4

External and Internal Organizational Environments and

Corporate Culture
Exhibit 4.1 (Credit: Free-Photos/ Pixabay/ (CC BY 0)), modified from an original image by Ivan Mlinaric)

Introduction
Learning Outcomes
After reading this chapter, you should be able to understand these statements:

1. Define the external environment of organizations.

2. Identify contemporary external forces pressuring organizations.
3. Identify different types of organizational structures and their strengths and weaknesses.
4. Explain how organizations organize to meet external market threats and opportunities.
5. Identify the fit between organizational cultures and the external environment.
6. Identify environmental trends, demands, and opportunities facing organizations.

EXPLORING MANAGERIAL CAREERS

Jeff Bezos of Amazon

Amazon’s market value was estimated at $1 trillion USD dollars in 2018. The company was recognized as
the most innovative company in Fast Company’s 2017 list, accounting for 44 percent of all U.S. e-
commerce that year—approximately 4 percent of the U.S.’s total retail sales. Amazon market value is
greater than the sum of the market capitalizations of Walmart, Target, Best Buy, Nordstrom, Kohl’s,
JCPenney, Sears, and Macy’s. Jeff Bezos, founder and leader, has creatively accomplished what most
large companies fail at: meshing size, scale, and external opportunities with agility. Sales figures reached
$100 billion in 2015 while the stock price climbed over 300% in the past five years. The company plans on
creating over 50,000 new jobs starting in 2018. Bezos has blended his strategy of virtually reaching
82 Chapter 4 External and Internal Organizational Environments and Corporate Culture

unlimited numbers of online customers while maintaining land-based distribution centers using Prime’s
$99-per-year—$119 in 2018—membership. Stephenie Landry, an Amazon’s vice president, stated that
Prime has reached 49 cities in seven countries. Over 100 million people in 2018 subscribe to the Prime
service. She noted that the business has only to answer two questions from customers: “Do you have
what I want, and can you get it to me when I need it?” The answer seems to be yes, especially with
Bezos’s strategy of having high-tech robots already working side by side with human
employees—resembling a “factory of the future.”

Bezos’s digital commerce strategy has led the firm to become the leader of retail commerce. Amazon’s
digital strategy uses Prime memberships that are supplied and supported by land-based distribution
centers; Prime takes in reaching about 60% of the total dollar value of all merchandise sold on the site.
That accounts for 60 million customers in the United States who use Prime and who spend $2,500 on
Amazon annually. A study of 3,000 independent businesses, half of whom were retailers, listed
competition from Amazon as their primary concern. Industry after industry is being disrupted, some
replaced, by Bezos’s strategy. He has said, “Everybody wants fast delivery. Low prices. I’m serious about
this. Our job is to provide a great customer experience, and that is something that is universally desired
all over the world”.

Still, Amazon faces such challenges as high shipping cost (over $11 billion annually), pressures on
employees (especially those working in warehouses that have been criticized for poor working
conditions), shipping contractors who go on strike demanding higher wages and reduced workloads,
and the possibilities of more governmental regulation (especially with regard to adding drones as a
delivery method), as well as pressures to pay more taxes. Bezos has countered these arguments by
adding more full-time jobs in different cities, promising to improve working conditions, supporting
public spaces for the public, and most importantly, contributing to the U.S. economy.

Sources: https://www.bloomberg.com/news/articles/2018-04-26/amazon-eyes-second-biggest-market-
cap-surging-past-microsoft. Noah Robischon, (2017). Why Amazon Is The World’s Most Innovative
Company Of 2017, https://www.fastcompany.com/3067455/why-amazon-is-the-worlds-most-innovative-
company-of-2017; L. Thomas, (2018). Amazon grabbed 4 percent of all US retail sales in 2017, new study
says, https://www.cnbc.com/2018/01/03/amazon-grabbed-4-percent-of-all-us-retail-sales-in-2017-new-
study.html

Organizations and industries are again at a crossroads when confronting new and challenging external
environmental demands. Exceptional companies such as Amazon, in the opening case, Apple, Netflix, and
Google/Alphabet Inc. exemplify evolving business models that combine strategic innovation, technological
prowess, and organizational cultural agility that not only meet external environmental demands, but also
shape them.

Many businesses with traditional business models, however, have failed or are not succeeding strategically,
operationally, and organizationally by not realizing and/or adapting to changing external environments. Such
firms that were once successful but did not anticipate and then adapt to such changes include Blockbuster,
Toys R Us, Borders, Sun Microsystems, Motorola, Digital Equipment Corporation, Polaroid, and Kodak, to name
only a few. A sample of contemporary external environmental trends and forces that currently challenge
organizations’ survival and effectiveness includes:

• Digital technologies and artificial intelligence (AI): Extensions of AI help automate a firm’s value chain, thus
speeding up and increasing efficient operations and service to customers—as Amazon exemplifies. A

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Chapter 4 External and Internal Organizational Environments and Corporate Culture 83

current survey showed that 59% of organizations are collecting information to develop AI strategies, while
others are moving forward in piloting and/or adopting AI solutions to compete faster and at less cost. 1
However, there are also risks that accompany firms that incorporate new digital and online technologies
without adequate security measures. For example, some newer online technologies can expose
operational systems to cyberattacks and large-scale manipulation. Hacking is now both an illegal and
ongoing “profession” for those who are able to paralyze organizations from accessing their data unless
they pay a ransom. While hacking is not new, it is more widespread and lethal, to the point of even
threatening national security. Emerging evidence from the U.S. presidential election between Donald
Trump and Hillary Clinton suggests that international hackers affected online U.S. election processes. Still,
the future of most businesses is using some type of digital and AI technologies.
• The advent of blockchain technologies that are interrupting new industry practices. Blockchain is not a
single technology; it is “an architecture that allows disparate users to make transactions and then creates
an unchangeable record of those transactions.” It is “a public electronic ledger—similar to a relational
database—that can be openly shared among disparate users and that creates an unchangeable record of
their transactions, each one time-stamped and linked to the previous one.”2 These technological
inventions will continue to affect almost every business process from procurement to legal management.
The banking industry is already using it. It increases speed, security, and accuracy of transactions.
• Sharing-economy cultural and economic value-added business models that use information technologies to
gain competitive advantage. Companies such as Airbnb and Uber have ushered in new business models
that have already disrupted real estate, hotel, taxi, and other industries. Taking out the middle layer of
management in transactions to increase efficiencies and customer satisfaction while cutting costs
through the use of information and social media technologies will continue. This trend has already had
both positive and disruptive effects on companies. Many customers are likely benefitted; businesses with
outdated and ineffective business models have either failed or struggle to adapt.
• Shifts in learning and learning credentials. Identifying, recruiting, and retaining talent is crucial to
organizations. An evolving crisis for the current generation—future talent—is the continued rise in higher
educational institutions’ tuitions, student debt, and the changing nature of jobs. With the advent of online
resources, prospective students’ inability to pay creates both a crisis and opportunity for traditional
higher educational institutions. While bachelor’s degrees remain a requirement for many companies
hiring needed higher-level talent, online resources such as Khan Academy, Udacity, and Coursera are
gaining recognition and legitimacy toward providing financially challenged students opportunities for
entry-level jobs. While many higher-skilled students and professionals may not presently be included in
this trend, companies seeking to pay lower wages while offering flexible working conditions are attracting
students.3 Again, how higher educational private, not-for-profit, and even for-profit educational
institutions adapt, innovate, and manage their external environments is yet to be seen.
• Ethics, corporate social responsibility (CSR), and sustainability. Corruption, lying, and fraud have been and
continue to be part of the landscape of governments and public- and private-sector corporations.
However, public awareness through social and online media has awakened consumers and corporations
to the impending dangers and drawbacks of illegal and unethical activities of certain large corporations.
And external environmental problems, created in part by humans, such as pollution and climate change
pressure companies to be responsible for their share of the costs associated with these problems.

This small sample of powerful external forces illustrates the continuing pressure companies encounter to
innovate in their industries. Basic theories, concepts, and principles are presented in this chapter to help
explain elements of external environments and how organizations and corporations can organize and are
organizing to survive and thrive in the 21st century.
84 Chapter 4 External and Internal Organizational Environments and Corporate Culture

4.1 The Organization's External Environment

1. Define the external environment of organizations.

To succeed and thrive, organizations must adapt, exploit, and fit with the forces in their external environments.
Organizations are groups of people deliberately formed together to serve a purpose through structured and
coordinated goals and plans. As such, organizations operate in different external environments and are
organized and structured internally to meet both external and internal demands and opportunities. Different
types of organizations include not-for-profit, for-profit, public, private, government, voluntary, family owned
and operated, and publicly traded on stock exchanges. Organizations are commonly referred to as companies,
firms, corporations, institutions, agencies, associations, groups, consortiums, and conglomerates.

While the type, size, scope, location, purpose, and mission of an organization all help determine the external
environment in which it operates, it still must meet the requirements and contingencies of that environment
to survive and prosper. This chapter is primarily concerned with how organizations fit with their external
environments and how organizations are structured to meet challenges and opportunities of these
environments. Major takeaways for readers of this chapter include the following: 1) Be able to identify
elements in any organization’s external—and internal—environment that may interest or affect you as an
employee, shareholder, family member, or observer. 2) Gain insights into how to develop strategies and tactics
that would help you (and your organization) navigate ways to cope with or try to dominate or appeal to
elements (e.g., market segments, stakeholders, political/social/economic/technological issues) in the
environment.

The big picture of an organization’s external environment, also referred to as the general environment, is an
inclusive concept that involves all outside factors and influences that impact the operation of a business that
an organization must respond or react to in order to maintain its flow of operations.4 Exhibit 4.2 illustrates
types of general macro environments and forces that are interrelated and affect organizations: sociocultural,
technological, economic, government and political, natural disasters, and human-induced problems that affect
industries and organizations. For example, economic environmental forces generally include such elements in
the economy as exchange rates and wages, employment statistics, and related factors such as inflation,
recessions, and other shocks—negative and positive. Hiring and unemployment, employee benefits, factors
affecting organizational operating costs, revenues, and profits are affected by global, national, regional, and
local economies. Other factors discussed here that interact with economic forces include politics and
governmental policies, international wars, natural disasters, technological inventions, and sociocultural forces.
It is important to keep these dimensions in mind when studying organizations since many if not most or all
changes that affect organizations originate from one or more of these sources—many of which are
interrelated.

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Chapter 4 External and Internal Organizational Environments and Corporate Culture 85

Exhibit 4.2 Macro Forces and Environments (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)

Globalization is a combination of external forces shaping environments of organizations. Defined as the

development of an integrated global economy and characterized by free trade, capital flows, communications,
and cheaper foreign labor markets, the processes of globalization underlie the forces in the general
international economic environment. This dimension continues to present opportunities and pressures to
companies operating locally as well as globally. Globalization continues to affect industries and companies in
ways that benefit some and not others. Amazon, for example, is thriving. The firm sells low-end products
through its brand AmazonBasics. The company has individual retail websites for the United States, the United
Kingdom and Ireland, France, Canada, Germany, Italy, Spain, the Netherlands, Australia, Brazil, Japan, China,
India, and Mexico. Uber and Airbnb represent some of the larger sharing-economy companies that operate
internationally and have to date prospered in the so-called new but fragmenting global economy.
86 Chapter 4 External and Internal Organizational Environments and Corporate Culture

Exhibit 4.3 Bezos Jeff Bezos’ digital commerce strategy has led the firm to become the leader of retail commerce, and forced traditional
retailers like Toys R Us to close their operations, and retailers like Walmart, Target, and Sears to reassess their business environment. Amazon’s
digital strategy uses Prime memberships that are supplied and supported by land-based distribution centers; Prime takes in reaching about
60% of the total dollar value of all merchandise sold on the site. (Credit: Sam Churchill/flickr/ Attribution 2.0 Generic (CC BY 2.0))

In general, countries that have gained from globalization include Japan, South Korea, Taiwan, Malaysia,
Singapore, Hong Kong, Thailand, and China. China’s markets and growing economic prowess have particularly
been noticed. China’s GDP (gross domestic product) is estimated at $13.2 trillion in 2018, outpacing the $12.8
trillion combined total of the 19 countries that use the euro.5 Corporations worldwide, large and small, online
and land-based, strive to gain access to sell in China’s vast markets. Moreover, China at the beginning of 2018
owns $1.168 trillion of the United States’ debt.6 Japan, in second place, owes $1.07 trillion of this debt. Any
instability politically and economically with China could result in increasing inflation and interest rates in the
U.S. economy that could, in turn, negatively affect U.S. businesses.

Economic forces
Economically, “The strategic challenge of the next decade is navigating a world that is simultaneously
integrating and fragmenting. Stock markets have set new records and economic volatility has fallen to historic
lows, while political shocks on a scale unseen for generations have taken place. Seemingly contradictory
realities do co-exist.”7 Overall, while economic data indicates that globalization has had a positive effect on the
world economy, a dark side also shows that two-thirds of all households in 25 advanced-economy countries
had incomes stagnate and/or decline between 2005 and 2014. Moreover, the U.K. and U.S. witnessed falling
wages. Wealth distribution in these countries continues to decline. Income inequality globally is also rising.
Other trends that also affect the global, regional, and local economies are discussed in this chapter as well as
below.

Technological forces are another ubiquitous environmental influence on organizations. Speed, price, service,
and quality of products and services are dimensions of organizations’ competitive advantage in this era.
Information technologies and social media powered by the Internet and used by sharing-economy companies
such as Airbnb and Uber have democratized and increased, if not leveled, competition across several
industries, such as taxis, real estate rentals, and hospitality services. Companies across industry sectors cannot

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Chapter 4 External and Internal Organizational Environments and Corporate Culture 87

survive without using the Internet, social media, and sophisticated software in R&D (research and
development), operations, marketing, finance, and sales. To manage and use big data in all these functional
areas, organizations rely on technology.

Government and political forces also affect industries and organizations. Recent events that have jarred the
global economy—and are too early to predict the long-term outcomes of—are the United Kingdom’s exit from
the European Union, President Trump’s nationalistic policies echoed by other presidents in Chile and
Argentina,8 wars in the Middle East, policies that question and disrupt free trade, health-care reform, and
immigration—all of which increase uncertainty for businesses while creating opportunities for some industries
and instability in others.

Sociocultural forces
Sociocultural environmental forces include different generations’ values, beliefs, attitudes, customs and
traditions, habits, and lifestyles. More specifically, other aspects of societal cultures are education, language,
religion, law, politics, and social organizations. The millennial (ages 20 to 35) workforce, for example, generally
seeks work that engages and interests them. Members of this generation are also health conscious and eager
to learn. Since this and the newer generation (Generation Z) are adept and accustomed to using
technology—social media in particular—organizations must be ready and equipped to provide wellness,
interesting, and a variety of learning and work experiences to attract and retain new talent. Millennials are also
estimated to be the United States’ largest living adult generation in 2019. This generation numbered about 71
million compared with 74 million baby boomers (ages 52 to 70) in 2016. By 2019, an estimated 73 million
millennials and 72 million boomers are projected. Because of immigration, millennials are estimated to
increase until 2036.9

Other general sociocultural trends occurring in the United States and internationally that affect organizations
include the following: (1) Sexual harassment at work in the era of #MeToo has pressured organizations to be
more transparent about relationships between owners, bosses, and employees. Related to this trend, some
surveys show new difficulties for men in workplace interactions and little effect on women’s career
opportunities taking place in the short term.10 (2) While fewer immigrants have been entering the United
States in recent years, diversity in the U.S. workplace continues. For example, 20 million Asian Americans trace
their roots to over 20 countries in East and Southeast Asia and the Indian subcontinent—“each with unique
histories, cultures, languages and other characteristics. The 19 largest origin groups together account for 94%
of the total Asian population in the U.S.”11 (3) Young adults in the United States are living at home longer. “In
2016, 15% of 25- to 35-year-old Millennials were living in their parents’ home. This is 5 percentage points
higher than the share of Generation Xers who lived in their parents’ home in 2000 when they were the same
age (10%), and nearly double the share of the Silent Generation who lived at home in 1964 (8%).”12 (4) While
women have made gains in the workplace, they still comprise a small share of top leadership jobs—across
politics and government, academia, the nonprofit sector, and business. Women comprised only about 10% of
CEOs (chief executive officers), CFOs (chief financial officers), and the next three highest-paid executives in U.S.
companies in 2016–17.13 A 2018 study by McKinsey & Company “reaffirms the global relevance of the link
between diversity—defined as a greater proportion of women and a more mixed ethnic and cultural
composition in the leadership of large companies—and company financial outperformance.”14 These and
other related sociocultural trends impact organizational cultures and other dimensions involving human talent
and diverse workforces.
88 Chapter 4 External and Internal Organizational Environments and Corporate Culture

Natural disasters and human-related problems

Natural disaster and human induced environmental problems are events such as high-impact hurricanes,
extreme temperatures and the rise in CO2 emissions as well as ‘man-made’ environmental disasters such as
water and food crises; biodiversity loss and ecosystem collapse; large-scale involuntary migration are a force
that affects organizations. The 2018 Global Risks Report identified risks in the environmental category that also
affect industries and companies—as well as continents and countries. These risks were ranked higher than
average for both likelihood and impact over a 10-year horizon. The report showed that 2017 was characterized
by high-impact hurricanes, extreme temperatures, and the first rise in carbon dioxide emissions in four years;
“man-made” environmental disasters; water and food crises; biodiversity loss and ecosystem collapse; and
large-scale involuntary migration to name a few. Authors of this study noted that “Biodiversity is being lost at
mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an
increasingly pressing threat to human health.”15 Most vulnerable to rising seas are low-lying islands in the
Indian and Pacific Oceans. The Republic of the Marshall Islands has more over 1,100 low-lying islands on 29
atolls that include island nations with hundreds of thousands of people. Predictions indicate that rising sea
levels could reach 3 feet worldwide by 2300 or sooner. One report stated that in your child’s lifetime, Miami,
Florida, could be underwater.16 Large sections of Louisiana’s marshes separating the ocean from the coastline
are submerging. Oil producers and other related corporations are being sued by that state, claiming that fossil
fuel emissions have contributed to natural disasters such as climate change. Many new companies in the
United States are already constructing buildings to withstand increasing flooding and predicted rising water
levels.

CONCEPT CHECK

1. Define the components of the internal and the external business environments.
2. What factors within the economic environment affect businesses?
3. Why do demographic shifts and technological developments create both challenges and new
opportunities for business?

4.2 External Environments and Industries

2. Identify contemporary external forces pressuring organizations.

Industry and organizational leaders monitor environments to identify, predict, and manage trends, issues, and
opportunities that their organizations and industries face. Some corporations, such as Amazon, anticipate and
even create trends in their environments. Most, however, must adapt. External environments, as identified in
the previous section, can be understood by identifying the uncertainty of the environmental forces. Exhibit 4.4
illustrates a classic and relevant depiction of how scholars portray environment-industry-organization “fit,”
that is, how well industries and organizations align with and perform in different types of environments.

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Chapter 4 External and Internal Organizational Environments and Corporate Culture 89

Exhibit 4.4 Company Industry Fit Adapted from: Duncan, R. (1972). Characteristics of organizational environments of uncertainty. American
Science Quarterly, 17 (September), 313-327; Daft, R. Organizational Theory and Design, 12th edition, p. 151, Mason, OH, Cengage Learning.

The two dimensions of this figure represent “environmental complexity” (i.e., the number of elements in the
environment, such a competitors, suppliers, and customers), which is characterized as either simple or
complex, and “environmental change,” described as stable or unstable. How available monetary and financial
resources are to support an organization’s growth is also an important element in this framework.17 Certain
industries—soft drink bottlers, beer distributors, food processors, and container manufacturers—would,
hypothetically, fit and align more effectively in a stable (i.e., relative unchanging), simple, and low-uncertainty
(i.e., has mostly similar elements) external environment—cell 1 in Exhibit 4.4. This is referred to when
organizations are in a simple-stable environment. Of course unpredicted conditions, such as global and
international turmoil, economic downturns, and so on, could affect these industries, but generally, these
alignments have served as an ideal type and starting point for understanding the “fit” between environment
and industries. In a stable but complex, low- to moderate-uncertainty environment, cell 2 in Exhibit 4.4,
universities, appliance manufacturers, chemical companies, and insurances companies would generally
prosper. This is referred to when organizations are in a complex-stable environment. When the external
environment has simple but high to moderate uncertainty, cell 3 of Exhibit 4.4, e-commerce, music, and
fashion clothing industries would operate effectively. This is referred to when organizations are in a simple-
unstable environment. Whereas in cell 4 of Exhibit 4.4, an environment characterized by a high degree of
uncertainty with complex and unstable elements, industries and firms such as computer, aerospace, airlines,
and telecommunications firms would operate more effectively. This is referred to when organizations are in a
complex-unstable environment.

Exhibit 4.4 is a starting point for diagnosing the “fit” between types of external environments and industries.
As conditions change, industries and organizations must adapt or face consequences. For example,
educational institutions that traditionally have been seen to operate best in low- to moderate-uncertainty
environments, cell 4 of Exhibit 4.4, have during this past decade experienced more high to moderate
uncertainty (cell 2)—and even high uncertainty (cell 1). For example, for-profit educational institutions such
the University of Phoenix and others—as compared to not-for-profit universities and colleges, such as public
90 Chapter 4 External and Internal Organizational Environments and Corporate Culture

state institutions, community colleges, and private nonprofit ones—have undergone more unstable and
complex forces in the external environment over the past decade. Under the Obama administration, for-profit
universities faced greater scrutiny regarding questionable advertising, graduation rates, and accreditation
issues; lawsuits and claims against several of these institutions went forward, and a few of the colleges had to
close. The Trump administration has shown signs of alleviating aggressive governmental control and
monitoring in this sector. Still, higher educational institutions in general currently face increasingly complex
and unstable environments given higher tuition rates, increased competition from less-expensive and online
programs, fewer student enrollments, and an overabundance of such institutions. Several private, not-for-
profit higher educational institutions have merged and also ceased to exist. Adapting to increasingly rapid
external change has become a rallying call for most industries and organizations as the 21st century evolves.

Organizational Complexity
It is important to point out here that external (and internal) organizational complexity is not often as simple as
it may seem. It has been defined as “…the amount of complexity derived from the environment where the
organisation operates, such as the country, the markets, suppliers, customers and stakeholders; while internal
complexity is the amount of complexity that is internal to the organisation itself, i.e. products, technologies,
human resources, processes and organisational structure. Therefore, different aspects compose internal and
external complexities.”18

The dilemma that organizational leaders and managers sometimes face is how to deal with external, and
internal, complexity? Do you grow and nurture it or reduce it? Some strategies call for reducing and managing
it at the local level while nurturing it at the global level—depending on the organization’s size, business model,
and the nature of the environments. Without going into complicated detail, it is fair to say at the beginning of
the chapter that you may want to read through the chapter first, then return here afterward.

In the meantime, here are some simple rules from organizational practitioners De Toni and De Zan to keep in
mind for managing high levels of complexity from the external environment, internally, after you have
diagnosed the nature of the external complexity—as we discuss throughout in this chapter: first, assemble
“…a set of self-managing teams or autonomous business units,[known as modularized units] with an
entrepreneurial responsibility to the larger organization.” These focused self-organizing teams use creative
methods to deal with the diversity to the advantage of the organization. A second method when facing high
external environmental complexity when you want to gain value from it is to find and develop “…simple rules
to drive out creativity and innovation … to keep the infrastructure and processes simple, while permitting
complex outputs and behaviours.” An example offered is found in the rules of the Legos company: “(1) does
the proposed product have the Lego look? (2) Will children learn while having fun? (3) Will parents approve?
(4) Does the product maintain high quality standards? (5) Does it stimulate creativity?”19

A third strategy for dealing with external complexity involves companies’ building on their own capabilities
manage too much complexity, which otherwise lead to chaos. Some of those strategies include creating open
networks internal and outside the organization to promote cooperation and integration and to develop brand
and reputation. Also, sharing “…values, vision, strategy, organizational processes and knowledge, through the
development of trust and incorporation and promotion of leaders at all levels” can help internal teams exploit
external complexity to the organization’s advantage. Keep these ideas in mind as you read through the
chapter and think about how leaders, managers, employees, and you can learn to read external environmental
clues that organizations can use to creatively and proactively use organizational resources to be more
competitive, effective, and successful.

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