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Pause IV Organizational Architecture

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					The Strategic Management of
 Organizational Competence
 Course Outline:

 First Day:
      Why have a strategy?
      The Evolution of Technologies and Markets
      Making Money from Innovation: Understanding Competition


 Second Day:
      The Strategic Management of Organizational Competence
      Actually Doing Strategy
One of three key questions...



               How will we
               Create value?




         How will we    How will we
        Deliver value? Capture value?
Outline
   Making Research Real
     Moving beyond teams
     Insights from the Pharmaceutical Industry


   Managing Discontinuities
     Transforming the organization
     Creating a separate unit
     Working with outsiders
Making Research Real:
Moving Beyond Teams
   Insights from the
Pharmaceutical Industry
Our Agenda
   Why world class research and leading edge
    product development are so closely linked
   Why this linkage is so difficult to manage
      It’s not just cultural resistance
   And what can be done
      Why teams are not the whole answer
In principle linking research to the
business should be
straightforward...
Simply build capability to optimize value and profits...


                          Value chain

           Technical         Product           Customer
                                                          Profits
           Capabilities      Attributes        values


                          Suppliers/Partners
But in practice there is often a
significant gulf between them
     R&D:                                Marketing
     Why won‟t they use our stuff?       Half the stuff they are working on
     Why are they so focused on the      will never find a market:
     short term and the bottom line?     real ivory tower stuff...



         Technical          Product         Customer
         Capabilities   ?   Attributes      values
                                                                Profits




 Product designers:                      Competitive Analysts
 Why are they so slow?                   R&D „s important: but why it is so
 Why aren‟t they more responsive?        expensive? Can‟t we be just a
 Why aren‟t they more innovative?        “fast follower”?
The ideal organization both develops
world class knowledge and
communicates it

In depth knowledge development
within each function




                       Coupled with in depth knowledge
                       transmission across both functional
                       and firm boundaries
 But in practice it is tough to be
 excellent at both....
A functional organization focuses on local knowledge generation...




A market focused organization focuses on knowledge integration...
And the organization of research
thus tends to oscillate between two
models:
    Centralized Research       Decentralized Research
   Often supported by        Often supported by the
    corporate funds “above     business units
    the bottom line”
                              Work often closely
   Focuses on the longer      linked to the needs of
    term                       the business
    BUT                        BUT
   May become an “ivory      May become “captured”
    tower” -- unresponsive     by the businesses -- and
    to the needs of the        fail to prepare the
    business                   company for the longer
                               term
The ideal organization offers the
best of all worlds:

    Functional
    focus




                          Customer focus


  Geographic
  focus
Attempting to do both creates
intense pressures inside the
organization...


                                       Matrix?
      Focus on
      disciplinary                       Teams?
      or functional   Organizational
      excellence      Energy




 Geographic                  Product or Customer focus
 focus
But there may be a fundamental
tradeoff

  Functional
  focus




                     Customer focus

 Geographic
 focus
In practice firms tend to
develop a “center of gravity”

    Functional       - Power concentrated for more
    focus              rapid decision making
                     - Clear reporting relationships
                     - Coherent incentives &
                        expectations
                     - Comfortable cultures


                          Product/Customer focus

  Geographic
  focus
Change is thus both critical often
and wrenchingly difficult


    Functional or
    Disciplinary
    focus               Chaos is to be expected




 Geographic             Product or Customer focus
 focus
What must be done?
   Leading: Communicating the
    vision, allocating resources
   Structuring: Exploring transitional
    and intermediate forms
   Incenting: Explaining “just what’s
    in this for me?”
   Building: Laying the foundations
    for a new culture, new expectations
  The Determinants of
     Productivity in
Pharmaceutical Research:
   Benchmarking Best
        Practice

    Iain Cockburn, UBC
  Rebecca Henderson, MIT
Insights from the Pharmaceutical
Industry
   An industry undergoing rapid and wrenching
    change
   In which the need to maintain a simultaneous
    focus on functional (disciplinary) knowledge
    and on product (therapeutic class)
    knowledge is absolutely critical
Successful research means
constantly balancing tension:



Knowledge
about
scientific
disciplines




                   Knowledge about
                   therapeutic areas
  Leading: Communicate the vision


Performance




                            Time
Leading: Understand
the dynamics of overload
          100%
Average
Value-Added
          80%
Time on
Engineering
Tasks     60%




          40%



          20%




           0%
                  1           2          3       4           5          6
                                              Number of Projects per Engineer
   Source: IBM Development Efficiency Study
  Leading:
  Allocate resources for new
  transitions


Average
Performance




                               Time
Structuring:
Continually reorganize?


 Functional
 focus




                    Market focus
Structuring: Create intermediate
structures

                                   For example:

 Functional                        Heavy weight teams
 focus                       ?     Matrix management
                                   Centers of excellence
                                   Front/back organizations
                                   Other...



 Geographic
 focus             Product focus
Alternative project team structures

     Functional structure                            Lightweight team




                                                                                       Market
                                                                                       Concept


     Heavyweight team                                 Autonomous, “tiger” team




                                           Market
                                           Concept


                                                                             Market
Source: Kim Clark and Steven Wheelwright                                     Concept
Revolutionizing New Product Development
Different team structures represent
different tradeoffs


 Functional   “Light weight” teams
 focus
                            “Heavy weight” teams


                                     “Tiger” teams


                           Product/
                           Customer
                           focus
Teams can be extremely powerful...

   Performance
      Stronger identification with and commitment to
       projects
      Facilitates development of systems solutions in
       line with customer needs
   Efficiency
      Products are developed and launched faster, and
       learning can be incorporated into the next launch
      Products are less expensive to develop
   Professional Development
      Development of general management skills at all
       levels of the organization
But teams must be used with care...
   Confusion of roles and responsibilities
   Shortage of effective project leaders
   Death by a thousand teams
   Degradation of key skills
   A super project to manage the project?
Changing Organizational Structure:
Centers of Excellence and Matrices:
                              Matrices:
                              Everyone has “two bosses”:
                              both functions and products/
            Functional        customers have line authority
            focus
Centers of excellence:
Different parts of the firm
are organized in different
ways: line authority is
split

   Geographic                   Product focus
   focus
The Matrix Organization

                         Ceo
                         CEO


             Market A   Market B   Market C

Function 1

Function 2

Function 3
Matrix Organizations
Strengths                        Weaknesses
    Makes the tension               Confusion of roles and
     between functional               responsibilities
     expertise and
                                     Powerful individuals “tip”
     product/customer focus
                                      the balance of power in
     explicit: every individual
                                      their direction
     must deal with it every day
                                     Worst of both “functional”
    Best of both “functional”
                                      and “product focused”
     and “product focused”
                                      worlds
     worlds
Case Example: An unbalanced
matrix in pharmaceuticals

               Hearts   Brains   Lungs


  Chemistry


  Physiology


  Genetics
Centers of Excellence

                           Ceo
                           CEO


               Market A   Market B   Market C


Function 1

Function 2


Function 3
Centers of Excellence
Strengths                        Weaknesses
    Build key expertise             Centralized groups can
     centrally -- e.g. central        degenerate into “ivory
     “basic” or “exploratory”         towers”
     research                        Without operating
                                      responsibility, functional
    Manage career paths of           managers become “staff” --
     key individuals to maintain      and it may become difficult to
     the skill base of the            attract top quality people to
     organization                     the role
    Leverage key learning
     across the firm -- avoid
     “reinventing the wheel”
     e.g. central manufacturing
     groups
Changing Organizational Structure:
The Front/Back Organization:




   Strengths



   Weaknesses
Effective process may also be a
solution:...
   Manage projects to generate new integrative
    knowledge:
      Invest in multiple approaches
      Early prototyping and architectural framing
   Maintain a balance of knowledge through
    carefully individual tracking:
      Rotate through integrative assignments
      Ensure continued disciplinary excellence
      Develop “T shaped” individuals
 Incentives, Culture and Mental
 Models

Understand the
Time Constant
                        Leadership


                 Formal Structure/Process


                 Incentives/Political Structure



                   Culture/Mental Models
Building and Incenting:
   Reward flexibility, team work,
    commitment to the whole
   Model the new culture


   And manage from the heart
What can be done?

   Leading:
      Communicate a clear strategic vision
      Make tough choices: allocate time for change
      Use high conflict, high respect decision making
   Structuring:
      Design an organization that can manage “off the
       diagonal”
   Incenting:
      Model the new “contracts”
      Tell the (whole) truth
   Building:
      Build new mental models
      Manage from the heart
Managing Disruptive
Innovation
Disruptions create problems for
established firms

Performance
                        Maturity


                                      Disruption
              Takeoff



                        Ferment

                                   Time
Disruptions often challenge existing
organizations severely
   Cumulate share of sales of photolithographic alignment equipment, 1962-
   1986, by generation

               Contact     Proximity   Scanners     S&R (1)     S&R (2)
   Cobilt      44                      <1
   Kasper      17          8                        7
   Canon                   67          21           9
   P-Elmer                             78           10          <1
   GCA                                              55          12
   Nikon                                                        70
   Total       61          75          99+          81          82+
But they also create major
opportunity
   Corning glass
      Cookware to optical fiber
   HP
      Instrumentation to computers
   IBM
      Mainframes to PCs to Services
   Enron
      Natural gas to Energy trading
Outline
   Why disruptions are so difficult
      Strategic problems: uncertainty, cannibalization, a
       focus on short term returns
      Competence traps: organizational inertia and the
       problem of change
   What can be done
      A tradeoff between coordination and
       entrepreneurial energy
      A range of solutions
Why disruptions are so difficult:
Strategic/competitive problems
   Genuine uncertainty
      Many “disruptions” ultimately fail
   A few of cannibalization
      The new product/service may compete directly
       with the old
   Margin erosion
      Margins on new S curves are often lower than
       those on older ones
   Time horizons
      New S curve projects typically take many years to
       come to fruition, and don’t offer much immediate
       relief to the bottom line
Why disruptions are so difficult:
Organizational problems
   Competency traps
   The problem of mental models
Competencies evolve over time,
creating “competency traps”

Performance
                        Maturity


                                      Disruption
              Takeoff



                        Ferment

                                   Time
Change challenges every aspect of
the organization
                                                       Individuals become
                                                   Invested in old approaches
                                                      Strategic/competitive
                                                    problems may provide an
        Whole scale changes to      Leadership          excuse for inertia
       structure and process are    & Strategy
            very disruptive:
        Two years of lost time?
                                    Structure &
                                                               Existing incentives often
                                     Process                   work against significant
                                                             change, and new incentives
                                                                 take time and work
  Strong cultures & deeply          Incentives
 rooted mental models are
  extraordinarily resistant
         to change
                                    Culture &
                                   Mental Models
Interrelated systems of practice
make change tricky

Performance




                               How we do things
 Because attempts to change
 usually degrade performance
The Problem of Mental
       Models
Mental models & the evolution of
knowledge:
   The Era of Ferment:
        A premium on flexible competence: deep
         integration across functions and boundaries
   Dominant design established -- enables…
   An Era of Incremental innovation
        Allows the fragmentation of knowledge
        Component knowledge -- knowledge about the
         pieces
        Architectural knowledge -- knowledge about the
         relationship between the pieces -- about “what
         everybody else knows”
Architectural knowledge becomes
embedded in mental models...
   Information channels
        “If I have a question about customer needs
         I can always call Fred..”
   Communication filters
        “The only thing I need to worry about in
         this report is Section 8..”
   Problem solving strategies
        “The easiest way to increase speed while
         reducing noise is to...”
And in the Deep Structure of the
Organization



                    Leadership


            Formal Structure/Process


             Incentives/Political Structure



               Culture/Mental Models
Where it is a source of STRENGTH!
   It allows the organization to get things done!
        Minimizes “meeting time”
        Allows for clear responsibilities
        And quick response
   Embedded architectural knowledge is a key
    organizational competence
And of weakness:
   Problems in recognition:
         Denial
   Problems in response:
         Panic
         Overload & the recreation of old solutions
     or
         Destruction of existing architectural knowledge
          drastically reduces performance: “I pulled on the
          levers and nothing happened.”
What can be done?
What can be done?
   Leading: Building the
    “ambidextrous” senior team:
    communicating the vision,
    allocating resources
   Structuring: Exploring transitional
    and intermediate forms
   Incenting: Explaining “just what’s
    in this for me?”
   Building: Laying the foundations
    for a new culture, new expectations
Managing Discontinuities:
The Role of Leadership &
the Senior Team
  Communicating a Vision


Performance




                           Time
   Managing the Dynamics of Overload

Average       100%

Value-Added
Time on        80%
Engineering
Tasks
               60%




               40%



               20%




                0%
                         1           2          3       4           5          6
                                                     Number of Projects per Engineer
          Source: IBM Development Efficiency Study
Building the Ambidextrous Senior
Team
   Ambidextrous senior teams must manage both more
    mature, operationally focused businesses and higher
    growth, emerging businesses
   High performing senior teams show:
      High conflict, high respect decision making capabilities
      High levels of trust and truth telling
      Ability to manage divergent incentive systems and
       career paths
   Coupled with processes that support the divergent
    management of quite different business units
      Resource allocation processes that allow for different
       time horizons, milestones, rates of return
Managing
Discontinuous Change:
Choosing an Appropriate
Organizational Structure
There are a Variety of Approaches                                                           Parent resource
                                                                                            commitment
    Out-licensing                       External funds                                           More
                US Foods Co.
 Lost ideas          Xerox - 3COM, Adobe                                                          Less
                Euro Telecom
                               Incubators
                                                                                       Entrepreneurs
                                                                                      and professional
                Xerox XTV                                                              venture capital

                          Lucent             Tritec
    Internal                                                               External
    ideas                                                                  ideas
                          Nortel             US Drinks
                Shell
                                             Co.          Joint ventures

                    P&G                      Internal ventures              Corporate venture capital

                Roche - Protodigm                              Xilinx Ventures
                Prudential - egg                                         Dow Chemical
                                                              Siemens SVC
                Emerson SIP        3M                                   Intel Capital
                                                      Nokia NVO
                                                                             JJDC
                                    Internal funds
  Choice between them is constrained
  by a key tension:

Entrepreneurial
Drive,                  Successful disruptive
Freedom from              innovation unites
the “old ways”       entrepreneurial insight with
                        effective coordination




                       Control & Coordination
  What drives this tension?
  (1) Finding entrepreneurial drive

Entrepreneurial
Drive,
Freedom from
the “old ways”



                                        ?
                             Business
                             As usual


                         Control & Coordination
Finding entrepreneurial drive in the
established firm
   Existing modes of behaving are very
    powerful:
      The problem of embedded architectural knowledge
   Change threatens established competencies,
    comfort for long tenured individuals
   Internal incentives may not be very “high
    powered” – while individuals at new entrants
    may see very considerable upside to their
    efforts
  What drives this tension?
  (2) Managing Coordination

Entrepreneurial
Drive,            Acquire/
Freedom from
                  Partner             ?
the “old ways”




                             Control & Coordination
Why is it hard to coordinate across
firm boundaries?
   The interests of your partners may not be
    your own
   If lawyers were free, and contracts could be
    perfectly written and costlessly enforced,
    this would not be a problem: one could write
    contracts to enforce alignment
   But perfect contracts cannot be written, and
    enforcement is very costly
   Trust may be a solution
Why may your partner’s interests not be
your own?
               Your partner’s interests
                 may not be your own if:
   Partner
                Your partner needs to
                 make investments that
                 are only useful if you
                 work with them

   Product
                You need to make
                 investments that are
                 only useful if you work
                 with your partner

    Firm
Such “specific” investments
increase the risk of “hold up”

                            Partner
       Partner threat:
  “Now that you‟ve made
    that investment --
    let‟s renegotiate...”
                            Product
                                          Firm threat:
                                         “We‟ll pay you
                                        what you can get
                                          elsewhere”

                             Firm



        A potential lack of coordination!
  Choosing a structure thus implies
  choosing problems

Entrepreneurial
Drive,
Freedom from      Acquire                         ?
the “old ways”
                             Joint
                            venture/
                            alliance
                                       Internal
                                       venture
                                             Build inside
                                             existing units
                                             existing unit


                                       Control & Coordination
Using Temporary Internal
Structures: Best Practice
   A great team leader
   Appropriate staffing
   Clearly defined goals for the team, coupled to
    well defined milestones & criteria for success
   Communication, trust between the team
    leader and the leaders of the current
    business
   Incentive structures that support the success
    of the team within the existing business
   A culture that supports innovation
Range of Possible Team Models
                    Functional Organization                                               Lightweight/Matrix Project Team


                                                                             Degree of Team                                        Market
         Functional                                                          Leader Influence
         Manager
                                                                                                                                  Product
                                                                                                                                  Concept
                                                                                                        ENGINEERING   MFG   MKG
                         ENGINEERING      MFG   MKG                                Team
                                                                                   Leader
                                                                             Some coordination across functions. Program Manager
  Work occurs within each function. Cross-functional                         acts as project coordinator and as liaison to functional
  coordination by superiors.                                                 managers, who are the key decision makers.

                Heavyweight Project Team                                                          Autonomous Project Team


 Degree of Team                                             Market
 Leader Influence
                                                                            Degree of Team              ENGINEERING   MFG   MKG
                                                                                                                                   Market
                                                         Product            Leader Influence
                                                         Concept
                         ENGINEERING                                                                                              Product
       Team                               MFG   MKG
                                                                                                                                  Concept
       Leader                                                                  Team
                                                                               Leader
True cross-functional team. Decision-making authority                        Individuals are reallocated from functional group and
within team. Team members still have functional home,                        formally assigned to team. Program Manager has full
but report to Program Manager on project activities.                         control over resources.

                                       Adapted from Wheelwright and Clark, Revolutionizing Product Development
A computer storage manufacturer experimented with a cross functional team
approach to learn about a new business model
                                            Storage                                      End-user
                   Storage                  Storage xSP
                                            Products                                       End-user
                                                                                         End-user
                   Product                  Products
                                              Sales
                    Sell to                     Sell
                                             Service with/through
                                              Sales
                   Service                   Service
                                            Business Support Services


                                                Customer of xSP

“Learning Lab”

                              New business group experiment




                                                                    Service Partners
                                                                      Service Partners
                              Marketing
                                Marketing




                                                  Professional                               Customer
                    Sales
                                                    Services
                                                  Professional                                Service
                                                                                             Customer
                    Sales
                                                    Services                                  Service




                                                 xSP Customer
                                            Traditional End User
                                            Traditional End User

                                              Traditional End-user
Using Temporary Internal
Structures: Pros and Cons
   Pros:
      Maximizes corporate control,
      Minimizes necessary coordination with external parties
      Encourages a culture that can incorporate any type of
       innovation
      Provides some freedom from current organizational
       constraints
      But plays a role in transformation of the current
       business
   Cons:
      Requires significant cultural change – which is difficult
       to do
      Hard to measure success
      Is ever-evolving – needs constant management
  Internal ventures can take many
  forms

Entrepreneurial
Drive,
Freedom from
the “old ways”
                   Spinouts

                        “Pseudo”
                      Venture capital

                          Internal ventures




                         Control & Coordination
Quantum’s Plus Development Co. was a spin out that
transformed the company when reacquired
                                $4,500

                                $4,000

                                $3,500
        Revenues ($ Millions)




                                            1984: Plus launched as              1988: Plus spun
                                $3,000       internal venture, 80%
          Quantum Corp.




                                                                               back in to Quantum
                                              owned by Quantum
                                $2,500

                                $2,000

                                $1,500

                                $1,000

                                $500

                                 $0

                                         1982      1984        1986         1988         1990         1992      1994       1996

Quantum Corp., 1984-88:                                                                               Quantum Corp., post-1988:
• $100m, OEM hard disk drive supplier                                                                 • Plus‟ processes and capabilities
• Plus launched to exploit huge opportunity to sell “disk on a card” to                                 transform Quantum’s design and
  emerging PC market                                                                                    manufacturing
• Plus develops 70% market share, 40% margin, $100m revenue in 2 yrs.                                 • Quantum averages over 45% revenue
                                                                                                        growth per annum from 1988 to 1996
• Plus develops new business processes and improved production
  capabilities
                                                    Source: Prof. Henry Chesbrough, Harvard Business School
All forms strike a different balance
between incentives and control


 External Equity JV/    Spin out      Pseudo       Internal     Internal
 Venture/ Alliance                    Venture      venture      division
 Acquisition                          Capital
                                                inside $, expertise
        outside $, expertise

 high                    incentives                           low

 low                 Coordination, control                    high
Internal Ventures: Best practice
   Clearly defined mission, goals coupled to
    well defined milestones and criteria
   Appropriate staffing
   Senior management “buffering” from the rest
    of the organization
   Careful management of incentives, both
    within the new venture and with respect to
    the rest of the organization
   Tolerance for (some) failure
   Flexibility and resilience
Internal Ventures:
Common problems
   Team A vs. Team B: rejection of businesses that are
    “too close” to existing strategic mission
   New venture is not really new: old behavioral
    problems are transferred to the new entity
   New venture is not coordinated with existing business
    and existing resources are not made available
   High risk and low incentives for internal corporate
    promotion
   Lack of managerial commitment when signs of
    success begin to appear. Are often (prematurely?)
    disbanded
“Pseudo” venture capital:
Best practice
   Appropriate choice of venture personnel
   Clearly defined governance structure that mimics
    venture capital – separation from parent corporation,
    opportunity to bring in external capital
   Well defined time horizon, milestones, expectations
   Mechanisms in place to provide benefit to the parent
    corporation if appropriate
   Incentive structures that balance giving high powered
    incentives to venture members with the needs of the
    parent corporations
   A culture that supports the use of VC in the context of
    the current organization
“Pseudo” venture capital:
Pros and Cons
   Pros
     Provides high powered motivation, clear signal of
      the need to “do something different”
   Cons
     How can one benefit the corporation and yet stay
      true to the “venture model”?
        Paying a “fair” price creates issues of internal equity
        Paying less than a “fair” price betrays the model
     Very mixed track record. At Xerox, Intel, Exxon
      programs generally judged to be failures.
     External venture capital makes money but has little
      impact on the strategic mission of the firm
Alliances and Joint Ventures:
Best Practice
   Bring together partners with related skills to
    focus on a common goal
   Provide JV with clear strategic goals and
    milestones
   Build “best of both worlds” culture and
    approach
   Develop trust over time to mitigate problems
    of “hold up”
Alliances and Joint Ventures:
Pros and Cons
   Pros
      Best of both worlds – real entrepreneurial drive with
       close coordination
   Cons
      Often no clear framework of task at hand or goals
      Uneven levels of commitment and resources
      Information asymmetries and lack of information sharing
      Benefits are often not equally shared
      Issues of scope and milestones are often not adequately
       addressed
      Partner trust and employee loyalties are difficult to
       manage
      Corporate politics can affect partners differently
      Often overestimate partner capabilities
Acquisitions:
Best Practice
   Pay the “right” price:
      Invest in superior information
      Create value through combination
   Manage the acquisition
      Create the right expectations
      Nurture the new culture (and people!)
      Manage the interfaces with the existing
       organization
Acquisitions:
Pros and Cons
   Pros
     Brings in a new culture with an established set of
      skills – a “sure bet”?
   Cons
     Is the market efficient? – Will the shareholders of
      the acquired firm capture all the value?
     Should you worry about the winner’s curse? Will
      you pay too much?
     Once acquired, will the new firm simply be
      assimilated into the existing firm?
The “Winner’s Curse” may mean
that you pay too much


No. of
firms

                            “Winner‟s” valuation




             “True” value               Perceived
                                        value
  Once acquired, acquisitions must be
  managed

Entrepreneurial
Drive,              Buy an
Freedom from      Innovative            ?
the “old ways”       firm




                                   Assimilate it   ?


                               Control & Coordination
Summary
Disruptions Create Problems for
Established Firms

Performance
                        Maturity


                                      Disruption
              Takeoff



                        Ferment

                                   Time
  Crafting a solution requires careful
  thought and committed leadership

Entrepreneurial
Drive,
Freedom from      Acquire                         ?
the “old ways”
                             Joint
                            venture/
                            alliance
                                       Internal
                                       venture
                                             Build inside
                                             existing units
                                             existing unit


                                       Control & Coordination
Exercise:
                 This solution works best when:

Transform
the firm


Work with
third parties


Create a
separate group
 Summary: Managing disruption requires
 both vision and organizational
 sophistication



Performance




                          •Transform the entire
                           organization?
                          •Build an ambidextrous
                           organization?
                          •Outsource?


                            Effort

				
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posted:8/5/2011
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