China's market for consumer goods is growing quickly, stimulated by a strong economy that is putting more disposable income into the people's pockets. Competition to serve consumer needs is intense; multinational companies are battling one another and also taking on increasingly sophisticated Chinese players. One of the bigger issues facing multinational consumer goods companies in China is their ability to serve the mass market cost-effectively—an important advantage of the local competitors.

Procter & Gamble, one of the world's leading consumer goods companies, is facing this challenge head-on. P&G is the most successful foreign marketer in China as measured by market share, with leadership positions in four of the seven product categories in which the company competes. Last year, China generated almost $1.8 billion in sales for P&G, or about 3 percent of its total revenues. While growth has slowed in major markets such as the United States, sales have risen much more briskly in China. In 2003 it was P&G's sixth-largest market, up from tenth just three years earlier.

Leadership hasn't come easily. Procter & Gamble entered the Chinese market through a joint venture in 1988. For many years, the company focused its marketing effort on premium-priced products—its traditional path—in...