10 Principles for Winning the Game of
Digital Disruption
It’s time
to take today’s technological threats seriously and change the way you do
business.
If you
haven’t already noticed, a high-stakes global game of digital disruption is currently
under way. It is enabled by the latest wave of technology: advances in
artificial intelligence, data analytics, robotics, the Internet of Things, and
new software-enabled industrial platforms that incorporate all these
technologies and more. Every enterprise leader recognizes that, as a result,
the prevailing business models in his or her industry could drastically and
fundamentally change. A wide range of industries, such as entertainment and
media, military
contracting, and grocery retail have been profoundly affected. No enterprise,
including yours, can afford to ignore the threat. Yet most companies are still
not moving fast enough to meet this change. Some leaders are still in denial
about it, some are reluctant to upend the status quo in their companies, and
some are unaware of the necessary steps to take. But these are not good enough
excuses.
If your company is currently struggling, then digital disruption
will accentuate your problems. You may not have needed a plan for the new
digital age yet, if only because it didn’t seem relevant to your industry. But
you will need it now. Otherwise, no matter how well you run your business, it
will not produce results at a scale that will allow you to compete. The
companies with a clearly differentiated identity — those that stand apart from
the crowd — are in the best position to thrive. For every company, this is an
immense opportunity to rethink every aspect of your business, and chart a bold
path for success.
Disruption, by our definition, means a shift in relative
profitability from one prevailing business model to another. The dominant
companies, wedded to the old approach, lose market share to a new group of
companies. Not every disruption is driven by digital technology, but this one
is. And because the software fueling this transformation can be applicable across
traditional industry and business function boundaries, competitors can emerge
from seemingly anywhere. In sector after sector, new entrants are lowering
prices, meeting consumer needs in novel ways, making better use of
underutilized assets, and hiring people with broadly relevant digital skills,
who have collaborative, creative, and efficient work styles.
If you’re skeptical about this, it’s probably because you’ve seen
digital technology appear before, without much of an effect on core business.
Even industries that feel pressure are not completely affected. No matter how
many people order their paper towels and canned soup online, for example, there
will continue to be some brick-and-mortar grocers.
But the wave of disruption that’s cresting now is more
comprehensive and far-reaching than any previous wave. Consider what has
already happened to less physically based industries, such as media and
entertainment. They have had to rework their business models, seeking revenue
through social media and new forms of consumer engagement. Industrial and
manufacturing companies will soon follow a similar path: embedding logistics
systems with sensors, linking supply chains with shared data and robotics,
opening the door to innovations in energy and materials, and changing the way
that every product is made and delivered.
Your shareholders (particularly activist shareholders), customers,
and employees expect you to respond quickly. But panic and full-bore
opportunism, in which you pursue every seeming source of revenue, will not work
either. The answer is to develop a coherent strategy, seeking out the options
that fit best with what you already do well. Here are 10 principles for
accomplishing this, drawn from the experience of companies that have done so.
Recognizing the Change
1. Embrace the new logic.
When you first hear about a
new digitally enabled competitor, you may tell yourself that company can’t
succeed. It’s operating in a narrow niche, and it won’t be profitable at scale.
Hundreds of executives of established companies have made this mistake, dismissing
such innovations as the photocopier, steel mini-mill, graphical user interface,
smartphone-embedded camera, and video streaming service. Instead, view each
upstart competitor as a company you can learn from.
There’s
always logic behind a new entrant’s business model, a reason it is being
introduced. It meets customer needs more effectively than you do, offers
consistently lower prices, or makes better use of assets. Chances are, it does
all three. For example, Zume, which makes pizza to order in ovens in its
robot-equipped delivery trucks, delivers fresh, inexpensive food to peoples’
homes rapidly. As of October 2017, it had raised
more than US$70 million in venture capital.
Although no one can predict whether Zume or another contender will succeed, the
logic of vehicle-based fast-food represents a major threat to existing low-cost
restaurant chains. In your industry, the very existence of potential disruptors
— especially if they are funded by venture capital — is a sign that your
business model is regarded as obsolete. It’s up to you to figure out why, and
how you can change it.
In addition to studying your new competitors’ logic, look closely
at the assumptions embedded in your company’s current business model. Keep in
mind what you know digital technology can do for you. How could you redesign
your capabilities to deliver better value than your competitors can? What
aspects of your current business model could you change to deliver better
value, on a grand scale, than any upstart could? What would you have to do
differently to make your own disruption work?
Best
Buy went through a thought process much like this, and became one of the very
few specialty retailers to compete successfully against online retailers such
as Amazon. Among the disruptive factors it had to deal with, as New
York Times reporter
Kevin Roose put it, was “showrooming: customers were testing
new products in stores before buying them for less money online from another
retailer.” Best Buy chose to disrupt its own business model with a
price-matching guarantee, a renewed emphasis on customer consultations, new workforce policies to gain a
more skilled and loyal employee base, and improved logistics that integrated
its online and in-person experiences. These elements add up to a
powerful new approach for Best Buy that raised its stock price more than 50
percent in 12 months.
2. Start now, move
deliberately.
You have to balance moving reactively
and strategically when the signs of pending disruption first appear for your
industry. “We always overestimate the change that will occur in the next two
years,” wrote Bill Gates in his 1995 book The Road Ahead. “And [we]
underestimate the change that will occur in the next 10. Don’t let yourself be
lulled into inaction.”
To be sure, it may take a year or more for customers to change
their habits at a scale that affects you financially. During this period, you
are still relying on your old business model for earnings. But if you don’t
start visibly taking steps to change that business model right away, it could
affect your company’s market value. Investors, particularly activist investors,
are gauging your effectiveness based on their perceptions of the digital threat
approaching your industry. If they think you’re not prepared, they will have
reason to pounce.
At the same time, you have to proceed deliberately and
strategically, rather than frantically and reactively. Panic is contagious. You
are not looking for quick opportunities — you are plotting the new trajectory
of your company. Use this time to develop your own sustainable, digitally
enabled value proposition, to build out your own distinctive capabilities, and
to sell off or shut down the assets you will no longer need when the disruption
fully takes hold.
Be bold and openly declare your intentions. Make it clear to your
constituents — not just investors, but employees, suppliers, distributors, and
other members of your business ecosystem — that you are preparing your own
disruptive innovations. Use this time to continually reevaluate and refine your
new approach, adjusting it to reflect changes in customer behavior and in your
industry. Prototype new products and services and take them to market quickly,
testing them with real customers. Bring the best ideas to scale.
When your industry’s changes finally reach a tipping point, it
will seem sudden to everyone else. But you’ll know better. Because of your
early start, you’ll be ready with the capabilities you need. You can then move
fast, seize the advantage, and lead your sector.
Amazon has provided an example of this approach since the 1990s.
Starting with books, then branching into other types of retail, and ultimately
moving into general logistics and cloud-based computer services, it always had
the same game plan: To expand gradually, taking on challenges when it was
equipped to do so. It took Amazon 20 years to build up the requisite
capabilities to master grocery delivery, an extraordinarily difficult challenge
because fresh food can easily spoil. By contrast, Webvan, which also began in
the late 1990s, started out with a home food delivery concept, overextended
itself trying to cover the then-too-expensive “last mile” to the customer’s
door, and went bankrupt.
Building Your Identity
3. Focus on your right to
win.
A right to win is the
ability to meet challenge after challenge with a reasonable likelihood of
success. Instead of relying on a single product or service to define your business,
develop a strong identity — a recognizable expression of what your enterprise
does well and why it matters — that makes your company truly distinct. Don’t
abandon your old business model entirely; build on your existing strengths. In
many disrupted industries, the new and old business models continue to coexist:
brick-and-mortar groceries will not go away entirely, just as there continue to
be brick-and-mortar bookstores. But you need to create one consistent approach
to everything you do. Like Amazon, Apple, IKEA, Starbucks, or other iconic
companies, you will then continually send a strong signal of who you are and
what customers can expect from you. Or as Harvard Business School professor
Clayton M. Christensen, who developed today’s prevailing concept of disruption,
put it: “Decide what you stand for, and then stand for it all the time.”
One company that has gained a right to win is PetSmart, a retailer
of pet products and services. In April 2017, PetSmart made the largest
e-commerce acquisition in history. It acquired Chewy.com, a pet supply site,
for $3.35 billion — just a bit more than Walmart paid for the online store
Jet.com around the same time. Chewy provided customer service capabilities that
complemented PetSmart’s extensive retail store network and its multiple
services (such as boarding hotels, grooming salons, and walk-in pet clinics).
Chewy offered a high level of customer interaction, comparable with that of
premium retailers such as Nordstrom. The company calls customers proactively to
address service problems, and sends cards to thank people for their business.
These combined capabilities give PetSmart and Chewy a much clearer identity and
way to compete.
You
gain your right to win by building and maintaining a system of distinctive cross-functional
capabilities — combinations of
people, knowledge, IT, tools, structures, and processes, refined and developed
over time. To preeminent business historian Alfred D.
Chandler Jr., this “integrated learning base” was the single most important
factor for business success. You already have some of those capabilities, or
you wouldn’t have gotten this far, but you may need to develop or acquire
others, as PetSmart did. Orient your business around those key capabilities.
Make long-term investments to support them, and divest businesses that don’t
fit.
Another prominent example is Honeywell. In the mid-2010s, its
right to win enabled Honeywell’s heating, ventilation, and air conditioning
(HVAC) business to beat back a disruptive threat from Nest and other digital
thermostats. Honeywell had a strong distribution capability; its people knew
how to maintain strong relationships with HVAC installers and contractors, who
referred customers to Honeywell’s digital thermostats instead of those from the
Alphabet upstart. This gave the company time to bring its technology up to
date.
4. Create your customers’
future.
What does your customers’
future look like? Think about meeting their needs in a more fundamental way, so
that they continually want more contact with your company and its offerings.
Your mission, as Steve Jobs told his biographer Walter Isaacson, “is to figure
out what they’re going to want before they do.” This will require imagination
and insight; they won’t be able to articulate it if you ask them. Creating your
customers’ future may require an obsessive focus on them. Make their problems
go away. Remove the friction in their lives. Make things easier and less
complex, while reducing the price they have to pay.
The most effective consumer-oriented companies rely on privileged
access to their customers. For example, IKEA has an extensive program for
sending executives to the homes of customers, who welcome them because the
company has already enhanced their daily life. You can also learn a great deal
from co-creating your products with customers, involving them in design and
development. Adobe Systems, for example, routinely consults with graphics
professionals in designing new packages for them. Google and Facebook had a
huge advantage in the large number of sophisticated early adopters in their own
workforce. The companies continually sampled their employees’ reactions and
adapted their offerings accordingly.
As marketing experts have
pointed out since at least 1960, when Theodore Levitt’s seminal Harvard
Business Review article “Marketing
Myopia” was published, customers are most compelled by outcomes: the
results your products and services deliver, rather than the products and
services themselves. This was how Philips profited from its halogen bulbs, the
kind that retailers install in parking lots. Concerned about losing out to
makers of lower-priced commodity bulbs, Philips set up a service to change the
bulbs itself, and continued its R&D on longer-life bulbs so Philips’s own
costs would go down. Similarly, GE’s aircraft engines, Daimler’s trucks,
Tesla’s electric cars, and Siemens’s power systems are all embedded with
sensors, designed to provide analytics about not just the machines’ behavior
(for better maintenance) but what the customer (the airline, truck driver, or
power utility) is doing day after day, and how that experience might be
improved.
5. Price to drive demand.
Nearly every significant
disruption reduces costs in some way. Customers respond more powerfully to cost
reduction than to other types of increases in value. When you set your prices
low, you attract customers, scale up your new business model, and force changes
that make it more difficult for rivals to compete.
Even high-profile
disruptive competitors do not dramatically affect the rest of the industry
until they become competitive in price. For example, it was only with its
launch of the “affordable” $35,000 Model 3 in 2017 that
Tesla began to compete with a wide range of other automakers. For most products
and services, it’s best to build your response to disruption by lowering costs
and looking for a larger customer base. Often this means using digital technology
in inventive ways. Sometimes, as with Amazon and Uber, it involves pricing at a
loss for the sake of long-term scalability and market share.
Undoubtedly, you are already diligent about reducing costs. But
you may not have gotten in the habit of strategic pricing: cutting costs to
drive up demand. A notable example is IKEA, which builds a 1.5 to 2 percent
product price reduction into its budget planning every year, as a forcing
function. This requires its planners to figure out how to reduce costs
significantly, and it has created the kind of customer loyalty that no
disruptor can dislodge.
6. Profit from overlooked
assets.
Many digital disruptions
take advantage of assets that have been underutilized. This approach is
feasible because of the way digital technology reduces friction and reveals
options. The sharing economy businesses that sell access to unused privately
owned automobiles, production plants, homes, and office spaces changed their
industries by monetizing their assets’ previously unused capacity.
You too can disrupt your industry, by identifying ways to create
value from underused assets. These may be found anywhere in your business. With
a cloud computing installation, you may make more effective use of your
computer processing power — and your programmers’ time. Or consider the
stockroom of a big-box store. The space is big because of the scaling factor of
labor. Once you have paid for the cost of putting in one pallet, putting in the
next four is quite cheap. Because digital interoperability makes it easier to
process multiple materials and products from multiple vendors, why not share
back rooms and warehouse staff?
Overlooked assets don’t have to be physical. They can include
proprietary information, continually gathered data, or specialized expertise.
For example, the Aravind Eye Hospital in India is one of the most effective
cataract treatment centers in the world. It treats professional expertise as a
specialized asset. Each surgeon treats 10 times as many cataract patients per
day, on average, as a similar surgeon would in the United States. The hospital,
whose processes were modeled after those of McDonald’s, uses every means
possible to focus a skilled surgeon’s time where it matters most: on the
cataract operation. Everything else, including administrative work and
referrals of complex cases, is handled by someone else.
It may take time to develop a compelling and profitable approach
to your assets. The first shared office space enterprises emerged in the early
2000s, but it took 15 years for WeWork, a company that provides shared
workspace, to develop a format and package that made a mass of people
comfortable. While you are developing your own approach, consider divesting the
assets that hold you back or require ongoing costs. Every asset you own should
contribute to, or benefit from, your differentiating capabilities.
7. Control your part of the
platform.
Disruptive companies don’t
do everything themselves. They rely on the capabilities provided by others.
Those capabilities will be increasingly available as vast business-to-business
platforms emerge: platforms such as Amazon Web Services, GE’s Predix, Siemens’s
MindSphere, and the emerging Chinese “Belt and Road” system. A platform is a
group of interoperable technologies that provide a basic
infrastructure into which applications and processes from a host of companies
can fit, working together seamlessly. The new digital platforms will help
transform enterprises in the same way that their online predecessors, such as
Google, Facebook, and Amazon, helped change consumer habits. A platform
provides access to others on the platform, new ways of creating value from
digital assets, and a much greater scale at minimal cost. Just as it’s vital to
know what your company is best at, it’s critical to know where you can rely on
others’ technology and solutions.
Some companies thrive by becoming platform providers.
Salesforce.com, for example, has used its capabilities in developing
software-as-a-service (SaaS) and other cloud-based offerings to build an open
ecosystem for sales and customer relationship management that give it a
distinctive competitive advantage. By incorporating independent developers,
system integrators, and consultants into the Salesforce ecosystem, the company
has become a hub for a vast number of innovative businesses in multiple
sectors, giving Salesforce unique access to information and leading trends.
But you don’t have to own platforms to profit from them. Instead,
focus on a part of the platform that gives you a right to win and establishes
stable standards for an entire ecosystem. For example, if you are one of many
component manufacturers for, say, servers or home-control devices, or one of
many developers of similar software apps, you may lose value. But if you carve
out a distinctive identity and role within other companies’ ecosystems, you can
still draw value to you. You can be like Corning, manufacturing the Gorilla
Glass used in the iPhone, along with many other kinds of specialty glass used
for automobiles and other smartphones; or like HCL Technologies, which has
parlayed its distinctive R&D and consultation capabilities into a refined
outsourced technology business serving other high-tech companies.
Because digital technology blurs boundaries among industries, use
platforms to break free of the constraints of your sector. It is no longer
necessary to manage your own supply chain to connect with suppliers and
distributors. Apple, famously, is in music and video streaming, information
technology hardware and software, Internet services, telephony, time pieces,
digital photography, and retail. It is number one in most of those businesses.
It doesn’t matter anymore what sector you think it is in; Apple is number one
at being Apple. It has consolidated its market around one distinct identity.
Choose the platforms you join carefully. Once you are intertwined
with them, there may be enormous switching costs if you need to change. Protect
your control over your customer data, intellectual property, and distinctive
capabilities system.
There may still be an
advantage to integrating vertically; as Inditex (Zara), Amazon, and Haier have
discovered, this provides opportunities for differentiating your company. But
the best option is to make a more fine-grained assessment of your costs and
customers, and design your mix of vertical and horizontal activity accordingly.
Bringing Your Future to Life
8. Integrate, don’t
isolate.
The perception that
disruption is imminent has many executives scrambling to launch digital side
projects in the form of programs, products, and services that can stand on
their own. There are many evocative nicknames for these mini-enterprises and
isolated projects: Skunk works. Pirate ships. Special forces. Labs. Quarantined
units. The names convey the problem: a basic lack of connection between this
subscale unit of activity and the core enterprise.
To be sure, “pirate ships” have more freedom than the rest of the
enterprise. They avoid the usual restrictions and requirements, the cultural
antibodies that hamstring creativity. They can even generate innovative
products and services that seem to be the wave of the future. But because they
are not integrated with the rest of the company, they don’t have the
capabilities or support they need to be sustainable. Nor does the core business
learn from them or benefit from their capabilities. Even if it succeeds in a
narrow context, a pirate ship dissipates resources and makes it more difficult
to go to scale with a new digitally enabled business model. In the end,
transformation doesn’t happen in silos; it requires an enterprise-wide digital
effort.
One classic example of a
failed mini-enterprise occurred at the North American typewriter manufacturer
Smith Corona. In 1976, rightly fearing the onslaught of computer-based word
processing machines, the company opened a digital research and development lab,
staffed with newly recruited hardware and software engineers. But they placed
it in Danbury, Conn. — a four-hour drive away from the company’s headquarters
near Syracuse, N.Y., where mechanical engineers worked on “real” typewriters.
People at the two facilities had no regular opportunity to learn from one
another or build common capabilities. The resulting new electronic word
processors were easier to use and less expensive than personal computers, but
they lacked some critical features (such as the ability to print pictures) that
Smith Corona might have developed with more input from its customer base of students
and writers. According to a case study by Erwin Danneels, they were also
plagued with manufacturing problems, which the rest of the company would have
known how to manage. The company went through two bankruptcies and another
acquisition before becoming a small manufacturer of thermal labels for barcode
printers.
Other well-known examples of pirate ships that ran aground are
Ericsson’s AXE-N project — an asynchronous digital highway endeavor that cost
the company billions before being shut down in 1995 — and the Xerox Palo Alto
Research Center. This semi-independent lab is famous as the source of many
ideas, including the graphic user interface that Steve Jobs adapted into the
design of Apple’s first Macintosh computer. Xerox never gained commercially
from the innovations it had funded.
Instead of quarantining your digital efforts, embed them
throughout your organization. Then experiment with prototypes that you can
realistically bring to scale. Tailor them to make use of your existing
strengths. Ensure that both the prototype and the main enterprise continually
interact, learning from each other.
GE has instilled this type of approach in all its new ventures.
When it designs a prototype of seaport infrastructure embedded with sensors and
analytics, for example, it conducts exercises that simulate activities at
existing seaports. Truckers pick up shipments, trains stop to unload and load
cargo, and employees move goods around the yard or into containers. Even
regulators are simulated, querying the reports. Because of this, when it’s time
to bring that complex new technology to scale, the company is ready.
9. Challenge the rules.
Sometimes you have to ask
for permission before you ask for forgiveness. But when you are facing
disruption, or launching a disruptive effort, recognize the leverage that comes
from finding unrecognized gaps in the rules. A disruptive move will tend to
undermine regulations and governance structures that have been built up over
time, wherein people internalize the behavior and turn it into a norm. For
instance, years of compliance may lead a company to institute tracking sheets
that, after 15 years, are no longer needed by the regulator or anyone else. But
the tracking continues.
If a regulation is preventing customers from getting what they
need, it is likely to be ripe for disruption. Probably the best-known case
involves ride sharing. In many cities, the regulation of taxi medallions led to
artificial scarcities and monopolies. The first taxi competitors took advantage
of this. Incumbent taxi firms, in response, have adopted some of the same
measures the startups pioneered, including the use of apps to hail cabs.
Nonetheless, non-medallion companies have had an edge in most localities,
except for the few cities that put in new rules tailored to ride-sharing
companies.
Most regulations exist for a reason: If you can orient your
practices toward that intent rather than the letter of the law, you will tend
to succeed. In deciding how far to go, let the creation of value be your guide.
You have little or no control over rules imposed from the outside.
But your interpretation of them is under your control. Likewise, your rivals
have their own interpretation of the rules. As part of the digital disruption
game, then, compare your new competitors’ interpretation with your own. If
their interpretation is less restrained, which of those constraints might you consider
giving up as well? Alternatively, which constraints will ultimately come back
to haunt them? And can you prepare your company to take up the slack?
You may also compete against companies that matured under
different regulatory regimes. Tech giants Alibaba and Tencent, for example,
have a history in China of entering financial-services businesses that were
prohibited to their counterparts in the U.S. and Europe. They’ve introduced
mutual funds and wealth management systems, whereas Apple and Facebook scaled
back their payments efforts because of regulatory concerns. Now all four of
these companies will be operating in the same environment.
10. Define a new way of
working.
Most companies have been
experimenting with new technologies for years. But the relatively few companies
that embrace digital technology successfully have used it as a catalyst for
changing the way they operate. They rethink how marketing, IT, and finance work
together, and every aspect of their organization embodies that understanding.
Start with recruiting. Don’t look for cloud architects or
blockchain specialists. Assemble teams of people who can combine skills in
business strategy, consumer experience, and advanced hardware and software
development. (In our firm, we call this BXT, for “business, experience, and
technology.”) Along with your coders and spec-writers, include creative
designers, anthropologists, finance people, data analysts, and psychologists
who can understand when something is drawing people in, as opposed to pushing
them out. Look especially for “helicopter quality”: the ability to think in
close detail and broad strokes, moving rapidly from one to the other. Seek out
these people at every level of the hierarchy, so they can make technological
and design decisions on the fly that are in harmony with larger business
strategy.
When you combine technological acumen, strategic purpose, and an
appreciation for customer experience in one group, it enables you to imagine
products and services that you wouldn’t have thought of otherwise. For example,
Apple defined itself as the creator of a digital hub in 1999, and everything
the company introduced after that, from the iTunes online store to the iPhone
and iPad, followed from that identity. Amazon defined itself as a store that
connected with customers online, with a new and innovative interface that
allowed people to exchange views about the value of its products. Danske Bank,
a leading Scandinavian financial-services company, redefined its business
around a peer-to-peer smartphone payments app that is used today by more than
half the Danish population. Its subsequent products, including innovative
mobile mortgage and wealth management offerings, followed naturally from that
digitally enabled logic.
In practice, it’s often
surprisingly difficult to integrate business, experience, and technological
acumen. Each typically involves a different functional silo, with its own skill
base, priorities, and culture. In many companies, business strategy is the
domain of financial specialists and top executives, who may not understand the
options that digital technology gives them. User experience is often relegated
to marketing or design specialists, who may lack the strategic perspective to
create the right sort of vehicles for the company. And technology is typically
the domain of software engineers, whose background may lead them to
underestimate the importance of simplicity, emotional resonance, and intrinsic
fulfillment to the customers and employees who use their systems. Typically, these
three groups work separately, and they may not know how to talk together. A
word like effective could mean low-cost to a
business strategist, high-touch to an experience designer,
and leading-edge to a technological specialist. If you can’t
get them to work together easily at first, persevere. They will come to
appreciate one another over time.
If you don’t know where to begin, start with customer and employee
experience. Best Buy CEO Hubert Joly, for example, began to reshape the
company’s digital identity by canvassing employees about their experience on
the job. When they complained about a faulty internal search engine that
misinformed them about out-of-stock items, the search engine was immediately
upgraded. That early step paved the way for continuous improvement of the
customer-facing and backroom operations.
Digital disruption can seem like a threat, but it can truly be a
game changer for you. Your opportunities to rethink your business have never
been so great. The challenge facing you, no matter how mature your enterprise,
is the same challenge facing any upstart: To create a new business model, value
proposition, and system of customer-facing capabilities, positioning your
enterprise for long-term success.
by Mathias
Herzog, Tom
Puthiyamadam, and Nils
Naujok
https://www.strategy-business.com/article/10-Principles-for-Winning-the-Game-of-Digital-Disruption?gko=63513&utm_source=itw&utm_medium=20171205&utm_campaign=resp
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