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Environmental Analysis
“Businesses and managers are now faced with highly dynamic and ever more complex operating environments.” - Robert Paton.

3.1 The Concept of Organizational Environment
Organizational environment is always dynamic. It is ever changing. Changes today are so frequent and every change brings so many challenges that it is highly essential for managers and leaders of the organization to be vigilant about the environmental changes. Every organization, whether business or non-business, has its own environment. Environment of an organization consists of its surroundings – anything that affects its operations, favorably or unfavorably. Environment embraces such abstract thing as organization’s image and such remote visible issues as economic conditions of the country and political situations. The environmental forces –abstracts and visibles – need a careful analysis. Systematic and adequate analysis produces information necessary for making judgments about what strategy to pursue. Managers cannot make appropriate and sound strategy simply on the basis of their guesses and instincts. They must use relevant information that directly flows from the analysis of their organization’s environment.

Environment of an organization consists of its surroundings – anything that affects its operations, favorably or unfavorably.

3.2: Understanding Environmental Influences
Business managers must understand the various facets of the impacts of external environment. They need to recognize that external environment has many aspects that can have significant impact on the operations of a firm. They need to undertake analysis of environment on a regular basis. This is particularly important for the reason that developments/changes in the remote environment1 influence the business organizations. They also need to understand the influences of changes in the industry environment. Managers are benefited in several ways when they have a deep understanding and appreciation of the impact of environmental factors on business:
1

Managers are benefited in several ways when they have a deep understanding and appreciation of the impact of environmental factors on business.

Remote environment refers to general external environment, as apposed to ‘specific environment’ or industry environment.

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• Knowledge of environment helps mangers identify the
Managers can develop crisis plans for overcoming crises that affect organization.

direction to which they should proceed. They will travel along with a distinct way of changing direction, whenever necessary. Without an understanding of environment, managers are like a bicycle without a handlebar – no way of maneuvering while riding on a street.

• Managers can isolate those factors, especially in the
external environment, which are of specific interest to the organization.

• Managers can take preparation to deal with predicted crisis

in any of the factors in the environment. They can develop crisis plans for overcoming crises that affect organization.

• The key to achieving organizational effectiveness is

understanding of the environment in which the firm operates its businesses. No knowledge or inadequate knowledge is very likely to lead managers to ineffectiveness because of ‘running on the wrong road for reaching the goals.’

3.3 Types of Organizational Environment
We can classify the organizational environment into two broad categories. These are: 1. External environment, and 2. Internal environment An organization’s operations are affected by both the types of An organization’s environment. Therefore, it is essential for the managers to make indepth analysis of the elements of the environments so that they can operations are affected by both the develop in themselves an understanding of the internal and types of environment external situations. Based on their understanding, they will be –internal and better able to set required objectives for their organizations and external. formulate appropriate strategies to achieve those objectives. This chapter has two major sections: Section A deals with the analysis of the external environment and Section B discusses the analysis of internal environment.

Section A: Analysis of External Environment 3.4 External Environment: Meaning and Nature
External environment consists of an organization’s external factors that affect its businesses indirectly. The organization has no or little control over these factors. The external environmental factors

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reside outside the organization, which can lead to opportunities or threats. For convenience of analysis, we can divide external environmental factors into two groups: (a) general environment (or remote environment), and (b) industry environment (or immediate operating environment). The strategy-makers must understand the challenges and complexities of both the remote environmental factors and the immediate operating environmental factors. They need to appreciate that the remote environmental factors are largely uncontrollable because of their distantly located external nature. However, they can undertake appropriate strategies to deal with these factors, usually collectively with other actors in the industry, to reduce the intensity of their impact on the businesses. On the other hand, the operating environmental factors are those in the immediate competitive situations of a company. These are often regarded as ‘task environment’ or ‘specific environment.’ These factors basically constitute the competitive environment of a company. When strategists take into cognizance of both the remote and operating environments, they can become more proactive in strategic planning and more dynamic in grabbing opportunities. In the following discussions, you will find a broad description of general environment. The industry environment (operating environment) will be discussed in chapter 4.

The strategy-makers must understand the challenges and complexities of both the remote environmental factors and the immediate operating environmental factors.

3.5 The General Environment
The general environment includes the distant factors in the external environment that are general or common in nature. Its impact on the operations of the firm, its competitors and customers make its analysis imperative. We can use PESTLED model for the identification and analysis of the factors in the general environment. PESTLED Model covers political, economic, sociocultural, technological, legal, environmental (natural), and demographic aspects. Some authors prefer to use each factor as ‘environment’ such as political environment, economic environment etc. In this book, we will use both the term interchangeably. A list of the general environmental factors is given below:
Factor-wise PESTLED Environment-wise PESTLED We can use PESTLED model for the identification and analysis of the factors in the general environment.

Political factors Economic factors Sociocultural factors Technological factors Legal factors Environmental (natural) factors Demographic factors

Political environment Economic environment Sociocultural environment Technological environment Legal environment Environment (natural) Demographic environment
The government of a country intervenes in the national economy through setting policies/rules for business.

Political environment: The government of a country intervenes in the national economy through setting policies/rules for business. In

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our country, we see many such policies – import policy, export policy, taxation policy, investment policy, drug policy, competition policy, consumer protection policy etc. Sometimes, the government pursues nationalization policy for state ownership of business. Some countries, such as India, pursue state-driven mercantilism to reduce imports and increase exports. Some countries have liberalized their own economy and shifted from centrally managed economy to capitalist economy or welfare economy. In Bangladesh, the successive governments are emphasizing more on privatization rather than on state ownership. As global competition has increased, the government has also liberalized its trade policies to Government agencies in line with the WTO agreements.2 Another important issue is be and pressure groups are also exercising political stability that affects operations of business firms substantially. Even decision about investment is highly affected by influences on business operations political stability. We have seen in Bangladesh how political of firms that have instability has in the past affected investment and trading in the political character. country. In many other countries also, political instability or political disturbances substantially affected businesses, such as Sri Lanka (civil war with LTTE), Nepal (mass upsurge by the Maoist activists), Pakistan and Afghanistan (terrorist activities) and Argentina (default in international debt). In addition, government agencies and pressure groups are also exercising influences on business operations of firms that have political character. Managers must be able to understand the implications of the activities of these agencies and groups. Government agencies include different ministries, the office of the Controller of Imports and Exports, Board of Investment, National Board of Revenue, etc. Pressure groups include Consumers Association of Bangladesh, various Chambers of Commerce and Industry, Employers’ Associations, and the like. Since the pressure groups put restraints on the business managers, managers should have clear ideas about the actions of these groups. Economic environment: A country’s economic well-being affects market attractiveness. Several economic variables are relevant in determining business opportunities. There is thus a need to analyze economic environment prudently by the business firms. Economic environment comprises a distinct variable with which management The economy of a country can be in a must be concerned. The economy of a country can be in a situation situation of boom or of boom or recession or depression or recovery or it may be in a recession or state of fluctuation. Managers/strategy-makers must have the ability depression or to predict the state of the economy. The performance of business recovery or it may be organizations is affected by the health of a nation’s economy. This in a state of warrants the necessity of studying the economic environment to fluctuation. identify changes, trends and their strategic implications.
2

The World Trade Organization (WTO) was created on 01 January 1995 through abolition of GATT. Bangladesh is one of the first signatories to the WTO Agreements. For details about WTO, its functions, agreements and other relevant issues, readers may visit its web site: www.wto.org

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Business organizations operate their businesses in markets consisting of people. These people are likely to become customers when they have purchasing power. And purchasing power depends on income, prices, savings, debt and availability of credit. Therefore, business organizations must pay attention to the income and consumption patterns of the customers. However, all the economic variables in the economy must be treated holistically for clear envisioning of the entire economy and the market. Socio-cultural environment: Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes towards technology, and people’s values, opinion, beliefs etc. These forces dictate a particular set of values and attitudes with resultant lifestyles. A society’s values and attitudes form the cornerstone of a society. They often drive the other conditions and changes. The demand for many products changes with the changes in social attitudes. Socio-cultural factors differ across countries. In many countries, worker diversity is now a common phenomenon. We find in some countries the increasing life span of population, trend toward fewer children, movement of population from rural areas to urban areas, increasing rate of female education, entry of more and more women into the mainstream workforce, etc. All these have a primary effect on a country’s social character and health. Therefore, it is very important for managers of business organizations to study and predict the impact of social and cultural changes on the future of business operations in terms of meeting consumer needs and interests. Business firms must offer products in the society that correspond to its values and attitudes. Technological environment: Technological dimensions include information technology, the Internet, biotechnology, global transfer of technology and so forth. None can deny the fact that the pace of change in these technological dimensions is extremely fast. Technological changes substantially affect firm’s operations in many ways. Advancement of industrialization in any country depends mostly on technological environment. Technology has major impacts on product development, manufacturing efficiencies, and potential competition. The business organizations that face problems with changing or unstable technology are always in difficulties in terms of predictability than those organizations that have stable technologies. The effects of technological changes occur primarily through new products, processes and materials. An entire industry may be transformed or revitalized due to use of new technology. Strategy formulation is linked to technological changes. An intelligent response to the ever-increasing technological advances should be entrepreneurial rather than reactive.3 Strategic managers need to monitor developments in technology for their particular industry when formulating strategy. Quick and thorough study of
3

Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes towards technology, and people’s values, opinion, beliefs etc.

Technological dimensions include information technology, the Internet, biotechnology, global transfer of technology and so forth

S. C. Bhattacharya, Strategic Management: Concepts and Cases, op. cit., p. 21.

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technological changes helps managers achieve higher market share because of early adoption of new technology. A firm must be aware of technological changes to avoid obsolescence and promote innovation. It means that strategy managers of an organization must be adept in technological forecasting. Technological forecasting can protect and improve the profitability of firms in growing industries. Legal environment: The legal environment consists of laws and regulatory framework in a country. There are many laws that regulate the business operations of enterprises such as the Labor Code, Factories Act, Industrial Relations Ordinance, the Contract Act, and the Company law, just to name a few. Business laws The legal primarily protect companies from unfair competition, and also environment consists protect the consumers from unfair business practices. Business of laws and regulatory framework in a laws also protect the society at large. The laws regarding merger, country. acquisitions, industry regulation, employment conditions, unionization, workmen’s compensation and the like affect a firm’s strategy. Even globalization has caused significant repercussions on the legal environment. Thus, the business mangers must have thorough knowledge about the major laws that protect the business enterprises, consumers and the society. Natural environment: Strategy-makers need to analyze the trends in the natural environment of the country where it is operating its business. The most pertinent issues in the natural environment that strategy-makers should consider include the availability of raw materials and other inputs, changes in the cost of energy, levels of environmental pollution, and the changing role of government in environmental protection. Changes in physical/natural environment, such as global warming, will heavily affect our daily lives and the functioning of our organizations with a variety of consequences. Demographic environment: The demographic environment is concerned with a country’s population. Specifically, it is related to population’s size, age structure, geographic distribution, ethnic mix and income distribution. With over six billion population,4 the demographic changes are evident all over the world. In some countries there is negative population growth and in some countries The demographic couples are averaging fewer than two children. In general, average environment is age is increasing. In many countries, rural-urban migration is concerned with a rampant. These trends suggest numerous opportunities for firms to country’s population. develop products and services to meet the needs of diversified groups of people in the society. Strategy-makers must make an analysis of the demographic issues, especially, size and growth rate of population, age distribution, ethnic mix, educational level, household patterns, and inter-regional movements. In fine, we can say that all of the above external environmental factors are interrelated. Therefore, strategy-makers need to analyze
4

The world’s population reached six billion in October 1999.

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all of them in an interrelated fashion to understand and visualize the ‘whole of the environment.’

3.6 How Do Organizations Respond to External Environment?
Environmental factors influence the businesses in many ways. The influences may be positive or negative. There are some forces in the environment that may retard the growth of a business organization. Similarly, there are some forces that may give a sudden boost to the growth of an organization. It is, therefore, essential for the strategy managers to understand the importance of environmental influences on the operations of their businesses. Based on such understanding, they can devise ways to respond to the environmental forces. A business organization can employ several ways to respond to its environment. We discuss here some common measures.

It is essential for the strategy managers to understand the importance of environmental influences on the operations of their businesses.

1. Lobbying: Companies can hire strong lobbyists to bargain
with regulators to change any law or to refrain them from enacting new law that may adversely affect business activities. Federation of Bangladesh Chambers and Commerce and Industry (FBCCI) is a very influential lobbyist. FBCCI representatives often undertake efforts to influence government agencies/ ministries /committees.

2. Influencing customers: Organizations can influence their
customers in different ways. Managers may devise new uses of a product. They may create new set of a product. They may create new set of customers for products or they may direct their efforts toward taking customers away from competitors.

3. Influencing suppliers: One of the ways to directly influence
environment is to establish a long-lasting relationship with suppliers. Organizations can do it by signing long-term contracts with fixed prices. This would serve as a hedge against inflation. Organizations can also protect itself from supply-related crisis by establishing backward linkage (that is, producing their own materials). For example, a mineral water firm may start producing bottles by itself or a soft-drink/fruit-processing firm A person is called a might become its own supplier of cans.

4. Boundary spanning: A firm may engage itself in boundary
spanning for learning about what other organizations are doing. A person is called a boundary spanner who collects information from outside the organization while he/she is working in the field. Salespeople, purchasing agents, relationship manages are most suitable as boundary spanners.

boundary spanner who collects information from outside the organization while he/she is working in the field.

5. Environmental scanning: Organizations can influence
external environment based on information collected through

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regular observation and analysis. This is known as environmental scanning. When followed, environmental scanning can actively monitor the environment. Using both boundary spanner and environmental scanning organizations can gather and organize relevant information for assisting managers in making decisions.

6. Strategic response: A firm may alter its strategy to deal
with the environmental changes. The strategy-alteration may take any of the forms: slight change in the strategy; adopting an entirely new strategy; or maintain status quo. Which one would better meet the demands of its competitive environment depends on situations that prevail.

In order to enter into new markets or uphold prominence in the current market or for some other strategic reasons, a firm may resort to merger, acquisition, takeover or alliance.

7. Organizational combinations: In order to enter into new
markets or uphold prominence in the current market or for some other strategic reasons, a firm may resort to merger, acquisition, takeover or alliance. Two or more firms may combine together (merge) to create a new firm. A firm may buy another firm to acquire its assets. In the case of acquisition (or takeover), the acquired firm may continue to operate as a subsidiary of the acquiring firm, or the acquired (taken-over) firm may cease to exist and become part of the acquiring company. When two or more firms undertake a new venture, it becomes a joint venture or strategic alliance (if the venture is of cooperative in nature).

Section B Analysis of Internal Environment 3.7 Internal Environment: Meaning and Elements
The internal environment of an organization consists of the conditions and forces that exist within the organization. Internal environment portrays an organization’s ‘in-house’ situations. An The internal organization has full control over these situations. Unlike the environment of an external environment, internal environment is much more directly organization consists controllable. It includes various internal factors of the organization of the conditions and forces that exist such as resources, owners/shareholders, board of directors, within the employees and trade union, goodwill, and corporate culture. These organization. factors are detailed out below.

1. Resources of the organization:

An organization’s resources can be discussed under five broad heads: physical resources, human resources, financial resources, informational resources and technological resources. Physical resources include land and buildings, warehouses, all kinds of materials, equipments and machinery. Examples are office buildings, computers, furniture, fans and airconditioners. Human resources include all employees of the organization from the top

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level to the lowest level of the organization. Examples are teachers in a university, marketing executives in a manufacturing company, and manual workers in a factory. Financial resources include capital used for financing the operations of the organization including working capital. Examples are investment by owners, profits, reserve funds, and revenues received. Informational resources encompass ‘usable data needed to make effective decisions.’ Examples are sales forecasts, price lists from suppliers, market-related data, employee profile and production reports.

2. Owners/stockholders: Owners of an organization may be
an individual in the case of a sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a limited company or members in a cooperative society. In public enterprises, the government of the country is the owner. Whoever the owners, they are an integral part of the organization’s internal environment. Owners play an important role in influencing the affairs of the business. This is the reason why managers should take more care of the owners.

3. Board of Directors: In our country every registered
company (private or public limited company) must have a board of directors as per the Companies Act, 1994. What would be the number of directors in the board is stipulated in the company’s Articles of Association. They are responsible for top-level strategy making and providing directions to the company. They are strategic decision-makers and planners. They oversee and monitor the overall functioning of the company. Some organizations have no board of directors, rather they have ‘board of trustees’ (such as in a university or charitable organization or a hospital) or ‘Managing Committee’ (such as in an NGO or non-government school) or a Governing Body (such as in a college).

Owners of an organization may be an individual in the case of a sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a limited company or members in a cooperative society.

4. Organization’s culture: An organization’s culture is viewed
as the foundation of its internal environment. Organizational (or corporate) culture significantly influences employee behavior. Culture is important to every employee including managers who work in the organization. Strong culture helps a firm achieve its goals better than a firm having a weak culture. Culture in an organization develops and ‘blossoms’ over many years, starting from the practices of the founder(s). Since culture is an important internal environmental concern for an organization, managers need to understand its influence on organizational activities.
Strong culture helps a firm achieve its goals better than a firm having a weak culture.

5. Organization’s

image/goodwill: Reputation of an organization is a very valuable intangible asset. High reputation or goodwill develops a favorable image of the organization in the minds of the public (so to say, in the minds of the customers). ‘No-reputation’ cannot create any positive image.

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Negative image destroys the organization’s efforts to attract customers in a competitive world. Analysis of the internal environment (or microenvironment) of an organization is an essential part of situation analysis. The situation of an organization, whether business or any other type of organization, is expressed in terms of its internal and external When an analysis is environmental factors. When an analysis is made of both the types made of both the types of internal andof internal and external environments, managers can have a clear external environment, idea of the overall situation of the organization. External managers can have environmental factors reside outside of the organization and, a clear idea of the therefore, depict the external situation. The internal environmental overall situation of the factors reside inside the organization and, therefore, portray the organization. internal situation. Internal environmental analysis (some prefer to call it simply ‘internal analysis’) helps managers identify the internal strengths and weaknesses in respect of various internal environmental factors. Analysis is made of each factor in different areas of the organization.

3.8 Areas Usually Covered by Internal Analysis
Internal analysis is made of various internal issues of a company. Depending on the nature of the company, the following major specific issues need to be covered in the analysis:5 • Financial position • Product and service positions • Product and service quality • Marketing capability • Research and development capability • Organization structure • Human resources • Conditions of facilities and equipment • Past and present objectives and strategies Every area of a • And many more company that has
substantial impact on In the long-term survival fact, every area of a company that has substantial impact on the long-term survival of the company should be analyzed to determine of the company should be analyzed to the strengths and weaknesses of each area. A framework for determine the internal environmental analysis is shown in Figure 3.1. This strengths and framework indicates several sample questions that need to be weaknesses of each addressed while making an internal analysis. These are actually area.

important considerations for identification weaknesses of an organization.

of

strengths

and

Framework for Internal Analysis
Strengths A distinctive competence? Adequate financial resources?
5

Weaknesses No clear vision? Poor strategic direction?

L. L. Byars, L. W. Rue and S. A. Zahra, Strategic Management (Chicago: IRWIN, 1996, p. 89).

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Excellent competitive skills? Positive image of the company? Access to economies of scale? Proprietary technology? Cost advantages? Competitive advantages? Product innovation abilities? Good leadership and management? Achieved market leadership? Well-crafted functional strategies?

Obsolete machinery? Lack of managerial talent? Lack of competencies? Poor track record in strategy implementation? Falling behind in research and development? Narrow product line? Weak market image? Competitive disadvantages? Poor marketing skills? Inadequate working capital?

Figure 3.1: A sample framework for internal analysis of a company

3.9 Conducting Internal Analysis: Who to Do It?
The task of assigning the responsibility for performing internal environmental analysis may not be similar in all organizations. Evidence shows that practices differ from organization to organization. Usually the following practices are prevalent in different organizations:  Involvement of Planning Department: Some organizations involve the Planning Department for conducting the analysis of internal environment. The staffs in the planning department are expected to be proficient in such analysis. They gather information and then make analysis of the internal situations.  Use of Outside Consultants: Some organizations use independent consultants for conducting internal analysis. The expert consultants have experience in performing such activities. They can also give impartial view of the situations, which the internal staffs of the planning department or other persons may not give.  Forming of Team: Some organizations form a team of line managers with relevant experience. Usually such a team performs the analysis in collaboration with the planning staffs who provide technical assistance. The underlying philosophy behind using team approach is that the line mangers will be better able to understand the implications of the analysis and they will be in a better position to guide their strategic planning decisions.
The task of assigning the responsibility for performing internal environmental analysis may not be similar in all organizations.

Some organizations form a team of line managers with relevant experience.

3.10 Concluding Remarks
An analysis of external environment provides the managers with information about external opportunities and threats (OT). On the

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other hand, an analysis of internal environment generates information about the organization’s internal strengths and weaknesses (SW). It means that the managers can identify their organization’s strengths, weaknesses, opportunities and threats (SWOT) from the overall strategic analysis of the organization.

TERMS USED

Environment Environmental analysis Industry analysis SWOT Value chain General environment Remote environment PESTLED Model External analysis Internal analysis
SAMPLE MULTIPLE CHOICE QUESTIONS

1. For strategy-making we need to undertake a. external environmental analysis b. internal environmental analysis c. industry analysis d. all of the above 2. External situation analysis of a single-business company is also known as a. industry analysis b. company analysis c. organizational analysis d. none of the above 3. Which of the following is not covered in the internal analysis? a. strategic moves of the competitors b. strategies adopted and applied by the company itself c. research and development capability d. human resources 4. While responding to changing conditions in the context of an organization, management needs to look at a. how to take advantage of new opportunities b. how to lessen the impact of externally imposed threats c. how to strengthen the mix of the firm’s activities by doing more of some things and less of others d. all of the above 5. The external factors shaping may be a. business philosophies b. ethical principles of key executives c. shared values and culture d. none of above

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SAMPLE TRUE-FALSE STATEMENTS

Write down T if a statement is True, or F if a statement is False. Use the boxes in the second column.
# T/F Statements

1 2 3 4 5

Every organization has the same environment whether it is a business organization or non-business organization. Regular analysis of environment is particularly important for the reasons that developments in the remote environment influence the business organizations. An organization’s operations are affected by external environment, not by internal environment. A boundary spanner is a person who collects information from outside the organization while he or she is working in the field. Team is not useful for conducting internal environmental analysis.

SAMPLE SHORT-ANSWER QUESTIONS

1. Why should managers of business organizations clearly understand the influences of environment on business? 2. Explain the PESTLED Model for analysis of external environment. 3. How do business organizations respond to external environmental influences? 4. What are the areas usually covered by internal environmental analysis? Explain them briefly. 5. Prepare a framework for internal analysis of an organization. 6. Who are responsible for conducting internal analysis of organizations? Which one do you prefer and why?
PRACTICE QUESTIONS

1. Suppose you are responsible in your company for dealing with the environmental influences. Make a list of the approaches that you would adopt for dealing with the external influences on your business enterprise. 2. Talk to the manager of a bank, ask him/her to give you information regarding various resources of the bank and then prepare a list of the financial, human, and physical resources of the bank. 3. From the knowledge that you have gained from the study of internal environmental analysis, you could understand that company image is a very important internal environmental factor. Explain your view about the importance of company image on the basis of your study of a company like the producer of MUM or paper tissue of Bashundhara.

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