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What do you mean by organizational structure? Acknowledging and harmonizing differences and commonalities in three prominent perspectives

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• Published: 11 October 2023
• Volume 13 , pages 1–11, ( 2024 )

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• Daniel Albert   ORCID: orcid.org/0000-0003-3888-1643 1  

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The organizational design literature stresses the importance of organizational structure to understand strategic change, performance, and innovation. However, prior studies diverge regarding the conceptualizations and operationalizations of structure. Organizational structure has been studied as an (1) arrangement of activities, (2) representation of decision-making, and (3) legal entities. In this point-of-view paper, the three prominent perspectives of organizational structure are discussed in terms of their commonalities, differences, and the need to study their relationship more thoroughly. Future research may not only wish to integrate these dimensions but also be more vocal about what type of organization structure is studied and why.

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Introduction

An important area of research in the organization design literature concerns the role of structure. Early research, including work by Chandler ( 1962 , 1991 ) and Burgelman ( 1983 ), has studied how strategy execution depends on a firm’s structure, and how that structure can influence future strategies. Moreover, prior work has explored organizational structure and its connection to strategic change (Gulati and Puranam 2009 ), performance (Csaszar 2012 ; Lee 2022 ), innovation (Eklund 2022 ; Keum and See 2017 ) and internal power dynamics (Bidwell 2012 ; Pfeffer 1981 ), among others.

What is surprising is the divergence in understanding what constitutes and defines organizational structure. This becomes particularly apparent when considering how structure has often been operationalized in prior studies. While there are a variety of conceptual and empirical approaches to organizational structure, this point of view paper focuses on three particularly prominent perspectives. Scholars of one stream of operationalization have argued that structure is how business activities are grouped and assessed in the form of distinct business units (or divisions) (Karim 2006 ; Mintzberg 1979 ), which may represent a company’s operating segments for internal and external reporting (Albert 2018 ). In another stream of operationalization, scholars argue that structure is inherent in the organizational chart, specifically, the chain of command and the allocation of decision-making responsibilities. Often, a simple yet powerful proxy has been to consider the roles assigned to the top management team members (Girod and Whittington 2015 ). Finally, a third type of operationalization of structure is the composition and arrangement of legal entities (Bethel and Liebeskind 1998 ; Zhou 2013 ), specifically, discrete subsidiaries constituting an organization’s business activities. This may be the most consequential understanding of structure as it relates to the containment of legal responsibilities.

These three perspectives overlap in some cases but may also characterize organizational structure differently in important ways. In a clear-cut case, a firm may consist of a top management team that perfectly reflects its business divisions and units, reported by consolidated but legally distinct entities. However, when examining the financial filings of different corporations, a different picture emerges as such clean alignment is often not the case. Not only are well-studied differences in the corporation's legal form (such as holding versus integrated) present, but top management responsibilities and reporting of business divisions often show that structure is indeed a multi-dimensional phenomenon in organizations.

To illustrate how different perspectives may lead to varying conclusions about organizational structure, two companies, the financial service firm Citigroup and the automotive company Ford Motor, are briefly discussed with respect to each perspective. Both Citigroup and Ford Motor are interesting cases, as they are large organizations with diversified business operations across various industry segments and a presence in multiple geographical markets. This complexity in business operations underscores the necessity of an organizational structure to implement and execute the firms' respective strategies.

The objective of this point of view is to emphasize and discuss the co-existence of fundamentally different measures and their underlying assumptions of organizational structure. These three perspectives highlight different aspects of organizational structure and can help reveal important nuances idiosyncratic to specific organizations. That is, complementing one perspective with one or two other perspectives can paint a more holistic picture of firm-specific structural designs. The “arrangement of activities” perspective provides generally a measure that captures sources of value creation, that is, the groupings of economic activities and knowledge. The “decision making representation” perspective provides generally a measure of hierarchical allocation of decision rights and has been likened to the level of centralization, that is, which responsibilities are specifically assigned to the highest level of decision-making. The “legal entities” perspective often captures decentralization as "truly" autonomous activities that can render integration more difficult and, therefore, imposes greater decentralization among such units.

A follow-up goal of this point of view paper is to discuss the implications and future research opportunities of clearly distinguishing between these perspectives in organizational design studies. A completely new area of research constitutes the inquiry of the relationships between these perspectives and whether and when alignment between the perspectives is enhancing or hindering performance, innovation, and strategic change. It is important to note that this point of view paper is not meant to provide an exhaustive list of perspectives of organizational structure, but to spark a constructive discussion around the theoretical and operational differences and commonalities between the arguably most prominent perspectives. Additional perspectives of organizational structure are discussed in the limitations section.

Three perspectives of structure

Structure as arrangement of activities.

This perspective suggests that groups of economic activities, managed and reviewed together, make up departments, units, and divisions that form the organizational structure (Joseph and Gaba 2020 ; Mintzberg 1979 ; Puranam and Vanneste 2016 ). In the middle of the twentieth century, Chandler ( 1962 ) observed that large American corporations not only diversified into a greater number of different business activities but also started to organize business activities into separately managed divisions, which are typically overseen by a corporate center unit. The organization of activities into compartments is often nested, that is, activities within a given compartment are further organized into subunits and so on. In a more general sense, such compartmentalization constitutes the division of labor (or specialization) in an organization, which can be organized along various dimensions. The most prevalent dimensions along which activities are organized into units include customer segments, products, geography, and functional domains, such as research and development, marketing, and sales activities (Puranam and Vanneste 2016 ).

The way activities are organized has been often related to archetypical designs, such as a more homogenous organization that is organized along functions and multi-divisional corporations that are more heterogenous in the activities making up business divisions (e.g., Raveendran 2020 ). The corporate center is often considered as a distinct unit of activities that holds the design rights of the organization, allowing it to organize these activities (Puranam 2018 ). The center may also play a coordinating role in the management of interdependencies between divisions to ensure alignment with corporate-level goals (Lawrence and Lorsch 1967 ) and foster value creation (Foss 1997 ).

Scholars of this perspective have studied how the arrangement of activities into compartments is associated with the propensity and type of reorganization (e.g., Karim 2006 ; Raveendran 2020 ), as well as its association with innovation outcomes (e.g., Karim and Kaul 2014 ). These two outcomes of interest are closely related, as compartments consist of employees and resources that constitute a source of knowledge that may be rearranged or combined with other units to address a (changing) market in novel and more efficient ways. Hence, this perspective may help to understand the sources of performance and innovation.

Illustration of arrangement of activities perspective

Figure  1 shows Citigroup’s operating business segments, which are in line with accounting regulations that require businesses to disclose operations in the way in which activities are managed internally and held accountable for cost and revenues (see Financial Accounting Standards No. 131). Accordingly, Citigroup operates three business segments, “Institutional Clients Group (ICG)”, “Personal Banking and Wealth Management (PBWM)” and “Legacy Franchises”, which are predominantly groupings of economic activities based on customer segments (i.e., institutional clients, private clients, and consumer clients). These groupings encompass various activities around this customer segment and the relevant product offerings. For example, the division Personal Banking encompasses activities for retail clients, such as Citibank’s physical retail network and online banking as well as private wealth operations for high-net-worth individuals. The respective segments may be understood as the organization’s business divisions, whereas further, nested, groupings exist within these divisions (e.g., U.S. Personal Banking constitutes a subunit with further subgroupings into Cards and Retail Banking operations). Supporting activities and operations that are not part of one of the three divisions are managed by the corporate center unit.

Citigroup’s operating business segments. This figure is the author’s own drawing but entirely based on Citigroup’s 2022 10-K report (page 2)

In Table 1 , the operating business segments are shown for the automotive company Ford. Accordingly, Ford operates six main segments (and one reconciliation of debt segment), “Ford Blue”, “Ford Model e”, “Ford Pro”, “Ford Next”, “Ford Credit”, and “Corporate Other”. These groupings encompass various product and customer segment activities, such as the “Ford Blue” legacy business of internal combustion engine automotives, under the Ford and Lincoln brands. Electric vehicle-related activities are grouped under “Ford Model e”, whereas “Ford Pro” groups activities to address corporate clients who seek to optimize and maintain fleets. Noteworthy is also the segment “Ford Next”, which is a grouping of investment activities into emerging business models. While these segments (i.e., divisions) encompass various activities, information is limited with respect to any nested groupings within these segments (or a potential lack thereof).

Structure as decision making representation

This perspective suggests that the job roles in the top management team (TMT) are reflective of the organizational structure, as executives are charged to oversee certain activities (Girod and Whittington 2015 ; Guadalupe et al. 2013 ). At first glance, this understanding is fairly similar to that of the arrangement of activities. At a closer look, however, the TMT structure perspective is more indicative of an information processing perspective. At the center of the information processing perspective lies hierarchy as a mechanism to cope with information uncertainty and resolve conflicts (Galbraith 1974 ). Moreover, information processing has long been considered as the way in which key decision-makers can ensure coordination and integration of units (Joseph and Gaba 2020 ). That is, the top management roles may in fact extend beyond the formal task structure and include the reintegration and coordination of activities more broadly.

The assignment of decision-making responsibilities can reveal how the organization “thinks” about interdependencies, such as the need to coordinate resources, the potential to leverage synergies and so forth. For example, roles that largely define autonomous areas of business allow managers to make decisions more independently from one another. In contrast, roles that are focused on dedicated functions, such as research and development, marketing, and finance often require greater coordination among managers (e.g., Hambrick et al. 2015 ). Hence, the decision-making representations in the top management team may be understood as a hierarchy mechanism to manage and even create interdependencies between activities. A case in point is the deliberate assignment of creating synergies between otherwise standalone units, for example, in the form of executives holding multiple roles that span several divisions.

While the assignment of decision-making responsibilities clearly relates to efforts of coordination and integration, it can also explain the emergence of internal power and politics dynamics (Cyert and March 1963 , Pfeffer 1981 ). For example, Romanelli and Tushman 9/14/2023 7:00:00 PM suggest that top management turnover is a measure of power dynamics in organizations and treat this as entirely distinct from organizational structure. Moreover, the upper echelons perspective has proposed that organizational choice and strategic outcomes are, at least in part, a direct reflection of the backgrounds of the leadership's individuals (Hambrick and Mason 1984 ), which suggests that design choices, such as organizational structure are decided under the auspice of the very same individuals (Puranam 2018 ) that researchers have used as a proxy to measure organizational structure. This emphasizes the importance of considering the TMT as a structure of decision-making representation rather than a measure of division of labor.

Perhaps it is this representational role of the TMT as a potential liaison between activity arrangements and decision-making, which Gaba and Joseph ( 2020 ) discuss as information processing, that has led some of the prior research argue that structure influences how decisions come about. Accordingly, decisions of reorganization and internal resource allocation are the result of a political negotiation process (Albert 2018 ; Bidwell 2012 ; Keum 2023 ; Pfeffer 1981 ; Pfeffer and Salancik 1974 ). Hence, this perspective may help understand the role of structure as a process that shapes decisions (Burgelman 1983 ).

Illustration of decision-making representation perspective

Table 2 shows Citigroup’s executive leadership team with each member’s specific job title that reflects the decision-making responsibilities. The team is made up of executives responsible for specific business divisions (e.g., one member carries the title CEO of Legacy Franchises), some members oversee particular geographical regions (e.g., one member carries the title CEO of Latin America), other members represent specific subsidiaries (e.g., one member carries the title CEO of Citibank N.A.), and again others are in charge of corporate functions (e.g., one member carries the title Head of Human Resources).

Table 3 shows Ford’s executive leadership team. The team is made up of executives responsible for business divisions, such as “President Ford Blue”, “CEO, Ford Pro” and “CEO, Ford Next”. In addition, executives represent particular activities of these divisions, such as “Chief Customer Officer, Ford Model e” and “Chief Customer Experience Officer, Ford Blue”. Similar to Citigroup, at Ford executives also represent geographical activities and various functional activities. Moreover, one executive represents a legal entity (Ford Next LLC), which is also a business segment (activity grouping).

Structure as legal entities

This perspective suggests that structure is delineated by legal boundaries, such as discrete subsidiaries that make up an organization’s operating units. This may constitute the most consequential understanding of structure as it relates to containment of legal responsibilities.

Thus, empirical studies have operationalized legal entities as a proxy for divisionalization in organizations (Argyres 1996 ; Zhou 2013 ) and degree of decentralization of research and development responsibilities (Arora et al. 2014 ). The way organizations are legally organized may be motivated by liability concerns, tax advantages, shareholder voting rights, as well as international law and compliance consideration (Bethel and Liebeskind 1998 ). Nevertheless, organizing into legally separate units can have important consequences for the management of the organization, such as limited economies of scope (see ibid.). For example, Monteiro et al. ( 2008 ) describe how subsidiaries in multinational corporations can become “isolated” from knowledge sharing with the rest of the organization. This isolation from intra-firm knowledge flows leads these subsidiaries to more likely underperform compared to less isolated subsidiaries.

It is important to note that legal structure is not always at the discretion of the organization. For example, the financial and economic crisis of 2007/8 has led legislators in some countries to introduce laws that require system-relevant banks to organize certain activities and assets into separate legal entities that contain losses and allow quicker resolvability in case the government decides to step in and take ownership stakes of affected units (Reuters 2014 ).

Legal structures, specifically in the context of multi-national organizations, have been studied with respect to decentralized decision-making, local market adaptation, and dynamics between subsidiaries and the headquarters (Bouquet and Birkinshaw 2008 ). Another aspect of studying legal entities in organizational design relates to internal reorganization. Legally separated activities are not only more straightforward to evaluate (i.e., greater transparency) as they typically maintain their own balance sheets and income statements, but they may also be easier to divest or spin-off, which provides the organization with greater flexibility. For example, the legal reorganization of Google into Alphabet in 2015 legally separated Google’s activities from all its “other bets”, which were run as their own legal organizations, with the goal for greater transparency and accountability (Zenger 2015 ). Moreover, the separation of activities into legal entities may also affect how easy or difficult it is for the organization to endorse cross-unit collaboration and execute internal reorganization without changing legal forms. Coordination cost between separate legal entities are greater, as more formal and legally binding contracts may need to be set.

Illustration of legal entities perspective

Figure  2 shows Citigroup’s legal structure. Accordingly, the organization is at the highest level a Bank Holding Company, which legally owns two (intermediate) holding entities, “Citigroup Global Markets Holdings Inc.” and “Citicorp LLC”. Each of these two entities owns additional subsidiaries, which are largely organized by region (these may hold additional subsidiaries). This structure is quite different from Citigroup’s management of operating activities as none of the business divisions is reflected in the legal structure.

Citigroup material legal entities. This figure is the author’s own drawing and a slight adaptation rom Citigroup’s publicly available presentation material via https://www.citigroup.com/rcs/citigpa/akpublic/storage/public/corp_struct.pdf , accessed on March 23, 2023. The dark blue boxed refer to operating material legal entities. The four boxes that are within the grey dashed rectangle are branches of Citibank N.A

Table 4 shows a list of legal entities reported by Ford in its annual report. Many of these subsidiaries are focused on regional activities and/or credit-related activities, which may be due to regulatory requirements of operating consumer financing activities. The legal entity Ford Next LLC is also its own business segment (i.e., an arrangement of activities reported as a managed division) and directly represented in the executive team. The Ford example does not provide much detail on the exact ownership structure among subsidiaries, which generally is indicative of a legal hierarchical structure of the respective legal entities. However, Ford European Holdings Inc. appears to own European subsidiaries, such as Ford Deutschland Holding GmbH, which in turn is the legal entity that owns subsidiaries in Germany and so on.

A path forward

The study of the commonalities , differences , and relationships between the three perspectives of organization structure—i.e., structure as arrangement of activities, decision-making representation, and legal entities—offers great potential for the field of organizational design. Previous research has often focused on one of these dimensions at a time to study organizational structure, but each perspective plays an important role in organizing and influencing decision-making.

Commonalities

All three perspectives share central ideas of organizational design. First, there is the notion that tasks are grouped and kept separate . The arrangement of activities perspective suggests that economic processes are managed and carried out together when these influence one another. Thus, this perspective stresses the grouping of tasks most forcefully of all the perspectives. However, the two other lines of research also reflect groupings of tasks. The decision-making representation perspective considers job titles and decision-making authority assigned to distinct members of the executive team to generally be related to how tasks are structured. Decision makers, therefore, oversee a particular task environment. The legal entity perspective proposes legal boundaries as delineations of responsibility and accountability. That is, legal separation and containment of financial accountability constitute somewhat binding modularity.

The three views also embrace the concept of hierarchy , albeit manifested differently. The arrangement of activities captures hierarchy by stressing that activity groups (i.e., units) can be nested, that is, a division is made up of several sub-units with own task responsibilities. Hierarchy in decision-making representation is captured by reporting lines and may be more focused on hierarchy as a means of conflict resolution and the diffusion of top-down ideas. The legal entity view shares similarity with the arrangement of activities perspective in that nested structures of subsidiaries can exist, but the “mechanism” of hierarchy is the ownership structure.

Differences

While the three perspectives have obvious similarities and overlap—after all, that is why scholars rely on one or the other perspectives to proxy organizational structure—these perspectives also capture distinct elements and, therefore, draw attention to different theoretical aspects of organization structure. The arrangement of activities perspective draws attention to the locus of value creation and innovation associated with structure. The grouping of activities influences whether synergies can be realized, goals achieved more quickly (Raveendran 2020 ) and whether knowledge can be recombined to seize innovation opportunities (Karim and Kaul 2014 ). The representation of decision-making perspectives draws attention to the top management team as structural authority to resolve conflicts between lower-level decision makers, and lobby for distinct operating activities in the organization. Moreover, top management plays a crucial role in the restructuring of the arrangement of activities and decisions with respect to changing the composition of legal entities. For example, political power of executives has been argued and shown to affect division reorganization decisions (Albert 2018 ) and allocation decisions of internal non-financial resources (Keum 2023 ). Finally, the legal entities perspective draws attention to structure as legal accountability and draws a sharp line between what is truly separate and what is more ‘loosely’ integrated. Consequently, arranging activities as legally separate entities often requires more costly coordination measures, such as formal contracts.

Theoretical and empirical questions around these differences may investigate the following claims.

A research focus on organizational structure as arrangement of activities may be of particular interest for the aim of understanding performance and innovation outcomes as economic activities are directly related to the process of value creation.

A research focus on organizational structure as decision-making representation may be of particular interest for the aim of understanding how strategic goals are formed, with respect to change and associated corporate reorganizations.

A research focus on organizational structure as legal entities may be of particular interest for the aim of understanding barriers to integration and realization of synergies as well as flexibility with respect to changes in corporate scope.

However, these preliminary statements about the different perspectives on organizational structure are not meant to encourage researchers to keep them strictly separate. Instead, future studies can explore these perspectives' theoretical relationships, offering wonderful opportunities for new insights, as will be discussed next.

Relationships

By investigating underlying connections between the different perspectives, future research may surface important insights about organizational design that can open up entirely new research programs. An essential theoretical question involves whether there are any directional relationships between specific perspectives. For example, when does top management team structure induce or follow other changes (in divisions and legal structure)? Karim and Williams ( 2012 ) show that changes in executives’ division responsibilities helps predict subsequent reorganizations in the respective units. Another question is how the legal structure may affect the arrangement of activities over time. The greater cost of integration of legally separate entities may imply that greater autonomy is more likely to follow, which future research may want to investigate.

Moreover, it would be useful for the field of organizational design to better understand when potential structural changes in divisions and legal entities trigger in turn a reorganization of leadership responsibilities. The legal structure may change much more slowly than the other two types, because of regulatory and other legal reasons. Nevertheless, the legal structure can play an essential role in how the organization lays out its strategic priorities, is internally managed, and evaluates its performance. At least, these appear to be the main reasons of notable reorganization that lead to an overhaul in legal structure. Recent examples include the already mentioned case of Google’s legal reorganization into contained group subsidiaries under the Alphabet umbrella, Facebook’s legal reorganization into the corporation Meta (Zuckerberg 2021 ), and Lego’s reorganization into the Lego Brand Group (LEGO Group 2016 ). The question remains whether the legal reorganization is a means to enable better top management and divisional structures or whether the top management structure, for example, motivated such legal changes for better alignment.

Finally, a completely novel question that acknowledges the multifaceted perspectives of organizational structure emerges. What are the performance, innovation, and strategic change consequences for organizations when these different perspectives are aligned or misaligned? Are there specific “archetypes” organizational structures along these dimensions?

Implications

It is important to stress that in some cases it may be necessary to draw upon two or all three to gain a more holistic picture of organizational structure and important nuances that may be highly specific to a particular organization. Whereas the arrangement of activities provides an overview of distinct operating units, such as divisions and subunits, this perspective alone does not capture complex interrelationships with respect to who reports to whom. This becomes most critical in cases of a matrix organization, where, for example, a segment is guided by a product goal as well as some geographical goals.

Moreover, a comparison of some of the organizational structure characteristics between Citigroup and Ford demonstrates how important, potentially strategy-influencing differences exist when consulting all three perspectives. For example, the fact that Ford’s executive team is in part made up of executives who represent a specific legal entity, which is its own reporting segment, suggests that legal structure, decision-making and value creation for certain parts of the organization go hand in hand. In contrast, Citigroup’s legal structure bears little to no resemblance to its operational structure. This may suggest that in Citigroup’s case legal entities play a very different role for organizational design purposes, such as containing legal regulatory requirements and legal containment of liability, whereas its management of value creating activities and decision-making responsibilities is guided across these legal boundaries. Concluding that the legal structure is a reflection of operational and strategic design may be somewhat misdirected with respect to product-market operations but more reflective of risk and geographical profiles in Citigroup’s case. Future research is encouraged to explore such differences in more detail.

Limitations

Before concluding this point of view paper, it is important to acknowledge that there are other important attributes of organizational design and structure that should be considered. For example, the leadership perspective of structure may be extended or complemented by considering the structure of corporate governance and its effects on organizational changes (Castañer and Kavadis 2013 ; Goranova et al. 2007 ). Moreover, the arrangement of activities into departments, units, and divisions determines the formal structure of the organization. Employees who belong to the same department (and work on the same task) often work in the same physical location and, therefore, are more likely to interact (including outside their formal task) and form (informal) networks with those close to them (Clement and Puranam 2018 ). As such, the structure of tasks can affect the emergence of networks in the organization. Organizational changes to the arrangement of activities may consequently conflict with the informal structure that has formed over time (Gulati and Puranam 2009 ). Informal networks in the organization may, therefore, constitute another “measure” of structure, but this paper takes the perspective that networks are a more likely to be a consequence of organizational structure (albeit one that may affect future structures).

Finally, organizational design can exceed a focal firm’s boundaries. Partnerships, such as alliances, joint ventures, and meta-organizations (Gulati et al. 2012 ), pose additional challenges in determining the actual structure of an organization. Future research is advised to study how different dimensions of organizational structure extend to and impact such boundary-spanning multi-organization designs.

The divergence in prior literature with respect to conceptualizing and operationalizing organizational structure reveals that this construct has more facets to it than sometimes acknowledged. Studying the alignment and divergence of these three characteristics of structure within organizations has potential to qualify and complement prior theories and generate new insights with respect to nuances of organizational design that we may have overlooked in prior work. It is important to consider that focusing only on one of these dimensions at a time for studying structure can indeed be sufficient. However, the field of organizational design may wish to be more concise in which perspective is chosen and why, when building, testing, and extending theory. Highlighting what is not measured following a particular perspective can already enrich our understanding of the role of organizational structure in novel and impactful ways.

Data availability

Data used in this manuscript are publicly accessible through regulatory filings and company Investor Relations websites.

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Acknowledgements

I appreciate the helpful comments and guidance provided by the handling editor-in-chief Marlo Raveendran and two anonymous reviewers. I also would like to thank all three editors-in-chief for supporting the publication of this point of view manuscript.

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Albert, D. What do you mean by organizational structure? Acknowledging and harmonizing differences and commonalities in three prominent perspectives. J Org Design 13 , 1–11 (2024). https://doi.org/10.1007/s41469-023-00152-y

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Received : 30 March 2023

Accepted : 12 September 2023

Published : 11 October 2023

Issue Date : March 2024

DOI : https://doi.org/10.1007/s41469-023-00152-y

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