, Philip Evans, and Lawrence E. Schulman,
"Competing on Capabitities: The New Rules of Corporate Strategy," Horvord Business Review 7o,
no. z (March-April ry92), pp. 57-69.
Part
One:
2.
3.
A distinctive competence is a competitively valuable activity that a company performs better than its riaals. Bccause a distinctivc competcncc rcprcsents a uniquely strong capability relative to rival companies, it has
significant competitive advantage potential This is particularly true when
the distinctive comDetence enables a comDanv to deliver standout value to
customers (in the form oilo*"r prices or better prodA distinctive competence is a competitively uct Performance or suPerior service). Toyota has
important activity that a company performs worked diligently over several decades to establish a
distinctive comPetence in low-cost, high-quality manbetter than its rivals-therefore offering the
potenal for competitive advantage.
ufacturing of motor vehicles; its "lean production"
system is far superior to that of any other automaker's
and the company is pushing the boundaries of its production advantage
with a new Global Body assembly line. Toyota's Global Body assembly
line costs 50 percent less to install and can be changed to accommodate a
new model for 70 percent less than its previous production system.5 The
conceptual differences between a competence, a core competence, and a
distinctive competence draw attention to the fact that a company's
resources and competitive capabilities are not all equal.n Strme capabilities
George Stalk, lr and Rob Lachenauer, "Hard BalL: Five Killer Strategies for Trouncing the
Competition," HoNotd Eusiness Review 82, no. 4 (April zood, p. 65.
6
For a more extensive discussion of how to identifu and evaluate the comDetitive oower of a
company's capabilities, see David W. Birchall and George Tovstiga, "The Strategc Potential of a
Firm's Knowledge Portfolo," Journal of General Management 25, no. 1 (Autumn 1'999), pp. r-16;
and David Teece, "Capturing Value from Knowledge Assets: The New Economy, Markets for KnowHow, and Intangibl Assels," Califomio Manoqement Review 4o, no. 3 (Spring 1998), pp. 55 79.
5
Chapter
4,
and competencies merely enable marke t survival because most rivals have
them. Core competencies are competitiaely more important than competencies because they add power to the company's strategy and have a bigger
positive impact on its market position and profitability. Distinctive competencies are even more competitively important. A distinctive competence is
competitivelv potent for three reasons: (1) It gives a company comPetitively valuable capability that is unmatchetl by rivals, (2) it has potential
for being the cornerstone of the company's strategy, and (3) it can produce
a competitive edge in the marketplace.
COI\'ll'L I E\CIES A company's resource strengths reprcsent its competiti\-e assets and determine whether its competitivc Power in the marketplace
rn il1 be impressivelv strong or disappointingly weak. A company that is wellendowed with potent resource strengths and core competencies normally
has considerable competitive powcr-especially when its management team
skillfully utilizes the company's resources in ways that build sustainable
competitive advantagc. Companies with modest or weak competitive assets
nearly always are relegated to a trailing position in the industry. Table 4.1 lists
the kinds of factors to consider in compiling a company's resource strengths
and weaknesses.
relate to:
.
.
.
lnferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business.
Deficiencies in competitively important physical, organizational, or intangible assets.
Missing or competitively inferior capabilities in key areas.
Part
One:
Section
Table 4.1
. Core competencies in _
. A strong frnancial condition; amplc frnancial resources to grow the business.
. Strong brand name image/company reputation.
. Economy of scale and/or learning and experience curve advantages over rivals.
o Proprietary technology/superior technological skills/important patents.
. CLr5t ddvanldg,es t.rver rivls.
. Product innovation caoabilities.
. Proven capabrlitics rn improving production processes.
. Cood supply chain management capabilities.
. Cood customer service capabilities.
. Better product quality relatrve to rivals.
. Wide geographic covcrage and/or strong global distribution capabiliry.
. Alliances/ioint ventures with other lirms that provide access to valuable
technology, competencies, and/or attractive geographic markets.
.
.
.
.
.
.
.
.
o
o
.
.
.
marSrns.
constructin g
where resource
lD[\TIFYING
Part
One:
l
Simply making lists of a company's strengths,
weaknesses, opportunities, and threats is
enough; the payoff from SWOT analysis comes
not
Z.
Chapter
8$
FI(;Ull
Prmary
ArtiYties
and
Costs
Support
Activiiies
ano
CosG
PRIMARY ACIVITIES
Supply Chain Manatment-Actvities, costs, and assets associated with purchasing fuel, energy, ra$ materals, parts and
components, merchandise, and consumable tems from vendors; receiving, storing, and dissemnatng inputs from suppliers;
inspection; and inventory management.
Opelations-Activties, costs, and assets assoclated with convertng inputs into final product form (production, assembly,
packaging, equipment mantenance, faclties, operations, quality assurance, environmental protection).
Distributlon -Actvties, costs, and assets deaLng with physically distributing the product to buyers (finished goods
warehousng, order processing, order picking and packing, shpping, delivery vehicle operations, estabtshing and
maintainng a network of dealers and dstributors).
Sales and Marketng-Actvites, costs, and assets related to sales fofce efforts, advertising and promotion, market
research and planning, and dealer/distrbutor support.
Service-Activities, costs, and assets associated with provding assistance to buyers, such as nstatlaton, spare pans
delivery, mantenance and repar, technical assistance, buyer inquiries, and complants.
SUPPORT ACTIVITIES
.
.
Product R&D, Technology, and Systems Development Actvities, costs, and assets relating to ploduct R&D, process
R&D, process design improvement, equipmen desgn, computer software development, telecommunications systems,
computer-assisted design and engineering, database capablities, and development of computerzed support systems.
Human Resources Management Actvtes, costs, and assets associated with the recrutment, hiring, training,
development, and compensation of all types of personnel; [abor relations activities; and development of knowledge-based
General Adminstraton-Activities, .osts, and assets relating to general management, accounting and fnance, legal and
regulatory affars, safety and security, management information systems, forming strategic alliances and collaboratng
pp 37-43.
include sitc selection, hiring and training, store maintenrnce, plLls the r-rsr-ral
assortmc.nt of admlnistrativc activities. A hotel chain's primarv aciivities an!-l
costs are mainlv comprised of reservations and hotel oPeratiolls (check-tn
and check-out, maintenance and housekeeping, dining and roorn service, and
Part
One:
For more details, see Gregory H. Watson, Strotegc Benchmorking: How to Rote Your Compony's
Performonce Against the World's Best (New York: john WiLey, 1993); Robert C. Camp, Benchnorkng: The Seorch for lndustry Best Practices Thot Leod to Superor Performonce (Milwaukee: ASQC
Quality Press, 1989); Christopher E. Bogan and Michael I. English, Benchmarkng lor Best Practices: Winning through lnnovative Adoptotrcn (New York: lvlccraw-Hll, t994); and Dawn lacobucc
and Christie Nordhielm, "Creatrve Benchmatking," Harvord Busness Revew 28, no. 6 (NovemberDecember zooo), pp. z4-25-
t leremy Main, "How to Steal the Best ldeas Atound," Forfune, October 19, 1992, pp. ro2 1oj.
Chapter
Internal Situation
Analysis
EJ
The tough part of benchmarking is not whether to do it, but rather how to
gain access to information about other companies' practices and costs. Sometimes benchmarking can be accomplished by collecting information from published reports, trade groups, and industry research firms and by talking to
knowledgeable industry anaiysts, customers, and suppliers. Sometimes field
trips to the facilities of competing or noncompeting companies canbe arranged
to observe hon'things are done, cornpare practices and processes,, and perhaps
exchange data on productivitv and other cost components. However, such
companies, even if they agree to host facilitics tours and ans\ er questions,
are unlikely to share compctitivcly sensitive cost information. Furthermore,
comparing trvo companies'costs may not involve comparing apples to apples
if thc two companies cmploy different cost accounting principles to calculate
the costs of particular activities.
Hon,ever, a fairly reliable source of benchmarking information has emerged.
The explosive interest of companes in benchmarking costs and identifying
best practices has prompted cor-rsulting organizations (e.g., Accenture, A. T.
Kearney, Benchnet-The Benchmarking Exchange, Towers Perrin, and Bcst
Practices, LLC) and several councils and associations (e.g., the APQC, the
Qualservc Bcnchmarking Clearinghouse, and the Strategic Planning Institute's
Council on Benchmarking) to ;ather benchmarking data, distribute information about best practices, and provide comparative cost data without identifying the names of particular companies. Having an independent group gather
the information and report rt rn a rnarurer that disguises the names of individual comp-rames avords the disclosure of competitively sensitive data and
lessens the potential for unethicai behavior on the part of company personnel
in gathering their own data about compctitors.
FIGURE 4,.2
Supplier-Related
Value
Chains
A Company's Own
Value Chain
Forward Channel
Value Chains
suppliers have built plants near the auto assembly plants they supply to
facilitate just-in-time deliveries, reduce warehousing and shipping costs, and
promote close collaboration on parts design and production scheduling.
Irrigation equipment companies, suppliers of grape-harvesting and winemaking equipment, and firms making barrels, wine bottles, caps, corks, and
labels all have facilities in the California wne country to be close to the nearly
700 winemakers they supply.l'Z The lesson here is that a company's value
chain activities are often closely linked to the value chains of their suppliers
and the forward allies.
As a consequence, accurately assessing a company's competitioeness requires
that company managers understand an industry's entire ualue chain system for delioering a product or setnice to custonters, not just the company's own aalue chain. A
typical industry value chain that incorporates the activities, costs, and margins of suppliers and forward channel allies (if any) is shown in Figure 4.2.
However, industry value chains vary significantly by industry. For example,
the primary value chain activities in the bottled water industry (spring operation or water purification, processing of basic ingredients used in flavored or
vitamin-enhanced water, bottling, wholesale distribution, advertising, and
retail merchandising) differ from those for the computer software industry
(programming, disk loading, marketing, distribution). Producers of bathroom and kitchen faucets depend heavily on the activities of wholesale distributors and building supply retailers in winning sales to homebuilders
and do-it-yourselfers but producers of papermaking machines intemalize
their distribution activities by selling directly to the operators of paper plants.
Concepts & Connections 4.1 shows representative costs for various activities
performed by the producers and marketers of music CDs.
nal activities, the suppliers' part of the industry value chain, and the forward
channel portion of the industry chain.
For more on how and why the clustering of suppliers and other support organizations matter to
a company's costs and co m p etit iveness, see Michael E. Porter, "Clusters and the New Economics
of Competition," Horuord Busness Review 76, no. 6 (November-December ry98), pp- 7l-go.
"
Chapter
4,
l.
9 2.40
s0.7s
2. Royalties
3. Record company marketing expenses
4. Record company overhead
5. Total record company costs
6. Record company's operating profit
7. Record companyt selling pricc to distributor/wholcsaier
B. Average wholesale dstributor markup to cover distribution activities and
9.
profit margns
Average wholesale price charged to retailer
10.
I Of
Sone Developed ftom infomation in "Fight the Power," a case study prepared by Adrian Ateyne, Babson College, 1999.
REMEDYING AN INTERNAL COST DISADVANTAGE Whenacompany's cost disadvantage stems from performing internal value chain activities at a higher cost than key rivals, then managers can pursue any of several
strategic approaches to restore cost parity:13
l.
lmplement the use of best practices throughout the company, particularly for
high-cost activities.
2.
3.
4,
5,
.99
1.50
1.50
6.39
1.86
8.2 5
1.50
9.75
5
.25
$r s.00
Find wnys to detour around the actiaities or items whue costs are hgh----compluler
chip makers regularly design around the patents held by others to avoid
paying royalties; automakers have substituted lower-cost plasfic for metal at
many exterior body locations.
,7
REMEDYING
Chapter,l,
Internal SituationAnalysis
2.
Competitive strength assessments provide useful conclusions about a company's competitive situation. The ratings show hor','l a companv compares
against rir.als, factor by factor or capability bv capability, thus revealing where
it is stron;est and weakest. Moreover, the overall competitive strength scores
indicate whethe the company is at a net competitive advantage or disadvantage against each rival.
In addition, the strength ratings provide guidelines for designing wise
offensive and defensive strategies. For example, consider the ratings and
weighted scores in Table 4.2. If ABC Co. wants to go on the offensive to win
additional sales and market share, such an offensive
probablr needs to be aimed directly at winning cus- A company's competitive strength scores
tomers away from Rivals 3 and 4 (n,hich have lower pinpoint its strengths and weaknesses against
overall strength scores) rather than Rivals 1 and 2
rivals and point to offensive and defensive
(which have higher overall strength scores). ABC's skategies capable of producing lirsfrate results.
advantages over Rival 4 tends to be in areas that are
moderately important to competitive success in the indusfry, but ABC outcLasses Rival 3 on the two most heavily weightcd strength factors relative
cost position and customer service capabilities. Therefore, Rival 3 should bc
viewed as the primarv target of ABC's offensive strate;ies, with Rival 4 being
a secondary tar8et.
The point hcre is that a competitively astute company should utilize the
strength scores in deciding what strategic moves to make. I\hen a company has
important competitivc strengths in areas where one or more rivals are weak,
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Chapter
it
If the items on management's "worry list" are relatively minor, which suggests the company's strategy is mostly on track and reasonably well matched to
Kev Points
There ae five key questions to consider in analyzing a company's own particular competitive circumstances and its competitive position vis--vis key rivals:
l.
2.
How well is the present strntegy working? This involves evaluating the strategy from
a qualitative standpoint (completeness, intemal consistency. rationale, and suitabilify to the situation) and also from a quantitative standpoint (the strategic and
financial results the strategy is producing). The stronger a company's current
overall performance, the less likely the need for radical strategy changes. The
weaker a company's performance and/or the faster the changes in its extemal
situation (which can be gleaned from industry and cornpetitive analysis), the
more its current strategy must be questioned.
What are the coffipany's competitiuely important rcsources and cnpabilities?
3.
Are the company's prices and costs competitiae? One telling sign of whether a
company's situation is strong or precarious is whether its prices and costs are
competitive with those of industry rivals. Value chain analysis and benchmarking ae essential tools in determining whether the company is perform-
4.
5.
ls the company competitiuely stronger or zaeaku than key rioalsT The key appraisals
here involve how the company matches up agairst key rivals on industry key
success factors and other chief determinants of competitive success and whether
and why the company has a competitive advantage or disadvantage. Quantitative competitive sength assessments, using the method presented in Table 4.2,
indicate where a company is competitively shong and weak and provide insight
into the company's ability to defend or enhance its market position. As a rule a
company's competitive stategy shouJd be built around its competitive strengths
and should aim at shoring up areas where it is competitively vulnerable. When a
company has important competitive strengths in areas where one or more rivals
are weak, it makes sense to consider offensive moves to exploit rivals' comPetitive weaknesses. VVhen a company has important comPetitive weaknesses in
areas where one or mote rivals are strong, it makes sense to consider defensive
moves to curtail its vulnerability.
What strategic issues and problems merit f'ront-burner managerial attention?
Tlis
analytical step zeros in on the stategic issues and problems that stand in the
way of the company's success. It involves using the results of both industry
and competitive analysis and comPany situation analysis to identify a "worry
list" of issues to be resolved in order for the company to be financially and
competitively successful in the years ahead. Actually deciding upon a shaF
egy and what specific actions to take is what comes after the list of strategic
issues and problems that merit front-burner management attention has been
developed.
Good company situation annlysis,like good industry and competitiae analyss, is a oaluable
precondition for good strategy making.
LOI 1.
Using the financial ratios provided in the Appendix and the financial statement
information for Avon Products below, calculate the following ratios fo Avon for
both 2007 and 2008:
a.
b.
c.
d.
e.
f.
B.
h.
i.
j.
Debt-to-equityratio
Days of inventory
Based on these ratios, did Avon's financial performance improve, weaken, o remain
about the same from 2007 to 2008?
Net sales
Other revenue
Total revenue
$ 1 0,588.9
$ 9,84s.2
101,2
1
I3.-5
9,9i8.7
j,949.1
3,941 .2
5,401 7
1,339
100 4
5,124.8
872.7
lt7.1)
377
(42 -2)
0,690.
6.6
76.6
101.0
1,238.3
362.7
875.6
Minority interest
Net income
112.2
796.1
262.8
533.3
(0 3)
12.6J
875.3
$ 530.7
$
$
Basc
Diluted
\teighted-average shares outstandi
Bs i(
Dilufed
205
2.04
$
$
1.22
1
.21
g:
426.36
429.53
433.47
436.89
Assurance
of Learning
Exercises
Current assets
Cash, including cash equivalents of $704.8 anrl $492.i
Accounts recevable (less allowances of $1 2 7.9 and $ 141
tnventone5
,1
04.7
963.4
795.O
687 .8
.1 )
1
,OO7 9
756_5
3,5 5 6.9
,041 .8
71 5.2
l,5 t 5.4
85.3
71 .B
1,OO0.7
972.7
1,3't7.9
2,362.4
Land
r,353.9
2,439.9
(1,096.0)
1,34i.9
Other assets
Total assets
[iabilities and Shareholders' Equity
Current liabilities
Debt maturing within one year
Accounts payable
Accrued compensation
Other accrued liabilities
Sales and taxes other than incomc
lncome taxes
Total current labilites
Long-term debt
Employee benefit plans
LonB-term income taxes
Other liabrlities (inr:luding minority nterest of $37.4 and $38.2)
Total liabilities
Commtments and ( ontinSencies (Notes I 3 and I 5)
Shareholders'equity
Common stock, par value $.25 - aufhrrrized 1,500 shares; issued
739.4 and 736.3 sharcs
Additional pa id-in capital
l,0l
r .4
800.l
285.8
581 .9
717.2
212.)
222.3
"t96_4
5,399.1
185.6
1
,874.1
4,1
$
$
929.5
214.4
665.4
1 68.9
724.1
128.0
2,912.2
't,456.2
Retaned earnn8s
,17 7.2
s 6,074.0
t1,084.2)
1 ,27 8.2
922.6
$ s,716.2
8.9
102.3
3,053.4
1,167.9
3 88.7
208.7
185.9
$ s,004.6
184 .7
1 ,7 21.6
3,586.5
(965.9)
\417.O)
(4,537.8)
(,4,367 .2)
6749
6,0740
71 1.6
$ s,716.2
LOZ Z.
Review the information in Concepts & Connecons 4.1 concerning the costs of
the different value chain activities associated with recording and distributing
music CDs through traditional brick-and-mortar retail outlets. Then answer the
following questions:
a.
Does the growing popularity of downloading music from the Intemet give
rise to a new music industry value chain that differs considerably from the
taditional value chain? Explain why or why not.
b.
What costs would be cut out of the taditional value chain or bypassed in the
event recording studios sell downloadable files of artists' recordings direct to
c.
What happens to the traditional value chain if moe and more consurlers
use peer-to-peer file-sharing software to dor,lrrload music fom the Intemet
rather than purchase CDs or downloadable files?
online buyers?
LOI
1.
102
LO3
What hard evidence can you cite that indicates your company's skategy is working fairly well (or perhaps not working so well, if your company's perforrrance
is lagging that of rival companies)?
2.
3.
4.
Does your company have any core competencies? If so, what are they?
5.
What are the key elements of your company's value chain? Refer to Figue 4.1 in
developing your answer,
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