How do your operations in China stack up, measure by operating measure, against what your company is doing in Europe, Japan, and the United States? This may be a more critical question than you realize: within a decade, if your organization in China isn’t a star in your company’s performance firmament, you may be in trouble—globally.

This question is also a very complex one to answer. Thousands of multinational companies of all sizes, including more than 460 Fortune 500 companies, now operate in China, and many are doing just fine. The American Chamber of Commerce in China conducts an annual business climate survey, and in its most recent one (which took place in 2006) 64 percent of the member companies reported that business in China was profitable or very profitable. One out of three said that their operations in China had higher margins than their worldwide organizations did, and another third reported margins on par with the global average.

But the conditions for success in China have been changing. Many multinational companies are expanding across the country to ever-smaller cities and towns, establishing positions to serve fast-growing segments of the Chinese middle class and small- and medium-sized businesses. In the...