Germany

ANALYZING THE COMPETITIVE ADVANTAGES AND DISADVANTAGES OF
GERMANY WITH THE TOWS MATRIX—AN ALTERNATIVE TO PORTER'S
MODEL
Heinz Weihrich, Ph.D.
* Most Outstanding Paper, 1999 - European Business Review *
Every nation is concerned with competing effectively in the global market.
Competitiveness does not depend only on the effectiveness of individual companies, but
also on the industries and the socioeconomic system of a nation. The rapidly changing
environments of the free world markets dictate that nations fully utilize their
comparative advantages to remain or become prosperous in the future. Political and
economic leaders must evaluate the opportunities in and threats from the external
environment in order to build appropriate national strategies that take advantage of
their nation?s strengths and to shore up its weaknesses.
This article will describe a logical and efficient process of developing coherent national
strategies in light of environmental forces that are present in the global market. It will
then apply that process to the Federal Republic of Germany. The TOWS (Threats,
Opportunities, Weaknesses, Strengths) Matrix will be used to accomplish this task. The
TOWS methodology will focus on aspects of German industries that have had a
significant impact - either positively or negatively - on the country’s economy and its
position in the European Community and the world. Intrinsic national forces in the
social, economic, political, and technological areas will be considered in determining the
origin of Germany's national industrial strengths and weaknesses. External
opportunities for and threats to these industries will then be analyzed. After an analysis
of a wide array of forces, strategies by German industries will be delineated and
alternative industrial strategies will be proposed. Because former West Germany differs
very much from former East Germany, the analysis will focus on what used to be called
West Germany, referred to in this paper simply as Germany.
PORTER'S DETERMINANTS OF NATIONAL ADVANTAGE
Harvard University Professor Michael Porter suggested the need for a new paradigm for
analyzing the state of a country in his book, The Competitive Advantage of Nations.
Specifically, he identified four determinants of national advantage:
1. The factor conditions of a nation, such as the infrastructure and the availability of
skilled labor;
2. The demand conditions, which refer to the home country's demand for products and
services within an industry;
3. The presence or absence of related and supporting industries necessary for being
competitive in the global market; and
European Business Review © Heinz Weihrich 1

4. The firm’s strategy, structure, and rivalry with other companies that influence how
firms are established, organized, and managed (the nature of the rivalry affects the
competitive advantage of industries and nations).
Porter's factor determinants of national advantage relate closely to a nation's strengths in
industrial production and, consequently, to its leading industries. Therefore, trends in
these determinants also predict to a great extent the nation's industrial competitiveness.
While Porter made valuable contributions in identifying important factors that
contribute to national advantage, certain facts may not be supported by his model. For
example, he suggests that the geographic concentration of industries is vitally important.
Porter mentions that the German automobile industry has become competitive due to
the proximity of the supportive industry around the cities of Stuttgart, Munich,
Ingolstadt, Neckarsulm, and Regensburg. While it is true that car companies such as
Mercedes, BMW, and Porsche are located in these areas, the largest European firm,
Volkswagen, is not located near those cities, nor are the plants of the Ford Motor
Company and General Motors' Opel firm. Therefore, Porter's model has only limited
validity with respect to the importance of geographic concentration in the German car
industry.
Although Porter's model provides a useful framework for analyzing the environment,
especially the economic one, it does not require government policy makers to develop
responsible alternative strategies that create and maintain a competitive advantage for
their nations. His analysis of the competitive situation is mainly descriptive and does not
necessarily result in the formulation of alternative strategies.
A different analysis for developing a nation's strategy for survival in the competitive
global market can be accomplished by using concepts from strategic management -
namely, the TOWS Matrix. This approach does not contract but, rather, supplements
Porter's analysis. The TOWS Matrix approach is less deterministic than Porter's model. It
provides a framework for developing alternative national strategies by analyzing a
nation's strengths and weaknesses and integrating them with global opportunities and
threats.
GAINING COMPETITIVE ADVANTAGE WITH THE TOWS MATRIX A
CONCEPTUAL MODEL
The TOWS Matrix was originally introduced for the formulation of company strategies.
Later, it was used as a conceptual framework for developing career strategies for
individuals. In this article, the framework will be used to analyze industries and to
identify the competitive advantage of a nation.
The development of a strategy, be it for a career, a company, an industry, or a nation,
requires a systematic analysis of the weaknesses (W) and strengths (S) of the respective
system (the nation in our discussion) which, in turn, operates within a larger external
environment that poses threats (T) but also provides opportunities (O) to the system.
These four factors are illustrated in the TOWS Matrix in Figure 1.

Figure 1
Internal Factors
External Factors
Internal Strengths (S)
e.g. cultural norms, education
system, political system, natural
resources, transportation system,
infrastructure, technological
innovation, managerial practices
Internal Weaknesses (W)
e.g. weaknesses in areas shown in
the box of "internal strengths"
External Opportunities (O)
e.g. European Union, North America,
Eastern Europe, Former Soviet
Republics, Pacific Rim & Asia
S-O Strategy: Maxi-Maxi
Potentially the most successful
strategy, utilizing the nation's
strengths to take advantage of
opportunities in the global market
W-O Strategy: Mini-Maxi
e.g., a developmental strategy to
overcome weaknesses in order to
take advantage of opportunities
External Threats (T)
e.g. from companies or whole
industries from areas shown in the
box of "external opportunities"
S-T Strategy: Maxi-Mini
e.g. use of strengths to cope with
threats or to avoid threats
W-T Strategy: Mini-Mini
e.g. invite foreign investments and
make it attractive to those firms or
industries
These four factors can become the basis for four distinct strategies. The most favorable
situation occurs when a nation uses its strengths (S) to take advantage of opportunities
(O) outside that nation. This is called an S-O (or maxi-maxi) strategy because the nation
exploits opportunities using its strengths. But in a globally competitive market, the
nation can also face threats which, in turn, may be overcome by its strengths. Such a
situation is deemed an S-T (or maxi-mini) strategy because the aim is to maximize
strengths by minimizing the threats (see Figure 1).
Every nation also possesses weaknesses, which must be overcome in order for it to take
advantage of external opportunities. Such a W-O (or mini-maxi) strategy is often a
developmental plan that attempts to convert a nation?s weaknesses into strengths. The
least favorable situation in the TOWS Matrix occurs when a nation faces external threats
in light of its weaknesses which may make it difficult for the nation to operate in the
global market. This strategy, shown as a W-T (or mini-mini) strategy in the Matrix, aims
at minimizing both the internal weaknesses and the external threats.
The conceptual TOWS Matrix will now be used for a broad country analysis of Germany
and for the specific analysis of selected industries to illustrate the practical application of
the Matrix.
ANALYSIS OF THE COMPETITIVE SITUATION OF THE FEDERAL REPUBLIC OF
GERMANY
The first part of this section discusses the strategic-planning-process framework for
developing specific strategies that Germany and its industries can pursue in light of
their inherent strengths and weaknesses and of the opportunities and threats in the

macro-environment. The TOWS Matrix, shown in Figure 2, illustrates the competitive
situation in the western part of the Federal Republic of Germany.
Figure 2
Internal Factors
External Factors
Internal Strengths (S)
- Educated, skilled labor force; pride in
workmanship & quality.
- Experience in global market (e.g. export)
- Strengths in engineering, machinery, chemicals
(e.g. BASF Bayer, Hoechst), banking (e.g.
Deutsche Bank), electro-mechanical (e.g.
Siemens), cars (e.g. Mercedes-Benz, BMW,
VW),
- Smallmidsize companies (AMittelstand@)
- Stable labor-management relations
- German unification
- Strong Deutsche Mark (also weakness) (p.s.
Recently the DM has become weak against the
U.S. Dollar)
Internal Weaknesses (W)
- High labor & social costs
- Slowness in responding to changes
- High cost of German unification
- Slowness in innovation
- Few natural resources
- Relative lack of skills in new sciences (semi-conductors,
electronics, computers, software, bio-technology)
- Problems in certain industries (shipbuilding,
electronics, steel)
- Service
- Relatively high unemployment rate
- Strong DM (also strength)
- Some strengths become weaknesses (labor
relations)
External Opportunities (O)
- Europe: increased trade within EU and EFTA;
crossborder trade; standardization (e.g. ISO
9000); banking and insurance without borders
(EU)
- N. America: German investments in US
because of strong DM
- E. Europe: former E. Germany=s relations with
COMECON countries
- Former Soviet Republics: industrial expansion;
pinned-up demand; relations with former E.
Germany
- Pacific Rim & Asia: increased wealth;
investment opportunities; opening of China
S-O Strategy: Maxi-Maxi
- Regulation & standardization within the
European banking industry that will make the EU
mor accessible to expansion by German banks
(e.g. through establishment of branches)
- Increase rivalry within EU to promote
Germany=s competitive advantage (e.g. BMW=s
acquisition of Rover Group)
- ISO will facilitate increased productivity &
superior quality
- Technological advancements in
telecommunications, aviation & manufacturing
through alliances or cooperation with, &
acquisition of, U.S. companies
- Expansion to the East of automotive, power
generation, & consumer markets
- Capitalize on Asian interest in Germany through
alliances
W-O Strategy: Mini-Maxi
- Set up steel plants in Spain & Portugal to exploit
cheap labor and cut costs
- Invest in U.S. to build auto plants (e.g. BMW &
Mercedes)
- Move operations to countries with lower labor
costs (e.g. Asia, U.S.)
- Expand into China with caution
External Threats (T)
- EU: price competition from other EU countries;
economic instability in other EU countries
- N. America: Weak US$ makes US goods very
competitive
- E. Europe: massive immigration (also from non-
European countries
- Former Soviet Republics: political and economic
uncertainties; poor legal & economic structures
- Pacific Rim & Asia: low cost (e.g. S. Korea);
high quality products (e.g. Japan); vigorous
economic activities(e.g high growth rate of S.
Korea)
S-T Strategy: Maxi-Mini
- Promote AMittelstand exports
- More guarantees from the German government
& the G-7 before German banks write off any
more loans to aid the Eastern bloc & prevent
mass immigration
- Establish wider banking in Asia
- Establish joint ventures with Asian car makers
- Adopt Japan's Just-in-Time & Total Quality
Control philosophies to get employees more
involved.
W-T Strategy: Mini-Mini
- Concerted efforts among the government,
business & labor sectors to cope with the problems
of overvalued currency, high wages & greedy labor
unions, high social taxes, government inaction, &
competition from the Asian Tigers.
- Establish production bases in Eastern Europe to
reduce the effects on a strong DM on costs &
export prices.
Germany’s Internal Environment: Its Strengths and Weaknesses
Among the largest Fortune 500 global corporations, 151 are American, 149 are Japanese,
and only 44 are German firms. This ranks Germany only third on a country comparison
study. Thus, on a global scale, large German corporations make up a much smaller
portion than their Japanese and U.S. counterparts. The largest corporation in Germany is

Daimler-Benz, which ranks twentieth worldwide. Comparatively speaking, the four
largest corporations are Japanese, with Mitsubishi Corporation ranking first. The largest
U.S. firm is General Motors, ranking fifth among Fortune’s Global 500 industrial and
service companies.
Germany's Internal Strengths
The intrinsic strengths of Germany, like those of other nations, developed over a long
time. Through the years, Germany’s strengths have contributed to its current position
within Europe and the world.
Social Factors Presenting Internal Strengths. Some social factors that have strengthened
German industries over time include the following:
1. A home market that demands quality;
2. A highly educated, skilled, and motivated work force;
3. A population that takes great pride in its work; and
4. The public education and apprenticeship systems.
One of Germany's strengths is the consumers’ demand for high quality products. This
demand provided the impetus for the establishment of Germany's leading industries
today. A home market that demands quality from its domestic manufacturers creates an
atmosphere of expectation for high quality exports to the rest of the world.
A highly skilled and motivated work force provides the human capital necessary for
producing quality products demanded by the domestic and global markets. The costs
associated with quality assurance are greatly decreased when the production work force
is raised in an atmosphere that nurtures and expects pride in work.
The internal mechanisms necessary for the creation of these social factors rest largely on
Germany's public education and apprenticeship systems. Germany's emphasis on skill
training and technical education provides the foundation for its work force. The
apprenticeship system is one of Germany's strengths. Under this system, the apprentice
gains practical experience by working in a company and, at the same time, learns the
theoretical concepts in a vocational school. Young people who choose the three-year
apprenticeship training work three to four days a week and spend one or two days a
week in the vocational school. The program leads to qualifications in specialized areas
(e.g., qualification to be an automobile mechanic or to be an electrician). While such
workers may be considered blue-collar, they are qualified technicians who enjoy a high
status.
The next higher level of education is provided by the technical colleges
(Fachhochschulen) which are more practical-oriented than the universities. These
colleges usually work closely with industries to meet employment needs of companies.
The strength of German universities is also in the technical fields. Many institutes, such
as the world-renowned Max Planck Gesellschaft, conduct world-class research.
Universities often specialize in certain fields and are usually located close to the industry
they serve. This facilitates a close cooperation between universities and companies.

However, some critics believe university professors lack the desired practical
orientation.
Political and Economic Factors. Some important political and economic factors
contributing to Germany’s strengths include:
1. Strong antitrust legislation
2. Low entry barriers to business; and
3. Development of common standards which promote exports.
German antitrust legislation and the generally low barriers to entry in many industries
have led to productive competition in Germany's stronger industries. This competition
has allowed German productivity to increase. And by working closely with the
International Standards Organization (ISO), Germany is now at the forefront of
developing standardized guidelines for industrial exports. ISO 9000 is an example of a
universal framework for quality standards within the European Union and for other
countries that wish to trade with it. As export standards become more firmly
entrenched, German exports should benefit.
Commitment to capital investment has also enabled Germany to maintain its position in
the very competitive electronics, engineering, mechanical, machinery, and automotive
industries. Germany’s commitment to capital investments in machinery and the low
entry barriers within that sector helped create Germany's powerful machinery industry.
Germany's infrastructure traditionally provided outstanding support for the growth of
capital intensive industrial expansion. Germany is presently providing for the
modernization of former East Germany which, among other things, will have the most
modern telecommunications and industrial infrastructure in all of Europe.
Some technological factors also contribute to the preeminence of certain German
industries. Germany's commitment to world-wide technological preeminence is
evidenced by its relatively large investment in research and development. In fact, one-third
of Germany’s small manufacturing companies engage in research and
development. In addition, Germany enjoys a deep scientific and technical knowledge
base, due primarily to the educational system previously discussed. The country?s
technological strengths can also be attributed in part to the scarcity of locally available
raw materials. This lack of abundance forced companies to synthetically create what did
not exist naturally and stimulated in large part the growth of Germany's successful
chemical industry.
Economic factors can best be discussed by focusing on Germany's key industrial
strengths. The evolution of Germany's assets, both human and capital resources,
provided the pathway to preeminence in the engineering, chemical production,
machinery, banking, and automotive industries.
Michael Porter pointed out that five competitive forces determine industrial
profitability: threat of new entrants, bargaining power of suppliers, bargaining power of
buyers, substitutes, and rivalry among existing competitors. He further noted that the

demand determinant promotes clustering of a nation's competitive industries. This
demand determinant has in part made Germany's industrial makeup unique compared
with those of most of the world's industrial powers.
Germany's industrial uniqueness also arises from the plethora of small- to medium-sized
companies which make up the backbone of Germany's export prowess. There are
about 2.5 million such firms in Germany, almost 40% of which are family-owned. These
"Mittelstand" companies are very important to Germany’s economy. They dominate the
machinery sector, which is Germany's most powerful economic sector. They also have a
commanding presence in chemicals.
While Mittelstand firms are certainly important to Germany's overall industrial success,
some larger firms also contribute to Germany’s internal strengths. One of Germany's
premier corporations is Siemens, the giant in the electronics and electromechanical
fields. Siemens AG, typical of many prominent German export-oriented firms, has
targeted U.S. markets. It is also investing aggressively in research and development. The
company ranks highly among American companies as the receiver of patents and
contributor to leading American colleges and universities for joint research programs.
Siemens' powerful position in the electromechanical industry owes much to Germany's
public education and apprenticeship systems which supplied the human capital
necessary for progress in this highly competitive industry. In fact, Siemens’
apprenticeship training program is now being adopted in the United States.
Germany's chemical industry is characterized by a high concentration of medium-sized
companies, but some larger companies do stand out. These include BASF, Bayer, and
Hoechst. All three companies have invested heavily in U.S. markets and continue to seek
new product markets. The range of products manufactured by these mega-companies
includes polyurethane raw materials and polymers, plastics, agricultural chemicals, and
photographic materials. While these firms currently face challenges from environmental
policy and global competition, their important beginnings can be traced to the stimulus
provided by the absence of locally available raw materials.
The strength of Germany's banking industry stems from its fiscal conservatism, a
definite response to the hyperinflation of the 1920s. German laws allow high bank
involvement in business, which results in low risks for investment and a stable stock
market. The three largest German banks are Deutsche Bank, Dresdner Bank, and
Commerzbank. Germany's banking legislation, unlike that of the United States, allows
banks to engage in all types of commercial, investment, and merchant banking. In fact,
there has been much concern on whether German banks exert too much control over the
German economy.
One of Germany's most visible leading sectors is its automotive industry. Daimler-Benz
AG is the parent company of: (1) Mercedes Benz AG; (2) AEG Aktiengesellschaft, which
is a producer of automation systems, office and communication technology, components
and electrical machinery, domestic appliances, microelectronics, and transport systems;
(3) Deutsche Aerospace AG, which is a producer of aviation, propulsion systems, and
space and defense technologies; and (4) Daimler-Benz Inter Services (dibis) AG, which

consists of the Software House, Finance Services, Insurance Trading Services, and
Marketing Services. In recent years, the car division of Mercedes-Benz has been doing
well, but other divisions have encountered difficulties. Other large manufacturers in the
automotive industry include BMW, Volkswagen, General Motors’ Opel division, and
Ford.
Another strength of Germany lies in the distinct labor-management relations. Unions
and employers generally regard each other as social partners. German law, which
guarantees workers' rights, requires all companies with five or more employees to have
a works council. These councils have veto power in many personnel decisions. Although
these councils do not have to include union members, they often do. Rather than being
in an adversarial relationship with management, council members participate in
developing strategies that will make the company more competitive in the global
market. While these unique labor-management relationships have helped prevent
strikes in the past, they have also led to wage increases in 1995, which can make some
German companies and industries less competitive in the global market.
Germany's Internal Weaknesses
While most German industries remain viable, weak areas also exist and must be
addressed. One important factor that makes German companies less competitive in the
world market is the complacency of businesses and their slow response to the changing
environment. Some businesspeople believed that prosperity had come to an end. But the
1993 recession may have caused an upheaval not experienced since World War II.
According to one executive of a large company, the 1993 economic shock may have been
the best thing that happened to Germany. On the other hand, some workers suggest that
the recession was used to justify laying off employees and cutting social benefits.
Nevertheless, Germany is now considering restructuring more seriously.
Carmakers are also in a crisis. Volkswagen, the highest-cost, big-volume car producer in
Germany, lost profits in 1992. Daimler-Benz, the parent company of Mercedes-Benz and
Germany’s biggest industrial firm, also lost profits in 1995 and cut its workforce
drastically. In addition, Mercedes had in the past passed on the high labor costs to
consumers through higher prices. But the new C-Class, which has more features than
the previous 190 model, does not cost more than the former model. This in effect is a
price reduction and a departure from past pricing policies. Furthermore, in early 1996, a
team of British car dealers stated that car prices in Europe must be cut by 20% if
consumers are to buy more cars.
Government officials are now recognizing the problem with Germany’s high labor and
social costs. Workers have on average a six-week vacation. In addition, they receive
vacation bonuses of half the monthly pay. German workers are definitely one of the
highest paid in the world. Moreover, manufacturing workers in eastern Germany earn
almost two-thirds as much as their west German counterparts while producing only half
as much. Germany has to trim its appallingly high labor costs. Chancellor Helmut Kohl
suggests that Germans must accept painful cuts in various social programs and even a
future loss in real income if Germany is to remain competitive. In fact, the government
has implemented a series of welfare cuts, including reductions in child allowances and

in sick pay from 100% to 80% of full wages, as part of its budget-trimming plan. It even
began a scheme to reduce pensions for those who retire early.
Another current weakness is the high cost of German unification. It has been estimated
that the net transfer for 1995 will be about $108 billion, or about 40% of eastern
Germany’s GNP. In addition, eastern Germany has poor infrastructure (particularly
roads) and high energy costs. While unification has been costly -- not only in monetary
but also in social terms as brought on by adjustments to a new social structure -- after
five years of struggle, the worst may be over for former East Germany.
Intrinsic economic factors affecting German industrial productivity include Germany’s
limited natural resources, lack of arable land, and high energy costs. The following
economic trends are also apparent in German industries:
1. Slow productivity growth;
2. Slow growth in per capita income;
3. Decreasing world shares of most industries; and
4. Lack of domestic investment due to high taxes.
To successfully participate in the fast-approaching European economic and monetary
union, Germany will need to control its budget deficit to within the 3% Maastricht
margin. Germany’s deficit was predicted to approach 4% of GDP in 1996, and the
International Monetary Fund (IMF) predicts that Germany will again fail the 3% test in
1997.
Shortcomings in German business attitudes and capabilities have also resulted in the
lagging of industries such as shipbuilding, steel, and consumer electronics. While
unification has brought new life to the ports of Bremen and Bremerhaven due to their
central European location and the decreasing ideological barriers between the East and
the West, the shipbuilding industry, led by giants like Hapag-Lloyd and the former
Bremer Vulkan, has had great difficulties. And to add to the thorny issue of state aid to
former East Germany, the German government extended about $572 million in aid to
two eastern shipyards. With the increasing sentiment for subsidy reductions, tough
competition in shipbuilding may spell the end of the German shipbuilding industry.
The related German steel industry has been troubled by complacency as well, and the
high-priced workforce has led to this industry’s decline. Steel companies have continued
to flounder even with codetermination and generous subsidies. These artificial props
only served to delay decisions in restructuring and postpone eventual profitability.
Unification has done little to help this industry, as the former East German steel industry
is also in a state of collapse.
The German hard coal industry is ailing as well and may soon no longer gain the benefit
of subsidies, as the German government seems intent on curbing subsidies across the
board.
Another German weakness is the lack of skills and lack of expertise in the new sciences
(e.g., semiconductors, fiber optics, telecommunications, software, and biotechnology). In

addition to skill shortages in eastern Germany (e.g., good secretarial skills coupled with
sufficient English-speaking skills), there have been few breakthroughs in new fields of
scientific work. A weakness also exists in certain technological areas like electronics and
computing, which exposed these industries to foreign competition. In fact, the once
powerful German consumer electronics industry, led by Grundig, no longer provides
serious competition to the more aggressive Asian consumer electronic firms. It seems
that Grundig had been slow to respond to the rise of competition and, as a result, had
lost tremendous market share in the consumer electronics industry.
Germany’s future prospects in engineering does not look too promising either. German
banks recently devised a plan to save the engineering firm of Klockner-Humboldt-Deutz
(KHD) from bankruptcy. Deutsche Bank, which owns 48% of KHD, planned to offer
most of the cash and forgiven loans that the company was scheduled to receive.
Unification has done little in this regard, as one big East German firm and heavy-engineering
group, Sket, began bankruptcy proceedings in late 1996.
Ironically, what is one of Germany’s strengths may also become the country’s weakness.
Germany’s approach of consensus building through codetermination in labor-management
relations resulted in extraordinarily high labor and social costs that make
German products too costly to compete effectively in the global market.
External (Geographic) Opportunities and Threats for Germany
Opportunities for Germany can be found in various geographic regions: the European
Union, North America, Eastern Europe (including the former Soviet Republics), the
Pacific Rim, and Asia.
Opportunities Within the European Union
Opportunities abound for all of Germany's leading industries within the European
Union. "The European Community seeks to achieve four fundamental freedoms: the
freedom of movement of goods, services, capital and persons." Clearly, the arrival of EC
1992 and the economic integration of the European Union member states have created
opportunities for German industries to expand. But at the same time, the integration has
brought increased competition from outside Germany’s borders as well.
The meeting of European partners in Maastricht, Netherlands, proved that Germany is a
leading advocate for European unity. However, the enthusiasm for Mr. Kohl’s
commitment to a European economic and monetary union is now losing support. For
instance, due mainly to their emotional attachment to the Deutsche Mark, most Germans
are now overwhelmingly against the European Monetary Unit (EMU), even though they
are just as convinced that it will inevitably arrive. Germans are also fiercely insisting on
a "stability pact" that would prevent excessive borrowing by EMU members. They fear
that, once EMU is implemented, governments may have an opportunity to borrow
partly at the expense of their partners.
In its Green Paper of June 1987, the European Commission delineated the liberalization
of telecommunication policy within the EEC. Nevertheless, the continuing development

of ISDN (Integrated Services Digital Network) should provide the standards for
technical specifications and terminal equipment which will facilitate EEC-wide
compatibility. Telecommunication liberalization and standardized telecommunication
services should bring many opportunities for industrial expansion into these services, as
well as increased efficiency of information flow among industries. This is actually a
great opportunity for Deutsche Telekom, which has one of the world’s best high-speed
telephone networks and which has Germany’s biggest cable-television network and its
second-biggest mobile telephone network. In fact, it is encouraging to note that Deutsche
Telekom, which became Europe’s largest-ever privatization on November 18, 1996,
announced a 1995 profit figure that was 47% higher than its 1994 figure. However, there
remains some uncertainty regarding the regulations that will govern competition with
other firms.
Cross border standardization is also arriving through ISO 9000, a framework for quality
assurance standards. ISO 9000 should further raise product quality within the EU.
Because of this standardization and a reputation for high quality products, Germany is
sure to find new opportunities within the EU.
The economic integration of 1992 also brought relaxed intra-European banking
regulations. These allow for a single market for insurance products and greater
opportunities for German banking market expansion. Strategic opportunities for the
banking industry include: (1) the acquisition of foreign banks or expansion of holdings
already in existence; (2) the establishment of branch networks in other countries; and (3)
cooperation with foreign banks through reciprocal holdings. The more relaxed intra-border
trade requirements also extend to small German exporters, thus giving German
Mittelstand companies new opportunities.
Opportunities in North America
For Germany's industries, opportunities have existed and continue to increase within
the North American continent. North America has traditionally boasted one of the
largest and most affluent consumer markets. The NAFTA agreement between the
United States, Canada, and Mexico makes this market even more attractive.
Opportunities in Eastern Europe, including the Former Soviet Republics
Eastern Europe provides huge opportunities for the market expansion of Germany's
industries. The accession of former East Germany provides a window to the East that
most other EU nations do not possess. Former East Germany was an active exporter of
manufactured products, such as machinery and transport equipment, to Eastern Europe,
particularly to the Soviet Union. As a member of the now defunct COMECON, East
Germany developed and maintained very deep trading dependencies with the former
Eastern Bloc nations. In addition, Eastern Europe has highly-educated engineers as well
as technical and skilled workers. Thus, vast potential for Eastern markets and industrial
expansion now exists and should be utilized.
The former Soviet Republics also provide opportunities for industrial expansion. After
years of (state-controlled) economic decline, citizens of the newly recognized Republics
of Latvia, Estonia, Lithuania, and the Ukraine now desire modern luxurious products

that capitalist markets can provide. With these Republics free to act autonomously, the
number of joint ventures will surely rise. The old Soviet Republics and East European
countries will remain important trading partners for a united Germany.
Opportunities in Asia and the Pacific Rim Countries
Asia and the Pacific Rim countries offer vast opportunities for expansion of Germany's
industrial might, as the affluence of those countries continue to increase. In Japan, for
example, Toyota now sells German Audis and Volkswagens in its dealerships. The
People's Republic of China (PRC) is also a source of enormous potential demand for
German products. The PRC prefers a strong Europe as an alternative to the U.S. for a
source of high technology products to support PRC’s ambitions for modernization.
Germany is currently a big supplier of products to China.
Threats from the External Environment
While various regions of the world do provide opportunities, they also pose threats to
Germany.
Threats from European Union Countries
The continuing transition to one unified confederation of states within the European
Union brings various threats to Germany's industries. Tariff-free trade will demand EU
industries to compete solely on merit, based on product quality and price. Germany's
industrial competitive edge has traditionally been based upon quality rather than price.
Economic cycles of prosperity and decline could disadvantage Germany's industries if
completely unprotected from stiff price competition within the EU.
Moreover, a truly single European market based on a single currency may give rise to
competition among the various European governments across nearly all aspects of
domestic policy - education, welfare, taxes, public investment, and even labor-market
regulation. Germany is already at a disadvantage due to its high labor and social costs.
Europe's economies are also dragging along with slow growth. The poorest EU
countries demand more aid from the richer EU nations. This will, of course, require
funding from the richer EU nations, led by Germany which is already financially
strapped with reconstruction funding for its eastern states and aid to the former Soviet
Union.
Germany is also beset by huge financial requirements for its newly acceded eastern
Laender (States). High levels of unemployment in western Germany add to this burden.
Moreover, the weak eastern German infrastructure and the necessary environmental
cleanup require huge investments from Germany.
Threats from North America
Threats from North America include economic and political conditions between
Germany and the United States. The legal battle between Boeing and Deutsche Airbus
(part of the Airbus Consortium, a subsidiary of Daimler-Benz) provides one illustration
of the controversy surrounding Germany’s alleged unfair government subsidies and
trade practices. Several years ago, the United States filed a complaint through GATT,

claiming that the German government was subsidizing Deutsche Airbus to reduce the
effect of the weaker U.S. dollar, thereby violating international trade regulations.
Another long-running legal dispute exists between General Motors (GM) and
Volkswagen (VW). This began in 1993 when some GM employees left to join VW,
allegedly taking with them industrial trade secrets. GM then filed suit against VW,
claiming fraud. Now, VW is demanding about $6.5 billion from GM for defamation.
Continued squabbles over trade practices could in time arouse greater protectionist
measures in North America against EU manufacturers.
Other threats from North America stem from the strategic acquisitions within Europe by
North American firms, which may weaken the competitiveness of German industries.
For instance, the purchase by United Parcel Service (UPS) of the transportation
company, Seabourne European Express Parcels, strengthened UPS’s position in the EU
transportation market, possibly to the detriment of smaller EU-based transportation
companies.
Threats from Eastern Europe
The feared mass immigration from Eastern Europe has been mitigated by substantial aid
from Germany to Poland and other East European nations. Nevertheless, the large
number of immigrants who have arrived within German borders has caused a backlash
of public sentiment that must be controlled.
The still uncertain future of the former Soviet Union lends great risk to the well-being of
the EU and the world. Great hardship within the old Soviet borders will not
only unleash unmanageable numbers of immigrants westward, but will also bring
uncertainty to the control of the Soviet’s huge nuclear arsenal. Reconstruction in the
former Soviet Republics will be more difficult due to the socialist-planned economic
mindset, which has been in existence since 1917.
Threats from the Pacific Rim and Asia
The efficiency and high-quality products of Japanese and other Asian manufacturers are
possibly the greatest economic threat to German manufacturers. For instance, Japan's
inroads to production facilities within the EU (via Britain) pose serious competition to
the dominance held by German car manufacturers. German industries also face possible
entrance barriers to the Chinese market. German electronics giant Siemens faces perhaps
its greatest threat in the semiconductor market from Japanese entrants. Many EU
analysts fear Japan may attempt similar strategies of chip dumping to control the market
in Europe as it did in the U.S.
The strengths of Korea in automobiles, semiconductors, information processing,
telecommunication, and nuclear energy could pose great threats for German companies
as well. It should not go unnoticed that Korea has the ambitious aim of becoming the
world’s leading manufacturer of high-technology goods.
FOUR SETS OF STRATEGIES FOR GERMANY
In light of Germany’s internal strengths and weaknesses and the opportunities and
threats from other countries, four sets of strategies should be considered.

Strengths-Opportunities Strategies (Maxi-Maxi)
The potentially most successful strategy for Germany involves using its strengths to take
advantage of opportunities, not only within the European Union, but also in North
America, Eastern Europe, Asia, and the Pacific Rim countries.
Opportunities created through the European Union allow the free flow of capital,
guided by common regulations governing financial transactions. Regulation and
standardization within the European banking industry will make the EU more
accessible to expansion by German Banks. For example, Deutsche Bank's strategy of EU-wide
expansion revolves around the establishment of branches throughout the EU and
cooperation with foreign banks.
Although the well-known management consulting company of McKinsey estimated that
40% of cross-border mergers of large companies result in failure, BMW successfully
acquired the British Rover Group Holdings PLC with the help of the strong German
currency. This acquisition gave BMW a head-start in producing a sports-utility vehicle,
thus increasing its domestic competitiveness over its German arch rival, Mercedes Benz.
Michael Porter suggested that such rivalry contributes to a nation’s competitive
advantage.
Germany's chemical industry is also pursuing aggressive strategies for increasing
productivity within the EU through cooperation with the International Standards
Organization (ISO). For example, the Hoechst Celanese Corporation plastics division
unveiled a completely automated system for producing mold specimens for ISO testing.
This system enables superior quality that requires less human supervision and lends
itself toward a common testing standard that global suppliers and global buyers need.
Germany's aviation industry, hallmarked by Lufthansa, has also established a
cooperative agreement with United Airlines. A close relationship with the major U.S.
carrier, coupled with an "open skies" treaty which frees air traffic between the U.S. and
Germany, enables Lufthansa to compete more effectively for transatlantic routes.
German acquisitions of American companies within similar industries is a widely-practiced
strategy. Acquisitions, such as that by the German chemical giant Hoechst of
the U.S. Celanese Corporation, are designed to bring improvements in the
manufacturing processes of the acquiring firm.
Germany can also use its strengths to scan for opportunities in Eastern Europe.
Volkswagen’s purchase of control of Czech Skoda is an example of such a strategy. This
move clearly indicates Volkswagen's intent to take advantage of the new consumer
market opportunities opening up within the Czech Republic and the rest of Eastern
Europe. Siemens AG also took advantage of opportunities in the Czech Republic by
acquiring the energy and power-generation division of Czech Republic’s Skoda-Pilsen
group, Eastern Europe’s second largest maker of nuclear energy plants. This gave
Siemens a big lead in the East European power generation market. And despite the
growing sentiment against subsidies, foreign companies have been persuaded to invest
in eastern Germany after receipt of generous subsidies. In particular, the Norwegian
conglomerate of Kvaerner bought a shipyard in Warnemunde near Rostock in 1992

upon receiving subsidies amounting to more than two-thirds of the total investment.
That shipyard has become one of the most up-to-date worldwide.
The current volatility of the former Soviet Union and its Republics provides perhaps the
greatest challenges and opportunities for German government policy and industrial
expansion. Germany’s short-term strategy has been to placate the Soviet masses through
generous relief grants and loans. Moreover, frequent changes in the balance of power
render meaningful joint ventures very difficult. But as the old Soviet Union continues to
evolve into a loose confederation of republics, plans must be made to capitalize on the
markets that will inevitably emerge. The Republics' people will undoubtedly begin to
demand free market goods. Nevertheless, such industrial strategies by expansion-minded
firms looking to the east for vast new markets must proceed cautiously.
Asian and Pacific Rim countries provide great opportunities as well. While many
German banks already have a presence in Asia, they should continue to forge new
alliances wherever possible to stay competitive. The huge international banks of Japan
will surely play a significant role in the European Union, and German banks must
follow suit by expanding into Asia. Germany has also become the favorite investment
location within the European Community for Asian companies.
Strengths-Threats Strategies (Maxi-Mini)
Germany's export-driven economy relies on gaining and maintaining market shares in
many foreign markets. German exports account for 24% of its gross domestic product,
most of it coming from the Mittelstand companies. Because exporting to certain
countries such as Thailand may involve some risk, the German government helps
promote Mittelstand exports by facilitating the acquisition of export insurance to these
countries.
German banks are the leading writers of Soviet loans. While this strategy may be
financially risky, it is also very necessary. Germany may want to continue to send
foreign aid to the Soviet Republics and other developing countries in trade credits and
privatization loans to abate the feared mass immigration and the destabilization of the
former Soviet Republics. However, German banks seem to have become quite anxious in
receiving more guarantees from both the German government and the G-7 countries
before making more loans.
Germany's banking industry should also increase its presence in Asia, and the German
automobile industry should consider joint ventures within that region. The threat of
increasing Japanese competition in the European auto market has led many European
car makers to try implementing Japanese-style production methods. In fact,
manufacturers in Germany have begun to implement Japan’s Just-In-Time and Total
Quality Control methods in an attempt to minimize threats from foreign competitors.
Efforts to get employees more involved in new production methods have had positive
effects in Germany.
Weaknesses-Opportunities Strategies (Mini-Maxi)

The German steel industry should consider setting up steel plants in Spain and Portugal
to exploit cheaper labor costs. Due to the high labor and social costs in Germany and
aided by a strong Deutsche Mark, Mercedes-Benz (a division of Daimler-Benz) is
currently investing in an Alabama plant to produce an All Activity Vehicle (AAV) in
1997. The vehicle will be marketed both in the U.S. and abroad. This new undertaking
will be quite different from traditional German operations. For instance, instead of
having 1,000 primary suppliers, the AAV venture will rely on only 100, a policy very
similar to that adopted by the Japanese. It may also be wise for German carmakers to
form strategic partnerships with American carmakers and move production just south of
North America where labor is much cheaper. In its pursuit to go global, BMW did
precisely this when it collaborated with Chrysler to produce a new small engine in Latin
America. Chrysler will put the engine in its Neon model, while BMW will fit the engine
in a new version of the classic Rover Mini, both of which are planned to be marketed in
Brazil.
Germany should bolster its ailing steel industry by focusing its production on rebuilding
the infrastructure of former East Germany and Eastern Europe. Germany can take
advantage of revived traditional trading ties between the recovering Central European
economies by soliciting, for example, parts suppliers from the Ukraine. Moreover,
businesses could expand through increased crossborder trade within the EU and EFTA
countries.
Despite the many opportunities in Pacific Rim countries, Germany has to increase its
productivity and lower its costs in order for it to succeed within this region. During the
1993 to 1994 period, West German industry initiated large scale reforms through labor
unions’ concessions in work-time flexibility and reduced wage growth. These reforms
boosted productivity and improved export performance. However, in 1995, the
powerful union of IG Metall, with its three million members, won substantial
concessions from companies after an 11-day strike, resulting in high pay raises, shorter
workweeks, and higher Christmas bonuses. Such favorable settlements will tend to
become the standard for other German industries, making firms less competitive in the
global market. As it was in 1994, the hourly labor compensation for manufacturing
workers was already $27.37 in West Germany, compared with only $21.38 in Japan and
$17.10 in the United States. Despite increased productivity in 1992-94, German workers
are not much more productive than their Japanese counterparts to justify the world’s
highest labor costs. Such wage differentials make it very attractive for companies such as
BMW, Mercedes-Benz, and Siemens to set up plants in Asia and the United States. In
fact, BMW recently opened an assembly plant in Spartanburg, South Carolina, and
Mercedes-Benz will begin factory operations in Vance, Alabama, in the latter part of
1996 or early 1997. Another solution for German companies may be to insource, or take
back the work from suppliers. With such union-friendly policies (e.g., fewer layoffs and
delayed staff cuts), companies have to keep their workers busy. In fact, Volkswagen and
Opel have recently moved away from outsourcing and began insourcing instead.
An interesting example of how companies are coping with the high costs in Germany is
Mercedes-Benz’s move into China. Driven by the company’s desire to be an early player
in this expanding market, Mercedes risks sharing its technology without sufficient

protection. Chrysler’s previous investment experience in China is illustrative. In 1994,
China informed Chrysler that it could obtain a $1 billion minivan project. But Chrysler
could not agree to China’s demands of transferring Chrysler’s technology to China and
giving China the right to sublicense the design and sell it to other Asian countries.
Because Mercedes needed an entry into the Chinese market, it successfully obtained
what was Chrysler’s minivan project. Although the details of this venture are still being
worked out, such projects show the dilemma and risks that companies face when
entering countries like China which provide weak protection for technologies and
intellectual property rights.
Weaknesses-Threats Strategies (Mini-Mini)
While some Germans concede that the country is in trouble, most people do not realize
it. In fact, different groups blame each other for some current problems, which include
an overvalued currency, high wages, greedy labor unions, high social taxes, inaction by
the government, and competition from the "Asian Tigers." Coping with these problems
will require a concerted effort among the government, business, and labor sectors of
Germany.
Because of its high costs and the threats it faces from its more efficient competitors,
Germany should form more partnerships similar to the Airbus Consortium. This
consortium shares work among its four partners from Germany, France, Britain, and
Spain, and will cut costs by becoming a single company. It is designed to enhance the
Airbus Industries ability to compete with its arch-rival, Boeing. In fact, China has chosen
Airbus over Boeing as a partner in building a 100-seat airliner for China’s potentially
vast market.
Germany's strong Deutsche Mark makes exports difficult. German industries should
thus consider establishing production bases in Eastern Europe to reduce costs and
barriers. The lagging industries in steel and hard coal may find new export markets in
the newly formed Republics of the former Soviet Union as they build their
infrastructures.
SUMMARY AND CONCLUSION
In this rapidly changing global economy, it has become necessary for individual nations
to use their comparative advantages in order to remain or become competitive and
prosperous. Nations must optimize the use of their strengths and weaknesses in light of
the opportunities and threats presented to them by factors external to their country. This
is the key aspect of the TOWS Matrix strategy. A TOWS Matrix approach will render a
nation’s business activities more feasible and efficient within the international arena
through the proper identification and optimal utilization of each country’s factor
endowments, thereby promoting the nation’s continued global success.
The methodology of the TOWS Matrix was demonstrated by using Germany as an
example. The economic success of Germany is built in part on its strengths and on
overcoming its weaknesses. It is also due partly to its industries’ strategies of taking
advantage of global opportunities and coping with global threats.

Undoubtedly, the educated and skilled labor force has helped Germany gain and
maintain its competitiveness. Moreover, Germany’s industrial strengths in chemicals,
automobiles, machinery, and banking are important contributing factors to the nation’s
success. However, the relative strengths in many of these industries have now started to
diminish. Furthermore, internal weaknesses, such as high labor and social costs, the
relative slowness in innovation, the lack of skills in the new sciences of semiconductor,
computers, software, and the bio-technologies, and other problems in industries such as
electronics, steel, and shipbuilding, indicate the need for transformation.
So what are the reasons for Germany’s survival and prosperity despite such
shortcomings? While strategies based on the factors shown in the TOWS Matrix are
important, it is the combination of these strategies and the total socioeconomic system
that has ultimately contributed to Germany’s success. The "Mittelstand," for example,
has been a powerful engine in the economy, and so has the socially-valued
apprenticeship system. It is clear that Germany’s socioeconomic system cannot be easily
duplicated by other countries. Nevertheless, national competitive analyses and a
systems approach will account for what is best for the country being considered.
Germany has been successful in global competition, but the relative decline in its
competitiveness demands a reexamination of its national competitive strategies. The
TOWS Matrix approach generates various alternatives for a nation to gain a competitive
advantage. However, these alternatives are not prescriptive. Rather, they should help
policy makers in systematically analyzing the internal and external factors and
combining them to achieve a synergistic effect. Although this article focused on the
practical application of the TOWS Matrix on Germany, other countries may also benefit
from generating strategies for maintaining or gaining competitive advantages in the
global market.

Germany

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