Should you promote based on seniority or based on skills?

What is the best policy to use when it comes to promoting employees, I know many companies use seniority as a factor when it comes to promotion, in facts it’s a tradition being practiced in many countries.

One famous success story is with Nissan Car Company, the company was suffering from serious market share loss and it felt as if Nissan was not able to innovate anymore. Nissan had a long an old policy, as with many Japanese firms, of promoting from within, this policy of not looking outside the company for talents and ideas led Nissan to, over time, lose its edge on innovation.

Nissan took a drastic measure, and hired a CEO who was not Nissan employee; he was not even Japanese. The first thing the new CEO did was to cancel the old tradition at Nissan and he started to look for talents outside of the company, and sure enough, the company was back again as one of the top auto makers in the world.

This is only a small instance of how companies should look for talents and skills everywhere and not only from within the company.