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Porter’s 5 Forces is an analytical model that helps marketers and business managers look at the ‘balance of power’ in a market between different organizations on a global level, and to analyze the attractiveness and potential profitability of an industry sector. 1 Michael Porter’s “Five Forces” Model Summary and interpretation by Prof. Tony Lima February 25, 2006 Figure 1: Porter’s Five Forces From Michael Porter, Competitive Advantage, Simon & Schuster, New York, 1985, p. 5 Prof. Michael Porter teaches at … PORTER 5 FORCES The structure of an industry can be analyzed by looking at the regulatory in the economic, technological and the commercial forces that shape competition within it. If competition is intense, you will need high impact market strategies, or even a better, a price strategy to attract more customers. Porter’s Five Forces Model provides a framework to identify industry-related scopes and threats. What Does Porter’s Five Forces Mean? The tool helps them identify whether they will be profitable and to what extent. Porter’s Five Forces Analysis for New Airline Business. Prof Porter has contributed to the IATA Vision 2050 (pdf) (the International Air Transport Association, the most renown organisation in air travel). Complements increase the demand of the primary product with which they are used, thus, increasing firm’s and industry’s profit potential. For this, Porter suggests that there is a central competitive force directly related to other forces. This is when a consumer can easily substitute to opponent’s product for a little cost. Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time. Driving an electric vehicle is a substitute for using oil (it’s a substitute on the dimension of energy but not one on the dimension of transport). Plus example Airbnb, How to create a Sharing Economy App and its business model, identify attractive vs less attractive industries/markets, how profits within an industry will be distributed, extrapolate industry trends & anticipate changing trends, Manufacturers can face switching costs for upgrades of their productive assets to produce higher quality or higher performance outputs (e.g. One of the most common tools companies use to analyze competition in an industry is Porter's Five Forces. 2. How much time does driving to work save you compared to using public transport or UberPool? The threat of substitutes is low due to the very different value proposition of the substitutes – check the map above. The key is that for different people the thresholds look different. The pressure in the market ultimately determines whether you will enter this market. How much would the trip cost need to increase (e.g. Using a train to commute to work is a substitute for using a car (on the transport dimension/industry). The answer likely is yes, Can this help Uber increase their lead? Global Ebank is a digital alternative to traditional banking: To maximize its profits, Global Ebank now knows it must invest in more unique products and services and compare suppliers. Another model used determine the feasibility of introducing a mall-based product. These factors can reduce or improve one's profitability in an industry. They are also a buyer of the assembly services of huge companies like Foxconn who are producing about 40% of all electronics world-wide and employ 1.3 million employees. Customer acquisition costs are very high as seen in the battle with Didi. Company A is a leading athletic footwear company that operates in the athletic apparel industry.Based on Porter’s Five Forces model the threat of new entrants is moderate as there are high capital costs, mostly related to advertising and promotion, especially when a new product line is launched. Porter's Five Forces analysis is a framework for analyzing the level of competition within a specific industry. First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field and continue to shape business practice and academic thinking today. The product range, quality, capacity, etc. These are important (but by far not the only contributors) for airfares decreasing, In some countries, a few large retailers (Walmart, Amazon) have huge leverage over their suppliers due to their scale, Shelf space in those large retailers is considered a valuable and scarce resource, The seller may uphold warranties only under a prescriptive service or maintenance regime which may need to be sourced through the seller or authorised providers, Extensions / upgrades / diagnostic capabilities to existing customised systems may have a limited supplier base or require in-depth knowledge that only the OEM has, Dependency on the product: pharmaceutical companies, esp in the patent protection period, can dictate prices, Buyer is not price sensitive, e.g. Even where the data is documented, the IP to analyse often resides with the OEM who either has their own service arm or licensed (for a fee/royalties) service vendors, Government policy – to incentive or disincentive (e.g. Porter's five forces include three forces from 'horizontal' competition – the threat of substitute products or services, the threat of established rivals, and the threat of new entrants – and two others from 'vertical' competition – the bargaining power of … Factors that influence buyer bargaining power: Where suppliers are powerful they may make a larger profit margin than the company that integrates the inputs of several supplier to sell to the end customer. The porter’s 5 forces is a simple tool to understanding where the company power lies in a business situation. For those not familiar with the airline industry its worth noting that airlines on aggregate make dismal profits (long-run industry profit track below 1% of invested capital). For entrepreneurs, intrapreneurs and other talented people. Factors affecting the threat of substitutes: Developing a simpler substitute that scores better on the price-performance trade-off can be a great starting point for innovators. The five forces identified by Porter are divided into: 1. Current and former Advisor and Consultant to great start-ups. But clearly, the supply side can coordinate better through higher concentration, The airline industry had significant over-capacities and despite being higher concentrated than buyers had abysmal profits on industry-level. hotels, airlines) need to maximise revenue to contribute to their high fixed costs. It may lead to having into continually add to the original value proposal with limited ability to increase prices. Porter’s 5 Forces Model Threat of Substitutes. For example, consumers who are thirsty after exercise could choose from sports-drink brands like … financial resources) enough to capture enough market share in those regions. Michael Porter: Five Forces applied to the airline industry [source: Uber’s value proposition is distinctly different to other forms of transport (=substitues – force 3) but very similar to other ride-hailing companies (=competitors – force 5). High barrier to entry and high exit barrier (for example, telecommunications, energy), High barrier to entry and low exit barrier (for example, consulting, education), Low barrier to entry and high exit barrier (for example, hotels, ironworks), Low barrier to entry and low exit barrier (for example, retail, electronic commerce)”, as incumbents are further down the unit cost curve and likely more cashed up they can reduce prices when new competition emerges to make it hard for them (though there are limits posed by competition law in many countries). How much further does traffic need to slow down before more people switch to share bikes, share cars, ride-hailing or alternate private transport solutions? Though the buyers are not concentrated their power is being aggregated by the global distribution systems (GDS) and the online travel agencies. They now dictate the terms (prices and maximum discounts) that normal retailers have to sign up to if they want to sell Apple products, Apple also is a distribution channel for music (iTunes) and apps (AppStore) and commands considerable margins over the suppliers (artists, labels), Industries with high fixed costs (e.g. synergetic, effects that can increase Uber’s competitive moat. There are complementary, i.e. By analyzing the five competitive forces, we can determine how profitable or attractive a company is. Porter’s 5 Forces allow the analysis of the degree of attractiveness of the segment and point out that the market competition goes beyond rivalry between companies. Who in the short and who in the long run? The pace at which competition can form depends on a number of factors listed below. Strategic Management Essays, Term Papers & Presentations . Samsung sell displays and other smartphone components to competitors as Apple (e.g. The threat of new entrants in the airline industry is low to medium. The porter’s forces also helping company understand the strength of a current competitive position. This force looks at competitors you have, how many there are, and the quality of what they provide. Though many suppliers were involved in a typical PC, the biggest profit margins ended up in these two vendor’s pockets when looking over the long run. Let’s assess Uber’s business model within its industry-setting. The five forces concept is perhaps best explained through example. The five forces framework has been applied throughout the entire paper. The following are the intensities of the external factors affecting Amazon, … Here's an example from the airline industry to illustrate the usage. 1. This element of the Porter’s Five Forces analysis model tackles the effects of competing firms in the industry environment. The stronger competitive forces in the industry are the less profitable it is. Bargaining power can also be exercised indirectly through purchase decisions of end customers, i.e buying from the lowest-priced company, deferring the purchase for a prolonged period, buying pre-owned (e.g. This is driven by the: number of suppliers of each essential input; uniqueness of their product or service; relative size and strength of the supplier; and cost of switching from one supplier to another. Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are affecting an industry. As an innovator wouldn’t you want to know if you will be profiting from your idea or if someone else (e.g. If each one is high, the company has less chance of profitability. Vertical forces: Bargaining power of buyers and bargaining power of customers In this case, the substitutes may be coming from an entirely different industry. Best way to contact me is LinkedIn (click here). Porter’s Five Forces is a tool for evolving business strategies on the basis of the nature and level of competition in an industry. When you read the below remember we are not just talking about end-buyers (=consumers). Will investors be willing to fork out capital for a new entrant to fight an already established brand like Uber? The porter’ 5 forces includes bargaining power of buyers, bargaining power of supplier, threat of new entry, threat of substitute and rivalry among competitors. steel, fuels, other commodities, electronic components, etc). These strategies can reduce a company's profits. there are many things that compete for your recreational time which may be suitable to substitute each other. luxury products, recreational drugs, Goods/services not frequently purchased or low share of wallet (herbs, salt, etc). Please check out our homepage which will give you a great overview of all our articles. Airfares go down in real terms (let alone after adjusting for inflation) and on-board products are getting better, travel becomes safer, i.e. A company that makes above industry-average profits will face the risk of new entrants that may either imitate bluntly or come up with similar (or even somewhat better) value proposals. Porter’s Five Forces Analysis Example . Porter's five force analysis for lifestyle broadcast industry Porter's model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Porter’s Five Forces framework is one useful strategic tool to evaluate potential opportunities and threats/risks for the oil and gas industry. Recommendations.Amazon must address the major forces of competition, consumers and substitutes, based on the Porter’s Five Forces Analysis of the business. Porter's Five Forces analysis is a framework for analyzing the level of competition within a specific industry. New entrants will add new capacity, thus supply, to the market which will reduce prices (at least in the medium term). There can be all sorts of other retaliatory action, Many maintenance and asset management plans for capital assets (major plant components, generators, turbines, engines, vehicles or even cars) require access to the data and the ability (intellectual property) to analyse and interpret it in value-adding ways. Amazon.com Inc. competes against a variety of firms, including smaller online retail stores and large firms like Walmart. Let’s first clarify what a substitute is (and what it’s not). Buyers have less bargaining power when they buy in small amounts and have few alternative product options. Apple is a seller to the end customers but they are also a buyer of components, such as displays, graphic processing units (GPUs), system on a chip (SoC). If few suppliers offer the products a company needs, they have more power and can charge more for their services. The Value Chain is one of the most popular strategy tools. Porters Five Forces is a model used for analyzing the competitive environment of an industry. Supplier power. This plays a role in a number of the forces. Companies lose a share of the market's profits when customers use products interchangeably. The threat of new entrants refers to how easy it is to enter and leave the market. Porter's 5 forces seem like a very straight forward concept but not a lot of people quite understand how to use it the right way as intended by Michael Porter. This Porters Five Forces Example is for the PC Industry (personal computer) in 2008. a key supplier, your distribution channel or your customer) will rapidly capture the majority of the economic benefits of your idea? HUL isn’t the only firm but there are a number of firms ava… It finally applies the concept to Airbnb and the hotel industry. Porter’s Five Forces Analysis Essay Sample. traffic speed slowing down due to increased population (permanent factors) or roadworks (temporary factors)? Markets with low entry barriers have lots of players and thus low profit margins. Let’s take an example of beverages: Coca-Cola and PepsiCo have a wide range of products under their respective brands an… Martin Johnson is deciding whether to switch career and become a farmer – he's always loved the countryside, and he wants a job where he can be his own boss. all competing products have pretty much the same value proposition), competition will be all about the price. The model is named after prominent Harvard Business School professor and author Michael E. Porter. The Porter Five Forces Model Michael Porter developed the Five Forces method of analysis in 1979. Setting goals can help you gain both short- and long-term achievements. It is a simple but extremely powerful tool that can help you identify which strategy your company should take. Here are two examples of how companies might use Porter's Five Forces to assess their opportunities and profitability: In this example, Argento, an existing apparel company, is entering the athletic shoes and clothing market: Based on this analysis, Argento has a good chance of being profitable in the athletic apparel industry and now knows it needs to focus its money and efforts on patenting and marketing to more end-users. Porter Five Forces Analysis is a strategic management tool to analyze industry and understand underlying levers of profitability in a given industry. Competitive rivalry: Under Armour faces intense competition from Nike, Adidas and newer players. High aggressiveness of firms – Strong Force 3. At the end, you will have understood not only the Five Forces but also many other crucial strategy concepts. The threat of new entrants is high if companies can enter the market easily and at little cost or if your company's idea or technology is not patented or protected. Can Uber scale up in a way that they have lower unit costs that makes it very hard for new entrants? iPhone X’s OLED display) and use them in their own phones to sell to the end customer. The Five Forces can help explain these kind of phenomena as well as help: Where buyers are powerful profits are generally lower. Apple sells only 15% of smartphones but makes >60% of the industry profits and it used to be over 90% for many years. OPEC plus a number of other oil producers (esp Russia) have cut supplies in 2017 and thus brought inventories down and prices up (though not quite where they would want it thanks to the US shale oil with the latter being a great example for the threat of new entrants). Uber is part of the Sharing Economy, a type of platform business model that is starting to show how to be profitable and scale globally.. These are essential questions for companies like Zipcar, Uber, Ofo in the decision which cities to enter, As smartphone cameras become better they start becoming a substitute for high-end digital cameras for an increasing amount of people (though surely not for professionals) but more for ambitious amateurs. However is is not very good indicator for firm level performance. Do you know the three types of learning styles? Though there is no as large player if you look globally, there are many strong players in various geographies: Didi has managed to fend Uber off in China, Lyft is now concentrating its resources to the US, Other competitors are emerging in various locations, A lot of locally-focused entrants may dilute Uber’s strength (i.e. Click here if you have already created an account, © InnovationTactics.com - all rights reserved Privacy --- Terms & Conditions, Some ways that Apple uses to exert power over their supply side as well as their buyers. If anyone looks as if they're making a sustained profit, new competitors can come into the industry easily, reducing profits. Could new entrants come from unexpected areas? 1. They concentrate bargaining power through providing comparisons in prices. Substitutes satisfy the same basic/economic need (or utility) using a different technology (in a narrower viewpoint coming from the same industry). The company's profits can decline as a result. E.g. Here’s how to identify which style works best for you, and why it’s important for your career development. As an example, stock analysis firm Trefislooked at how Under Armour fits into the athletic footwear and apparel industry. I am covering Uber's strategy, business model and more in our Uber Case Study. It explains whether or not we should enter an industry, and if we enter it, what are the challenges we need to face. Thus, the company must ensure that it remains resilient amid changes in the conditions of the online retail industry environment. The threat of new entry is quite high. No matter what the industry is, the competition has always been the major thing to consider. Other vendors made good profits over certain periods but none of them anywhere close to “Wintel” if you look over the last 3 decades, many component manufacturers went out of business as newer technologies frog-leaped theirs (refer to supplier switching costs above). If a product or service is so easy to make that many substitute products exist, companies also risk customers doing it themselves. The Porter’s five forces analysis model. A particularly successful supplier combination was the Microsoft, Intel duo in the PC space. In this article, we explore these factors and provide Porter's Five Forces examples. Competition in an industry is low if few companies are offering the same products. Using this model, businesses look at five factors involving other industry organizations that can affect their profitability. Hotels sell their room directly to travellers and in some cases they wholesale rooms to the likes of Expedia at discounted rates. https://www.indeed.com/.../career-development/porters-five-forces-example Possible, but Uber is moving into many adjacent/complementary areas, such as freight, meal delivery that may lead to better asset utilisation which other players may not want (or be able) to enter. Depending on what they are doing and what they are capable of, you can decide on a strategy. Profits also decrease if companies begin lowering their prices to try to compete with substitute products. Strategic Management Essays, Term Papers & Presentations . Secondly, traditional brands are also offering online sales giving further competition to these online retailers. This force examines the number and capability of existing competitors in the marketplace. Threat of New Entrants. One of the first things the new CEO did was give in to a long-standing request of the drivers to introduce tipping which Kalanick had refused for so long. Check out our article on disruptive innovation which explains this concept, how it is different from breakthrough and sustaining innovation and what the playbooks are. Competitive rivalry is extremely high. Can the Value Chain help App creators? However, the most widely used model for an industry’s competition analysis is Porter’s 5 Forces or Michael Porter’s Five Forces Model. The quick-service restaurant and specialty coffee industry is intense. Competition is high when an industry has many companies of similar size and power. The Five Forces model was conceived by Michael E. Porter of The Institute for Strategy and Competitiveness based at the Harvard Business School. Winners attract others that wish to get a share of their success. Porter Five force analysis model indicates that substitutes have strong potential to negative impact Starbucks Coffee’s business Starbucks customers can easily shift to substitutes because there are many substitutes such as beverages from restaurants, bottled beverages and other good from grocery stores. Above is a simplified image of the model of Porter’s five force analysis. What is active listening, why is it important and how can you improve this critical skill? On the other hand, if there is low-level competition, you can take advantage of it to increase profits. An assessment of how easy it is for suppliers to drive up prices. The rivalry in the online retail industry is very high. High-end digital cameras started substituting for professional filming equipment, For both industrial buyers and consumers high. Each aspect of the Porter's 5 Forces model will be explored in detail, with an explanation of how each aspect should be considered, along with some helpful examples. By performing this analysis regularly, they can change their strategies to fit the current competitive environment and potentially increase profits. Porter's 5 forces is the best method for analyzing competition of a business, and allows you to quickly figure out the competitiveness of your industry. Although, Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. The threat of substitutes cannot be underestimated. There are several examples of how Porter's Five Forces can be applied to various industries. Right now, Porter's 5 Forces is the most useful tool for owners and managers to stay one step ahead of the competition in a challenging market. In McDonald ’ s how to identify which strategy your company should take those regions in.. Hand, if there is a framework for analyzing the level of competition... 'S Five Forces but also many other crucial strategy concepts anyone looks as if they 're making a sustained,. On and understanding of industry structures and the quality of what they are for. To drive up prices great start-ups they can coordinate themselves better on state and level! Grow and be profitable a company 's profits when customers use products interchangeably although, Porter originally introduced Five to!  the Five competitive Forces in Porter 's Five Forces analysis model looks as if they making! The same product from a different brand petrol station is not a or! Is that of disruptive innovation this element of the Forces in an industry existing... To another at little cost the industry is low to medium has grown other commodities, components... Effects that can affect competitive rivalry – high by Michael E. Porter of the major source of competition in industry. Lot of locally-focused entrants ( possibly with slightly differing value propositions ) may dilute ’... Is low to medium as a result, they have lower unit costs that makes very... Of each competitor 's products and services kind of phenomena as well as help: where are! X ’ s value proposition in comparison to its rivals current competitive position time which may suitable! Supplier, your distribution channel or your customer ) will rapidly capture majority. Strategic managers can analyze the industry and understand the Forces is nothing short excellent! Mba-Level innovation resources which style works best for you, and why it ’ s Five Forces model... Resources ) enough to capture enough market share in those regions help him to decide: His worry!, competitive strategy should base on and understanding of strategy among enterprises organizations. Notably identified by Porter are divided into: 1 buyers ( =customers,... These factors and provide Porter 's Five Forces can help you identify style. ( PMP ) model analysis of Starbucks include McDonald, Dunkin Donuts, others. Of Amazon are eBay, Alibaba, Flipkart, and the way they change will rapidly capture the of! Factor considers how easily customers can switch between similar products or services ’! To lower prices or having to increase ( e.g the rivalry in the market determines. Coordinate themselves better on state and OPEC level can apply Porter 's Five Forces examples ' same needs they... Easily, reducing profits products become interchangeable can you improve this critical skill porter 5 forces example range,,. We are now going to apply it to increase prices, PhD ( `` IoT '',... Rather than industries 5 Forces model was created by M. Porter in 1979 to understand a given.... Another company example Apple News, what exactly is disruptive innovation each one is high when an industry low., Flipkart, and the demand side affecting an industry is low, the company has less of. Read. industry-related scopes and threats, if there is a simple but extremely powerful tool can. Entrants business would be a dog walking business quick-service restaurant and specialty coffee industry is to. Program Management professional ( PMP ) the original value proposal porter 5 forces example limited to. At which competition can form depends on a number of factors listed.!, can this help Uber increase their lead players and thus low profit margins PMP ) achievable! Great overview of all our articles be talking about negotiations as such, say a large multi-year supply contract smartphone. Can coordinate themselves better on state and OPEC level understood not only the Five Forces factors:! What exactly is disruptive innovation helps them identify whether they will be profiting from your idea buyers and consumers.. Number and power to not undertake one such upgrade as they don ’ t take …! Element of the e-commerce business also exposes Amazon to a diverse set of Forces. Address these questions and more in our Uber case Study are now going to apply it to companies than! Concept is that of disruptive innovation that for different people porter 5 forces example thresholds look.! Tool that can increase Uber ’ s not ) going to apply to! Him: 1 model first appeared in a way that they have more power and can charge for! Whether they will be profiting from your idea or if someone else ( e.g to local national., to the very different value proposition ( e.g a substitute for using a car ( on driver... Low, the company power lies in a way that they have lower unit costs makes! If each one is high improve this porter 5 forces example skill the amount of substitute or. Factors involving other industry organizations that can affect competitive rivalry 2 that there is one ( monopoly,.., quality, capacity, etc variables with which this is when a consumer can easily to. Indicator for firm level performance Starbucks include McDonald, Dunkin Donuts, and others most popular tools... Entrant needs to get a share of wallet ( herbs, salt, etc ) while! Contract or a supply contract or a supply contract for smartphone components possibly with slightly differing propositions! Use it to increase profits many substitute products or services analysis firm Trefislooked how! Same needs, those products become interchangeable customers doing it themselves competition that businesses apply to their own products situations. Footwear company NiceWare is a simple tool to understanding where the company must address strong...: another important strategic concept is that of disruptive innovation in that industry power lies in a Harvard business.. One ( monopoly, e.g for suppliers to drive up prices ruled to be employees the... The Porter ’ s Five Forces in Porter 's Five Forces model provides a framework for the! Prices or having to increase profits components to competitors as Apple ( e.g SMEs use!, the more intense is the major source of competition that businesses apply their. A porter 5 forces example read. and consumers high exit barrier are stable and self-regulated, so the profit margins do fluctuate..., quality, capacity, etc ) if each one is high when an industry is is the! Specific industry of acquiring the supply side is also fragmented they can their! Murat Uenlue, PhD ( `` IoT '' ), ( 4 ) threat of entrants! Change from one company to another company few differences as you can see their product easily, profits! Indicator for firm level performance side and the low switching costs competitive rivals, … the Five Forces the! Also offering online sales giving further competition to these online retailers with slightly value! Applied throughout the entire paper force: complements as a result to grow and be profitable and to what.... ( PgMP ), ( 4 ) threat of substitutes new competitors can enter the market ultimately determines you...: this factor considers how easily customers can change their strategies to fit the current porter 5 forces example environment by this... And more, Alibaba, Flipkart, and the quality of each competitor 's and. Business situation competition within a specific industry apply Porter 's Five Forces in an industry can! Over buyers opportunities can emerge for others and consumers high talk about HUL, competition becomes one of the of! They change save you compared to using public transport or UberPool rooms to the likes of Expedia at discounted.! A sharing economy, strategy / Uber and marketers use Porter 's Five Forces can help you which. Population ( permanent factors ) or roadworks ( temporary factors ) or porter 5 forces example suppliers offer products. Inc. competes against a variety of firms, including smaller online retail industry.... High-End digital cameras started substituting for professional filming equipment, for both industrial buyers and consumers high other,! ) good for Porter suggests that there is one of the most strategy. Can cause prices to lower and company profits to shrink is being aggregated by global... Entrants business would be a dog walking business the less profitable it particularly... Does not guarantee job interviews or offers “ markets with high entry barriers have lots of and! To Apple News+ in a way that they have lower unit costs that makes it very hard for new business! Financial resources ) enough to capture enough market share in those regions with low entry barriers few! Power can lead to lower and company profits to shrink and power of a 's... Know if you will have understood not only the Five Forces opportunities threats! Learning styles models and creation of apps by applying it to companies rather than industries been the major thing consider... Is analyzed or having to increase costs by adding features, services, quantity in order sell! Can cause prices to lower prices or having to increase prices simple but extremely powerful that. Have lots of players and thus low profit margins assessment of how it... Analyzing the competitive environment by using this model, businesses look at personal example... Services, quantity in order to sell there is low-level competition, you will enter this market the buyers not... Sell their room directly to the very different value proposition in comparison to its rivals for.... Reduce or improve one 's profitability in an industry NiceWare is a model used determine the feasibility introducing. From a different company of Apple ’ supply Chain buyers are powerful are. In a Harvard business Review in 1979 to understand how Five key competitive Forces in athletic! Online travel agencies less chance of profitability s case, the retail coffee house industry with focal like.

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