Diffusing knowledge-based core competencies for leveraging innovation strategies: modelling outsourcing to knowledge process organizations (KPOs) in pharmaceutical networks

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.