ANALYZING THE COMPETITIVE ADVANTAGES AND DISADVANTAGES OF GERMANY WITH THE TOWS MATRIXAN 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 countrys 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

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4. The firms 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 CONCEPTUAL MODEL

ADVANTAGE

WITH

THE

TOWS

MATRIX

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.

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Figure 1
Internal Factors Internal Strengths (S) e.g. cultural norms, education system, political system, natural resources, transportation system, infrastructure, technological innovation, managerial practices External Factors External Opportunities (O) S-O Strategy: Maxi-Maxi W-O Strategy: Mini-Maxi e.g., a developmental strategy to overcome weaknesses in order to take advantage of opportunities W-T Strategy: Mini-Mini e.g. invite foreign investments and make it attractive to those firms or industries Internal Weaknesses (W) e.g. weaknesses in areas shown in the box of "internal strengths"

e.g. European Union, North America, Potentially the most successful Eastern Europe, Former Soviet strategy, utilizing the nation's Republics, Pacific Rim & Asia strengths to take advantage of opportunities in the global market 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

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

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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 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), - Small\midsize 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) 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 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. 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 (semiconductors, electronics, computers, software, biotechnology) - Problems in certain industries (shipbuilding, electronics, steel) - Service - Relatively high unemployment rate - Strong DM (also strength) - Some strengths become weaknesses (labor relations) 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 Factors 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

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 nonEuropean 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)

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.

Germanys 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

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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 Fortunes 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, Germanys 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. 2. 3. 4. A home market that demands quality; A highly educated, skilled, and motivated work force; A population that takes great pride in its work; and 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.

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However, some critics believe university professors lack the desired practical orientation. Political and Economic Factors. Some important political and economic factors contributing to Germanys 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. Germanys 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, onethird of Germanys 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

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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 mediumsized 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 Germanys 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 Germanys 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

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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 Germanys 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 Germanys 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

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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 Germanys 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 Germanys limited natural resources, lack of arable land, and high energy costs. The following economic trends are also apparent in German industries: 1. 2. 3. 4. Slow productivity growth; Slow growth in per capita income; Decreasing world shares of most industries; and 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. Germanys 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 industrys 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

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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. Germanys 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 heavyengineering group, Sket, began bankruptcy proceedings in late 1996. Ironically, what is one of Germanys strengths may also become the countrys weakness. Germanys approach of consensus building through codetermination in labormanagement 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 Germanys 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. Kohls 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

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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 worlds best high-speed telephone networks and which has Germanys biggest cable-television network and its second-biggest mobile telephone network. In fact, it is encouraging to note that Deutsche Telekom, which became Europes 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 intraborder 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

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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 PRCs 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 Germanys alleged unfair government subsidies and trade practices. Several years ago, the United States filed a complaint through GATT,

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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 UPSs 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 Soviets 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 worlds leading manufacturer of high-technology goods. FOUR SETS OF STRATEGIES FOR GERMANY In light of Germanys internal strengths and weaknesses and the opportunities and threats from other countries, four sets of strategies should be considered.

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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 EUwide 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 nations 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 widelypracticed 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. Volkswagens 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 Republics Skoda-Pilsen group, Eastern Europes 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

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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. Germanys 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 expansionminded 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 Japans 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)

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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 worlds 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-Benzs move into China. Driven by the companys desire to be an early player in this expanding market, Mercedes risks sharing its technology without sufficient

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protection. Chryslers 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 Chinas demands of transferring Chryslers 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 Chryslers 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 Chinas potentially vast market. Germany's strong Deutsche Mark makes exports difficult. German thus consider establishing production bases in Eastern Europe to barriers. The lagging industries in steel and hard coal may find new the newly formed Republics of the former Soviet Union as infrastructures. industries should reduce costs and export markets in they build their

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 nations business activities more feasible and efficient within the international arena through the proper identification and optimal utilization of each countrys factor endowments, thereby promoting the nations 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.

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Undoubtedly, the educated and skilled labor force has helped Germany gain and maintain its competitiveness. Moreover, Germanys industrial strengths in chemicals, automobiles, machinery, and banking are important contributing factors to the nations 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 Germanys 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 Germanys 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 Germanys 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.

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