Small and Medium Enterprises (SMEs) are potential sectors which need to be developed. The objects of this research are a number of Small and Medium Enterprises (SMEs) in Sleman Regency. As for the objectives are as follows: 1) analizing superior sectors of SMEs which are the most potential to be developed; 2) identifying the competitive advantage of SMEs; 3) formulating development strategies for superior sectors of SMEs. The research problem is how to develop strategies of SMEs in Sleman Regency. This research tries to make a development strategy of SMEs which integrates superiority or local potency of SMEs with its existing external opportunities. On a macro basis, the strategy formulated in this research is begun with conducting analysis of potency and problem towards every sector of the existing SMEs, in order to be able to identify which SMEs sectors are more potential and appropriate to be developed, then it is formulated its development strategy based on qualitative and quantitative approach. The development strategies of SMEs is based on integration of two methods, namely location quotient and diamond cluster model. The calculation result of LQ is obtained that the business sector or scope of SMEs that is superior in Sleman Regency is business service sector (coefisien of LQ value is 1.6). Next, it is conducted identification of the advantages of SMEs of business service which refers to Diamond Cluster Model. The result is that several superiority instruments of SMEs of business service have potency to be developed in the form of input factors, demand conditions, supporting and related industries, and company strategies and competitors.