As pharmaceutical firms try to market their products and reduce costs, vertically integrated structures hamper innovation processes. Yet, pharmaceutical firms must innovate to compete. Outsourcing knowledge intensive activities to knowledge process organizations (KPOs) serves to reduce innovation process obstacles. Grounded in diffusion theory and strategic management literature, this conceptual paper explores four interrelated strategic concepts: core competencies, economies of scale and scope, knowledge sharing, and learning. This paper claims that (a) accumulated core competencies of multinational pharmaceutical companies (MPCs) erode over time and these companies become dependent on KPOs (b) MPCs must understand how KPOs manage core competencies (c) economies of scope benefit KPOs enabling them to sustain competitive advantages for their MPC partners, meanwhile the benefits from economies of both scale and scope shift from MPCs to KPOs (d) KPOs need to monitor their rate of learning to remain competitive. The paper identifies implications for industrial managers and directions for future research.