(FORTUNE Magazine) – We're not talking Windows 95 or Air Jordans here. Consumer-products colossus Procter & Gamble has a cupboardful of aging brands that do mostly mundane tasks--like wash, mop, sop, and glop. No matter how many times Tide has been "new and improved" over the years--more than 60, in case you were wondering--it's still fundamentally detergent. Pampers has just turned 35, Jif peanut butter has been sticking to kids' gums since 1956, and Ivory is so long in the tooth that your grandmother's grandmother might have used it. In a good year U.S. demand for such basic goods grows only about 2% or so.

The company must look elsewhere for growth--to new products, new countries, and new businesses. This methodical, conservative, and insular enterprise will have to become more innovative, more outward looking, and even--dare we say it?--more hip. Says Joel Weiner, a retired marketing executive who competed against P&G for 27 years, most recently at Kraft: "This is a company struggling to determine its core competencies. Procter's big challenge is to decide what it wants to be when it grows up."

Despite its challenges, P&G has been on a roll lately--with record revenues and earnings, a soaring stock price, and its best profit margins in nearly 50 years. That's largely due to ferocious cost cutting that has reduced expenses by over $3 billion since 1992. CEO John Pepper, 58, an earnest and personable 33-year P&G veteran, plans to whack another $2 billion out of costs to keep the fun going--and that won't be easy. Don't squeeze the Charmin, the company has long warned consumers, and now it's learning there's a limit to how much it can scrunch its own budgets.

Pepper is fully aware that cost cutting will take him only so far. Broadly speaking, he wants to transform P&G from a Cincinnati-centric corporation that helps keep people clean into a global enterprise that helps them look and feel healthy. Says he: "When you look at how we are going to be growing in the next 20, 30, or 50 years, health care overwhelms every other category we're in, in terms of size." By health care Pepper primarily means products that cater to the needs--and neuroses--of aging baby-boomers. His reasoning boils down to this: The denizens of the industrialized world are getting older, sicker, fatter, and more wrinkled. They crave products that help them feel younger, better, slimmer, and tauter. And by the way, they still need items that make their clothes brighter, their floors shinier, and their babies' bottoms drier.

P&G is already in the health business, sort of. It produces pharmaceuticals, cosmetics, and food--think healthy bodies, healthy skin, healthy diets. Unfortunately, all three of these are areas in which the company's performance has been decidedly unremarkable.

The key to Pepper's vision is innovation--not more innovation but better innovation. P&G already devotes $1.2 billion, 3.4% of sales, to research and development, an impressively high amount for a packaged-goods company. It holds more than 2,500 active patents, protecting 250 proprietary technologies. And it boasts 1,250 Ph.D. scientists, more, its spokespeople will readily tell you, than the combined science departments of Harvard, MIT, Stanford, Tokyo University, and London's Imperial College.

But P&G has actually wasted too much money and too much scientific talent coming up with minor improvements--a tweaked formula, a freshened fragrance, a marginally more compacted powder. Sometimes products aren't improved at all, just changed to meet the perceived needs of a specific market segment. P&G now makes more than 200 basic versions of Always, its best-selling feminine-hygiene pad, some of which differ by no more than a millimeter in length. Pepper is trying to halt this pointless proliferation of products. Says the CEO: "If we spend our time working on small modifications to something, we won't have time to work on the big new stuff."

What P&G seriously seeks is a few monster inventions. The company hasn't really produced a hit-the-ball-out-of-the-park innovation since it introduced disposable diapers in the early 1960s--around the time the Soviets were sending missiles to Cuba.

Pepper does not face an immediate crisis. His company still has ample room to expand overseas. Nor does he have to confront these challenges alone. He has a partner in president and chief operating officer Durk Jager. This always blunt and sometimes surly Dutchman was formerly Pepper's rival for the top job. He's now the other half of P&G's odd-couple leadership team.

A beefy man, Jager (pronounced YAH-ger), 53, has a weighty presence. He's the first person in P&G history to hold the title of COO, and all four of the company's global regions report directly to him, not to Pepper. This arrangement has distinct advantages. Pepper, a conscientious consensus builder, can help heal the organizational wounds opened by predecessor Edwin Artzt, the bull in the bureaucracy whose nickname--Prince of Darkness--said it all. Jager, meanwhile, an Artzt protege, has the hands-on decisiveness that some observers think Pepper lacks.

Says one former P&G exec who worked with both the CEO and COO, and who insisted on anonymity: "John Pepper is the epitome of the historical P&G executive. He's ethical, he's smart, he's nice, he works hard. He's the kind of guy you'd want your son to grow up to be. But, man, if I had a business to run, I'd pick Durk Jager any day. He just makes decisions and rolls with them. He makes sure things get done."

A breakdown of three of the sectors where Procter & Gamble needs to expand:

FOOD

P&G is still searching for the right recipe in food and beverages, which account for 12% of corporate sales. The company has stumbled repeatedly in efforts to refresh its slow-growing lineup, which includes Duncan Hines, Crisco, Jif, and Folgers. It has struck out in orange juice (Citrus Hill), soft drinks (Crush), and soft cookies (Duncan Hines). P&G does have a hit in Sunny Delight fruit drinks. And it has also managed to put the bite back into Pringles potato crisps (you can't call them chips because they're made from reconstituted flakes), the snack that comes in the uniquely shaped tubular container. The secret: Improve the taste.

But P&G's biggest bet in food is its nonfattening fat, olestra. This ingredient looks like a fat, tastes like a fat, and fries like a fat, but it does not, under any circumstances, digest like a fat. When P&G scientists started playing around with vegetable oil and sucrose molecules back in the 1960s, they weren't looking for a fat substitute. They were trying to concoct an easily digestible fat that would help premature babies gain weight. In that pursuit they failed miserably.

But what they found was a fatlike compound so chemically chunky that it passed through the body--all the way through the body and out the other end--unabsorbed. It imparted no calories. But it did have an unfortunate side effect, an oleaginous exudate that showed up on people's underwear, a phenomenon P&G scientists--who obviously forgot to consult their colleagues in marketing for a euphemism--dubbed "anal leakage."

A few decades and a few hundred million dollars later, P&G claims to have fixed the drainage problem and a good deal else. Olestra still runs through the body, but it's now supposed to pass politely out in solid, not liquid, form. In January the FDA pronounced olestra fit for consumption in salted snacks. But the agency did require P&G to enrich the compound with vitamins, since it tends to suck up fat-soluble nutrients and carry them with it. The FDA also ruled that all products containing olestra must carry an unusually graphic advisory label, which says, in its entirety: "This product contains olestra. Olestra may cause abdominal cramping and loose stools. Olestra inhibits the absorption of some vitamins and other nutrients. Vitamins A, D, E, and K have been added."

P&G isn't thrilled with the label, but it is happy with the way olestra is selling. The company is marketing it to other food manufacturers as a branded ingredient called Olean. In April, Frito-Lay began test-marketing potato and tortilla chips containing Olean in three cities. Those chips, brand-named Max, are selling crisply, and P&G has already signed supply contracts with 11 other snack manufacturers. John Pepper is ecstatic: "I think olestra is going to be viewed in history as one of the real benchmark innovations in this company, a testimony to persistence and science." P&G has broken ground on a new $160 million Olean factory in Cincinnati and has just begun test-marketing its very own Olean-based Pringles. Pepper is confident that Olean will eventually generate hundreds of millions of dollars a year in revenues.

But there's no denying that some people, after ingesting olestra, feel distinctly unwell. One of P&G's biggest challenges with olestra may well be the scatological nature of the debate, which, if you'll pardon the expression, could make the company the butt of jokes. Imagine what David Letterman and Jay Leno may have to say about this hot new product.

DRUGS

A latecomer in pharmaceuticals, P&G gets only 8% of its sales from health-related products, and that category includes prescription drugs, over-the-counter remedies like Vicks cough syrup and Pepto-Bismol stomach relief, and oral-care products like Crest and Fixodent. The company now devotes more than a third of its total R&D budget to health, and it recently spent $280 million to build a strikingly modern 1.3-million-square-foot research center north of Cincinnati. Scientists based there won't try to find a cure for AIDS or cancer or depression. Instead they'll concentrate on developing medications that address three specific categories of illnesses: bacterial infections, bone diseases, and cardiovascular ailments.

The attractions of the prescription-drug business are obvious. Even in an era of managed care, gross margins on pharmaceuticals can be spectacular, as high as 85%--significantly more salubrious than the lesser returns in detergents. But the costs, and the risks, are huge. Drug companies spend, on average, 12 years and $360 million to develop just one new medication, and there is, of course, no guarantee that it will succeed in the marketplace. Says Lynne Hyman, a security analyst at CS First Boston: "The payoff in pharmaceuticals is potentially far greater than it is in any other area where P&G does business. But a lot of this is new to them." P&G first moved into pharmaceuticals with the 1982 acquisition of Norwich-Eaton. It now sells about $500 million worth of pills per year around the world, but it has yet to develop a significant money spinner in the U.S.

In August the FDA approved what could well become P&G's first blockbuster medication. Called Helidac Therapy, it's actually a combination of three drugs designed to eradicate Helicobacter pylori in the stomach and small intestine. These bacteria are the pernicious microcritters that scientists have identified as the cause of 90% of all duodenal ulcers. Hyman puts the worldwide market for ulcer treatments at $4.5 billion.

The company's recent performance in over-the-counter remedies has been less than inspirational. P&G brands like Pepto-Bismol have lost ground to repackaged stomach medications that used to be available by prescription only. In oral care P&G completely missed the craze for toothpaste with baking soda and peroxide, allowing archrivals Colgate-Palmolive and Unilever to steal significant market share from Crest. Altogether, P&G's health care sales declined 2.4% in the past fiscal year. And Thomas Moore, the executive in charge of the U.S. health business, abruptly departed last March for what for he said were "personal reasons."

P&G, which wrote the book on selling branded products to supermarkets, knows very little about flogging pills to physicians, pharmacists, and HMO administrators. Can the sales force really peddle Helidac Therapy to Kaiser Permanente the way it sells Duncan Hines cake mix to Stop 'n Shop? Strangely enough, Bruce Byrnes, Moore's successor, thinks it can. Says he: "We would deal with a managed-care account exactly the same way we would deal with Kroger." As Byrnes sees it, the American health care system is in such tumult that hospital and HMO managers crave the kind of predictability that P&G has provided to supermarkets, such as just-in-time delivery, stable prices, and electronic billing.

But to really succeed in the drug business, P&G may have to buy one. With its $4.2 billion in annual cash flow, the company could make a sizable acquisition almost without calling its investment bankers. CEO Pepper insists there is no such purchase in the cards, but he's not about to rule one out.

BEAUTY

P&G bought its way into cosmetics when it acquired Noxell in 1989, but the results so far haven't been particularly pretty. Cover Girl, the company's flagship brand, has steadily lost share in the U.S. to two powerhouses of pulchritude--L'Oreal and Revlon. P&G recently threw in the sponge on its efforts to revive the money-losing Clarion line. It also put its mass-market perfume business on the block. In cosmetics, as in health, the company has suffered from executive churn.

Glitz and glamour aren't exactly what you would call P&G's core competencies. This is a company that knows how to sell help in a package, not hope in a bottle. Says Brenda Lee Landry, a veteran P&G analyst at Morgan Stanley: "Cosmetics are sold on dreams and celebrities and sex and fashion. They offer less of a sense of efficacy than does, say, a disposable diaper. Cover Girl needs a little face-lift. It just needs some sparkle. Revlon has so much sizzle with Cindy Crawford and her stay-on lipstick."

In fact, Cover Girl has its own stay-on lipstick called Continuous Color, thank you very much. And its own supermodels too--Niki Taylor and Rachel Hunter and Tyra Banks. Robert Blanchard, president of U.S. beauty care, says his company has been glam since before you were born: "Gosh, we've been selling Ivory soap for more than 100 years, and we've been showing pictures of beautiful ladies with lovely skin all that time."

Gosh, yes. Never mind that Ivory has only a 6% share of the U.S. bar soap market. P&G's best hope in the cosmetics business is to combine three ingredients: technology (like long-lasting lipstick), beauty, and health--with the emphasis again on health. Blanchard wants to market makeup that's good for you. Says he: "There are a lot of women out there who think color cosmetics, war paint if you will, are bad for your skin."

Fortunately, P&G happens to own a product that a lot of women think is good for their skin--Oil of Olay, a brand it acquired in 1985. The company is now test-marketing an Oil of Olay line of cosmetics in the U.S. and Europe--a trial that Blanchard says is going well. Last year the company made a big splash when it launched Oil of Olay body wash, a two-in-one blend of soap and moisturizer.

P&G's trump card is its robust, growing volume of business outside U.S. borders. Once so clueless overseas that it tried to market All-Temperature Cheer to Japanese housewives, who wash their clothes only in cold water, the company now generates just over half its revenues outside the U.S. and Canada. P&G fields operations in 62 countries, vs. only 24 a dozen years ago, and its managers have begun to realize that the world doesn't always begin in Cincinnati.

P&G's revenues in Asia have increased tenfold in the past decade, to $3.8 billion. Sales in China alone, which the company entered in 1988, are surging more than 50% per year and should hit $1 billion by 1997. Exclaims Brenda Landry of Morgan Stanley: "What they're doing in China is just incredible. Other companies talk. P&G does."

Indeed, when John Pepper looks out the window of his 11th-floor office in the company's fortress-like headquarters in downtown Cincinnati, he sees a great wide world of "white space" waiting to be filled. That's Procter-speak for all the countries where the company's core products--including detergents, diapers, feminine napkins, and shampoo--have either a minuscule market share or no presence at all.

Pepper, who tends to shimmy his left leg when he's enthusiastic, speaks wondrously of the opportunity in diapers. In China, India, Indonesia, and other Asian countries that teem with toddlers, a mere 2% of babies' bottoms are currently swaddled in dispensable plastic. (The rest are wrapped in reusable cloth or in nothing at all.) This so-called diaper change rate is a very mature 98% in the U.S.--not much room for growth there--but it's still only 25% in Mexico. Just get the emerging economies of Asia up to the change rate of Mexico, and look out. Imagine all those Chinese cherubs' cheeks! Says the CEO: "That could mean $4 billion in additional sales for our company, just in diapers."

But even the world has its limits. Many of the products that P&G sells in developing countries are smaller, cheaper, and less profitable than what it sells at home. In China the most popular size of Pantene is a one-use sachet going for about 6 cents. Durk Jager realizes P&G's torrid growth in Asia will slow. Says the president, who habitually refers to the company in the second person: "You will start running out of white space toward the end of the decade, so your focus must shift somewhat to creating new businesses."

Indeed, that shift has already begun. What P&G possesses is a well-honed capacity for self-renewal. Perhaps that comes from competing in products so basic they ought, by now, to have become commodities. Says Gary Stibel, a founding partner at the New England Consulting Group in Westport, Connecticut: "Procter's reputation for being inflexible was always inaccurate. They have always tested new ways of doing things."

This company has, in recent years, learned how to make and deliver products more efficiently. It's learned how to do business outside the U.S. And once P&G thoroughly tests the idea of becoming a health care company, chances are good that it will figure out how to do that as well.

REPORTER ASSOCIATES Ed Brown, Anne Faircloth