Diversifying and upgrading a country’s industrial sector and exports towards higher value-added activities are important dimensions of industrial development. By integrating diversification and upgrading processes at various levels into a single tool, it directly addresses the policy issue, as diversification largely results from upgrading activities and vice versa. For instance, in EQuIP Tool 1, we observe how the upgrading of capabilities facilitated structural change. Such transformation involves expanding the range of activities and products in which a country can engage (diversification on the production side). It is similar to converting latent comparative advantages into new and more attractive ones, enabling a more diversified export basket and trade partners. Conversely, the absence or slow progress in upgrading capabilities confines the country to existing comparative advantages and activities, often centred around primary products and light manufacturing, which offer limited value added. The present tool primarily focuses on sub-sectoral levels and assesses the degree of diversification in a country or industry. It compares the current level of diversification to the level it should ideally be, given the country’s stage of development, both relative to its “own” limits and in an international context. This may also be considered the first step towards defining policy areas, that is, areas that require (policy) attention. By monitoring the evolution of capabilities that enable diversification over time, the tool can establish a link between diversification performance and efforts to upgrade. In other words, a policy that includes the upgrading of capabilities leads to increased diversification, structural transformation and productivity growth. Diversification is not just about adding one primary good to another; it is also about adding a higher value-added good to the primary one. We can therefore determine the direction of diversification in addition to the level of diversification.