Facility location decisions made by many U.S. manufacturers during the past decade yielded disappointing results. These decisions were typically tactical, stop-gap actions which have resulted, at best, in short-lived benefits. Many firms moved manufacturing overseas to obtain a factor cost advantage, only to find that the cost advantage was fleeting, and that the distances the move introduced between manufacturing and other key groups (e.g., customers, suppliers, development, and sales) had constrained their ability to compete. This article explores the impact that facility location has on the critical capabilities that define a company's ability to compete. It discusses the shortcomings of the "traditional" approach to facility location, which ignores the internal workings of the company, and outlines a new capability-centered approach that creates sustainable benefits by fostering the development and growth of the unique set of critical capabilities required by a company's strategy, customers, and competitive environment.