The past two years have underscored China’s resilience and dynamism. Its economy has been booming against a backdrop of global stagnation. China’s business environment, in particular, has been changing fast, with new regulatory policies and a rising cost of doing business affecting the playing field for multinationals (see sidebar “Cautious sentiments”).

But the real story, in our view, isn’t China’s continued, rapid evolution. It’s the fact that, in far too many cases, executives still aren’t making China as central as it should be to their global strategy. In sectors ranging from auto parts to consumer electronics, semiconductors, aviation, and electricity transmission equipment, China is fast becoming the competitive battlefield on which global winners are determined. Even when companies are not competing in China, their Chinese and foreign rivals may soon be exploiting advantages earned there to compete in global markets.

With the stakes this high, the implication is clear: it is no longer possible for most companies to succeed in China while treating it merely as an interesting side bet. Instead, they need to start building a second home in China. At the core, this means committing a company as seriously to success in China as in its home market. The starting point is to set targets for performance in China that are on par with those at home: companies need to raise their aspirations for, and rigorously measure, a variety of targets. Some of them, such as senior-executive time spent on China and knowledge of Chinese customers, are challenging to quantify but no less important than more straightforward metrics regarding market share in China or sourcing volumes. Then companies need to deliver against those targets by bringing to China their global best practices across the value chain, adapting them as needed to local conditions, and executing against them. This sounds easy but happens so rarely that it’s a powerful competitive differentiator.

Why you may need a second home in China

For a simple illustration of China’s long-term importance, let’s consider a relatively modest industry: piano manufacturing. By some estimates, China has at least 50 million piano students among its 650 million urban residents. As China adds 20 million urban residents every year and average incomes in cities rise, the number of piano students will surely grow in unison. It is not hard to imagine a time in the near future when China has 100 million piano students.

While the parents of these piano students will want to purchase pianos for their children, it is unlikely that the large and expensive pianos in many North American or European homes will be well-suited to smaller, multigenerational Chinese homes. Some company will develop and bring to market a value-priced, more appropriately sized piano that sells well in China. It may be Pearl River Piano; it may be Great Wall Instruments; it may be Steinway & Sons or Yamaha. Someone will do it. Once that company’s piano wins in China and gains the advantages of scale, it will have a good chance of being successful, first, in other emerging markets (such as Brazil, India, and Turkey) and, soon thereafter, in Germany and the United States. While this may sound far-fetched, two-thirds of the world’s violins are already made in China.

Pianos exemplify the impact China will have on the structure of many industries as its role in the global economy expands far beyond low-cost manufacturing. Now, in industries ranging from musical instruments to semiconductors to auto parts to electricity transmission equipment, competition in China is leading to the creation of new products that have the potential to win in global markets—and, importantly, the winners can be either Chinese or foreign companies. One US company found that to be competitive in China, it had to redesign a semiconductor product to bring its cost down dramatically. Once the company was able to deliver such compelling value, its factory in China, which had been built to supply the domestic market, ended up exporting nearly 80 percent of its production.

In 2009, China became the world’s largest market for cars. Here again, the initial game is local. But once the “value for money” cars now on sale in China reach a certain quality level, the global auto industry will likely be changed profoundly. It’s only a matter of time: consider, for example, the relentless pursuit by Chinese companies of Western automotive assets—typified by Geely Automobile’s recent acquisition of Volvo—and of capability-enhancing joint ventures, such as the two, involving Chinese companies and GM, that together expect to sell over two million vehicles this year. Meanwhile, BYD Auto, a Chinese battery maker that has been focusing on making an electric car, recently announced that it will have one for the US market in 2011. Warren Buffett is a believer: he bought a 10 percent stake for $230 million last fall.

Of course, it would be naïve to suggest that China must be a second home for every company or product line or that it will be possible in all cases to capture significant market share and scale advantages there and to exploit them globally. In some industries with dominant incumbent players or significant regulation (such as power generation or electricity transmission and distribution), it may not be feasible in the foreseeable future to gain significant Chinese market share.

Even where local market opportunities are limited, though, it’s still possible to gain global advantages by leveraging China effectively. A company might, for example, develop a Chinese sourcing program that gives it a leg up on competitors in other markets by providing access to the lowest-price, high-quality components. Or it might establish a leading R&D center, become an extremely desirable employer, and leverage China’s abundant pool of low-cost but high-quality engineering talent for global product development.

Determining the role and importance of China is an industry- and company-specific exercise that requires a combination of competitive analysis, market research, war-gaming, and creative scenario planning (for an example of forward-looking industry analysis in the Chinese automotive sector, see “Applying global trends: A look at China’s auto industry,” to be published in late July on mckinseyquarterly.com). In our experience, too few executives focus on China’s long-term impact in a serious way—and when they do, most conclude that China is more important than they previously imagined.