R&D, Sales Force, and Margins
Points 3 through 6 — turning growth potential into actual, defensible profit.
The next four points move from "can this company grow" to "can it actually execute and keep the resulting profits." Point 3 asks how effective the company's R&D is relative to its size — not just how much it spends, since large R&D budgets can be poorly directed and small ones can be highly productive.
Point 4 asks whether the company has an above-average sales organization — a genuinely important, frequently underrated point, since even an excellent product doesn't sell itself, and a mediocre sales effort can leave real value on the table that a competitor with a better sales force would capture instead.
Points 5 and 6 turn to profitability itself: does the company have a worthwhile profit margin, and — just as importantly — is it actually doing something to maintain or improve that margin, rather than assuming today's margin is permanent.
| Point | What to look for |
|---|---|
| 3. R&D effectiveness | Output relative to spending — productive research, not just a large budget |
| 4. Sales organization | A genuinely above-average ability to convert good products into actual sales |
| 5. Profit margin | A margin worth having — not just any margin, but one that justifies the business |
| 6. Margin trajectory | Active efforts to defend or improve the margin, not passive assumption it holds |
Two companies each spend 8% of revenue on R&D. One has a tight, focused pipeline that regularly produces commercially successful products; the other spreads the same budget across many unfocused projects with a poor track record of actually reaching the market.
The spending percentage alone tells you almost nothing about which company is which — Point 3 is really asking about a track record of actually converting research into revenue, not the size of the budget behind it.
A healthy current margin under active pressure from new competition, with no visible management response, is a weaker position than a currently modest margin that management is actively working to expand — Point 6 is explicitly about the trend and the effort, not just today's snapshot number.
- R&D effectiveness is about output relative to spending, not the size of the budget alone.
- A great product still needs a genuinely capable sales organization to convert it into revenue — this point is easy to underrate.
- A worthwhile margin and active efforts to defend or grow it are two separate checks — a good current margin with no defense against erosion is a real warning sign.
- Margin trajectory, not just the current snapshot, is what these two points are ultimately trying to assess.