In 1962, The Dreamettes, a hopeful girl group from Chicago, enter the famous Amateur Night talent competition at the Apollo Theater in Harlem, New York ("I'm Lookin' for Something", "Goin' Downtown", "Takin' the Long Way Home"). The group is composed of full-figured lead singer Effie White and best friends, Deena Jones and Lorrell Robinson. For the contest, the Dreamettes sing "Move (You're Steppin' on My Heart)", a song written by Effie's brother, C.C., who accompanies them to the talent show. Unfortunately, they lose the talent show, but backstage, the girls and C.C. meet Curtis Taylor, Jr., a used-car salesman who becomes the Dreamettes' manager.
Curtis convinces James "Thunder" Early, a popular R&B star, and his manager, Marty, to hire The Dreamettes as backup singers. Though Jimmy Early and the Dreamettes' first performance together is successful ("Fake Your Way to the Top"), Jimmy is desperate for new material. Curtis convinces Jimmy and Marty that they should venture beyond traditional rhythm and blues and soul audiences and aim for the pop market. C.C. composes "Cadillac Car" for Jimmy and the Dreamettes, who tour ("Cadillac Car (On the Road)") and record the single upon their return ("Cadillac Car (In the Recording Studio)"). "Cadillac Car" makes its way up the pop charts, but a cover version by white pop singers, Dave and the Sweethearts ("Cadillac Car" (Reprise)), steals the original recording's thunder. Angered by "Cadillac Car's" usurpation, Curtis, C.C., and Jimmy's producer, Wayne, resort to payola, bribing disc jockeys across the nation to play Jimmy Early and the Dreamettes' next single, "Steppin' to the Bad Side". As a result, the record becomes a major pop hit. Conflict arises between Marty and Curtis when Curtis moves in on Marty's turf: Jimmy Early. Things become more complicated when Effie begins dating Curtis, and Jimmy, a married man, begins an affair with Lorrell ("Party, Party").
Curtis replaces him, strongly determined to make his black singers household names. Curtis attempts to transform Jimmy Early into a Perry Como-esque pop singer ("I Want You Baby"), and concentrates on establishing the Dreamettes as their own act, renaming them The Dreams, changing their act to give them a more sophisticated and pop-friendly look and sound. The most crucial of these changes is the establishment of Deena as lead singer, instead of Effie. Effie is resentful of her change in status within the group. C.C. convinces her to go along with Curtis's plan ("Family"). After a fight between Marty and Curtis, Marty quits as Jimmy's manager and Curtis takes over. The Dreams make their club debut in the Crystal Room in Cleveland, Ohio, singing their first single ("Dreamgirls"). After a triumphant show, the press is eager to meet the newly-minted stars ("Press Conference"). Curtis declares to Deena, "I'm going to make you the most famous woman who's ever lived," as the slighted Effie asks "What about me?" ("Only the Beginning"). Over the next few years, the Dreams become a mainstream success with hit singles ("Heavy"). As Deena is increasingly feted as a star, Effie becomes temperamental and unpredictable. She suspects Curtis and Deena of having an affair. Lorrell attempts to keep peace between her bandmates, but the task proves impossible.
In 1967, the group – now known as "Deena Jones and the Dreams" – is set to make their Las Vegas début. However, when Jimmy stops by to visit the girls ("Drivin' Down the Strip"), he learns from the others that Effie has been missing shows because of illness (it is later revealed that she was pregnant with Curtis's child). Curtis and Deena are convinced that she is trying to sabotage the act. Curtis replaces Effie with a new singer, Michelle Morris, a change about which Effie learns before anyone has a chance to tell her. Effie confronts Curtis, C.C., and the group ("It's All Over"), but despite her personal appeal to Curtis ("And I Am Telling You I'm Not...