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This paper attempts to explore the primary capability configuration in business transition. The business transition from Contract Manufacturing to Own Brand Manufacturing inherently changes the importance of each source of innovation, including lead users, customers, suppliers, external scientific expertise, internal R&D, universities and competitors. Some of the innovation capabilities may no longer be available or useful while new capabilities may need to be built up to generate the right ideas and respond to market demands. How to manage the change in the reconfiguration of innovation capability appears to be vital for firms' survival and sustainable advantage whereas the emergence of the knowledge economy, intense global competition and considerable technological advance has seen become increasingly central to competitiveness. How to manage the change appears to be vital for firms' survival because innovation is widely acknowledged to be a major source of firm growth and key to survive its competition. Acer was chosen for this case study due to its impact and significance in the worldwide PC industry. The data was collected through in-depth interviews and secondary data analysis. The findings show that sources of innovation change as business models evolve. To cope with the change, innovation capability needs to be substituted, transformed, or reconfigured to exploit new sources of innovation. External collaboration could facilitate the transition and shorten the product time-to-market. Internal collaboration may safeguard the innovation rate and product competitiveness. The findings of this study suggest that firms pursuing business transition should consider a proactive focus toward future source of innovation. The insight from this paper also provides fresh perspective on the innovation paradigm in the East Asian, known as the developing economies while most the existing innovation theory and perspectives are built on the data and cases from the advanc- - ed countries. The implication related to industry as this research seeks to identify key factors in business transition and how capabilities are reconfigured. Further research is also discussed in the conclusion..