With the continuing internationalization and liberalization of the global economy, the SMEs in Taiwan face more competitors from both the domestic markets and the foreign markets. In the new dynamic competitive environment, the traditional labor-intensive industry of Taiwan is no more competitive. The purpose of this paper focus on the problems: what kinds of the difficulty the Taiwan's traditional labor- intensive SMEs encounter now? and if there some solutions for the Taiwan's SMEs their can adopt to overcome the problems and maintain their competitive advantage? To solve the above mentioned questions, this paper investigates the theories of the competitive advantage, and uses the Prof. Porter's Diamond model and 5 forces to analyze the competitive disadvantages. Furthermore, the possible competitive advantages are also found through the re-structuring process of the SMEs and through the government's help. Finally, this paper the paper provides some solutions and recommendations for the SMEs and the government in Taiwan based on the Prof. Porter's model, and hope that the solutions found in this paper are helpful for the traditional labor-intensive industry to go through their challenges. web.