Forward-thinking companies are making their value chains more elastic and their organizations more flexible. And with the decline of the vertically integrated business model, sourcing is evolving into a strategic process for organizing and fine-tuning the value chain. The question is no longer whether to outsource a capability or activity but rather how to source every single activity in the value chain. This is the new discipline of “capability sourcing.”

A paradigm shift in outsourcing occurred in the worldwide auto industry. When U.S. automakers began losing market share to Japanese companies, they were forced to confront a growing gap in both cost and quality. Recognizing that upstream component quality was critical to their end product and seeing the success of the Japanese model of outsourcing, the Big Three began to move design, engineering, and manufacturing work to outsourcing partners.

Companies must challenge one of the basic tenets of business strategy: that you should always keep strategic capabilities within your walls. As globalization and technology transform more industries, all companies will eventually have to let go of that comfortable but simplistic guideline. A series of geopolitical, macroeconomic, and technological trends has opened the world’s markets, made business capabilities much more portable, and produced a level of discontinuity that has no precedent in modern economic history.

Focus on your Core of Cores. It’s no longer ownership of capabilities that matters but rather a company’s ability to control and make the most of critical capabilities. Now, globalization, aided by rapid technology innovation, is changing the basis of competition. It’s no longer a company’s ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities, whether or not they reside on the company’s balance sheet.