Imagine That Toys moved forward using a differentiation strategy and created the adaptive learning RoboDog. Sales for RoboDog were high last holiday season and the popularity of adaptive learning toys continues to rise. There is surprisingly little competition from new companies and the two current competitors that make adaptive learning toys have only made small improvements to existing products. Imagine That, focused on the upcoming holiday season, has added RoboCat and RoboDino to its adaptive learning product line. Imagine that has ramped up production to meet anticipated holiday demand. Alex Jorgenson, the purchasing manager, approaches you about a potential problem with a supplier. "I contacted Verotech to purchase additional microchips for our next production batch and they informed me that the price on the microchips increased-by more than double," he tells you. "What should I do? I'm not sure we have enough time to find a new supplier without disrupting production."

What do you tell Alex?

a. Tell Alex to place the order. Imagine that cannot afford to halt production this close to the holiday season. Imagine That can work on finding a new supplier after the holiday rush. In the meantime, Imagine That will maintain its profits by raising the price of RoboDog, RoboCat, and RoboDino and essentially passing the microchip price increase on to the consumer. The price increase will be minimal thanks to Imagine That's large scale production and the consumer won't even notice.

b. Tell Alex to negotiate with Verotech and offer to lock into a two-year contract if they are willing to lower the price. Imagine that cannot afford to raise the price on RoboDog before the holiday sales season. Imagine that is counting on a large sales volume and does not want to risk their reputation with the consumer.