Like many CEOs, Bob McDonald has filled his office with family portraits, each bathed in white light, on clear glass shelves. First there is Crest, then comes Tide, then Gillette. McDonald has more than 60 products on display, and he has every reason to be as proud of them as any dad is of his kids. Many, after all, pull in more than $1 billion in annual sales.

Welcome to the world of Procter & Gamble, and the man who heads an $80 billion branding powerhouse whose two-block concrete campus is a citadel on the Cincinnati skyline. And welcome to a company that doesn t seem burdened by the recession-related gloom that has hit so many others. While other big consumer-products firms are trying to adapt to the new thriftiness, P&G is beefing up its marketing and pushing product development, with major launches planned for Pampers, Gillette and Pantene. Recent results show promise. Despite an uneven economy, sales rose 6 percent in P&G s fiscal second quarter over the year-earlier period. We will see someone splurge on a product and cut back in another category, says McDonald.

However P&G needed a spoonful of its own Pepto-Bismol last year. Hit by increased commodity costs and currency devaluation, the company hiked prices on several major brands. As consumers turned to cheaper alternatives, market share skidded in several key categories. P&G had a whole series of problems that were hard to manage, says Leigh Ferst, an analyst with New York s Dudack Research Group. One result: P&G s stock underperformed rival consumer-products companies by 14 percent in 2009.

To stop the slide, P&G lowered prices on some brands and expanded its product portfolios with premium extensions like Tide Total Care and value extensions like Tide Basic. There s more to come: McDonald, 56, has vowed to reach a billion new customers over the next five years by focusing on new products and tapping developing markets. A former Army captain who at various points in his career headed P&G outposts in Canada, the Philippines, Japan and Belgium, McDonald has been in the top job for just a year.

While P&G stock has bounced back impressively from its $44 low, it trades at 16 times its estimated 2010 earnings, a discount to its historical multiple of 19 times earnings. McDonald figures the stock will respond when the world catches up to P&G s new emphasis on product improvement and its leading brands. He spoke to SmartMoney about innovation, his goal to bundle more babies in disposable diapers and where he s going to get all those new customers.

Some say the P&G model is broken that the trading-up, premium-price strategy P&G has relied on won t work now that thrift is here to stay.

We are much more deliberate than before at innovating at every point in the value pyramid, making sure we have the portfolios right in every market.

Innovation is a luxury for some consumers.

I m defining innovation broadly: People in the Philippines will soak clothes and use five rinses to get the soap out. Water is expensive. We created Downy Single Rinse, a product that uses less water.

You want a billion new customers in five years, or 548,000 customers a day. Did you get your 548,000 today?

We re working on that. It s all about strategy: touching and improving lives...more completely. We will fill out our portfolio by country and by category, extending distribution to more rural areas.

What makes you think that a company that s built itself on premium brands like Tide can shift toward selling inexpensive products to people living on $1 a day?

When I was general manager of the Philippines in 1991, 60 percent of products were in single-use sizes. The profitability was great. The after-tax profit margins for developing countries is the same for us as in developed markets.

How do you do that?

You design for that consumer. You give them what they want but nothing else. Top-tier products might have multifaceted benefits. Our low-tier products might solve one need, like Downy Single Rinse.

You can t expect competitors just to stand still.

We don t want them to. But it s not about taking market share; it s about growing a market that doesn t exist. Most babies in the world don t wear disposable diapers. People still wash clothes with just water.

You were late out of the gate?

Yes, we were. Starting from behind can be a competitive advantage. There s no installed capacity, no installed capital, no installed culture.

You aren t going to lower prices?

We are sensitive to consumer needs. To be anything else would be contrary to our purpose to touch and improve lives. Right? But we re not fixated on price as the only measure of value, because it s not.

You use this parable at P&G: A frog placed in boiling water will jump out but will die if placed in water heated gradually. What is P&G s warm water?

It could be private-label brands or a reduction in our innovation.

How will P&G look in five years?

We would have more of our categories in more countries, and we would be deeper into the rural areas. We will have created many new product categories like the Swiffer [P&G s successful line of dusting and mopping products].

What s the next Swiffer?

I can t tell you that.