Outsourcing has become an important strategy for many firms. Yet, firms need to compete with their competitors who also outsource and may share the same suppliers. This article explores how a firm could outperform others in managing the division of labor with a supplier in product development. Drawing on the empirical data collected from the Japanese auto industry, this paper shows that an automaker needs capabilities to coordinate various activities both externally with a supplier and internally within its own organization, in order to gain better component development performance. Overall, the results imply that outsourcing does not work effectively without extensive internal effort. Copyright © 2001 John Wiley & Sons, Ltd.