(FORTUNE Magazine) – Every working day at a Gillette plant in gritty South Boston, 200 men lather up their faces and scrape away the fifteen-thousandths of an inch their 10,000 whiskers have grown over the previous 24 hours. Peering into side-by-side mirrors, these volunteers are evaluating razors of the future for sharpness of blade, smoothness of glide, and ease of handling. When they're finished, the men punch their judgments of the prototype they used into a computer. In a nearby shower room, women are performing the same exercise on their legs, underarms, and what the company delicately refers to as the "bikini area."

These rituals are carried out in an aging building emblazoned with a quaint sign proclaiming it to be world shaving headquarters; the whole exercise seems more than a little archaic, like some throwback to a pre-industrial age. Yet the humble facility is operated by one of America's premier corporate innovators, a company that churns out so many cutting-edge products that it has climbed into a select circle of Wall Street superstars. More than 40% of sales have come from new products over the past five years, helping to polish a sparkling overall record. Earnings since 1990 have climbed at an annual rate of 17%, return on equity is nearly 33%, and profit margins are about 12%. Among consumer-products companies, that makes Gillette's return on sales second only to Coca-Cola's 16.6%.

All this has pumped up Gillette's stock price--and made its investors a decidedly gleeful claque. FORTUNE ranks the company (1995 revenues: $6.8 billion) No. 10 among the FORTUNE 500 in total return to investors over the past decade--well ahead of Wall Street darlings like Merck and Disney. A Stern Stewart study of market value added lists the company No. 20 out of 1,000 for piling on $13.8 billion to shareholders' wealth.

You might suspect from those figures that value investor Warren Buffett's divining rod would have led him to Gillette, and you would be right. Berkshire Hathaway, where Buffett is CEO, owns 10.8% of the stock. He confides, "I go to bed happy at night knowing that hair is growing on the faces of billions of males and on women's legs around the world while I sleep. It's more fun than counting sheep."

Buffett and Gillette's other shareholders celebrated even more good news recently after the company announced a merger with battery manufacturer Duracell International. Gillette used its bountiful price/earnings ratio of 33 (on 1995 earnings) to acquire Duracell--no slouch itself, with a P/E of 24--through an exchange of stock valued at about $7 billion. Wall Street blessed the combination by immediately increasing Gillette's stock price about $4 to over $70, a 52-week high.

The Duracell deal climaxes a methodical five-year search by Gillette for a business that could become a solid "sixth leg." Dominated by the manufacture of razors and blades, the company also makes Braun electrical appliances, Gillette toiletries and cosmetics (Right Guard, Soft & Dri), stationery products (Parker, Paper Mate, and Waterman pens), and Oral-B toothbrushes. All these consumer-product businesses share common traits: They are No. 1 worldwide in their markets, profitable, fast-growing, and anchored by a strong technological base.

Gillette CEO Alfred Zeien (pronounced Zane) had been searching for an additional business that not only fits those categories but also is growing at least as fast as the parent company. Duracell meets his exacting demands. A $2.3 billion (in fiscal 1996 sales) company based in Bethel, Connecticut, Duracell is the world's largest producer of alkaline batteries, claiming nearly 50% of the U.S. market. But the company has yet to penetrate alluring overseas markets such as China and India, where Gillette is a seasoned player. Zeien envisions sizzling synergies when Gillette begins distributing Duracell batteries through its far-flung distribution network.

Yet Gillette's future hangs mostly on its continuing commitment to innovation. The company will have to maintain technological supremacy in the razor-and-blade business--40% of 1995 sales and about 67% of profits--at the same time that it lights an innovative fire under the other businesses. That formula may not sound complicated, but its execution will require extraordinary discipline, largely because it depends on a commitment to keep pouring hundreds of millions into high-tech research every year. Unlike most consumer companies, whose idea of new products is an endless series of gimmicky line extensions, Gillette prides itself on bringing to market only new products that represent significant improvements. Says consultant Dwight Gertz of Mercer Management Consulting: "Everyone talks about innovation as the most successful way to grow. But very few companies create much business from new products and services."

Gillette is a prominent exception to Gertz's rule. CEO Zeien scorns the approach of attaching superficial frills to existing products and labeling them innovations. He dubs the practice "putting blue dots in the soap powder." Trained as an architect and engineer of naval ships and yachts, the 66-year-old Zeien declares: "Good products come out of market research. Great products come from R&D. And blockbusters are born when something great comes out of the lab at the same time people want it." During the six years he has run Gillette, the company has introduced about 20 new products annually, most of which have succeeded. The main reason: His company will spend $153 million, or a hefty 2.3% of sales, on R&D this year. Gillette's technological prowess is so integral a part of its image that it has even become the stuff of jokes. Quips humorist Dave Barry: "One day soon the Gillette Co. will announce the development of a razor that, thanks to a computer microchip, can actually travel ahead in time and shave beard hairs that don't even exist yet."

Consultant Gertz judges two Zeien strategies to be "real contributions to the art of corporate innovation." First, he says, Zeien encourages Gillette to eat its young by cannibalizing current products. "They know that if they don't bring out a new zinger, someone else will." Second, Zeien assures executives whose prototypes get shelved and never make it to market that they won't be punished. "In most companies, executives believe, 'If I don't get this nuclear-powered shaver out, my career is doomed,' " says Gertz. "Zeien's method gives project leaders a chance to be objective. He is growing a cadre of people who know how to lead a project from idea through successful product launch."

Another potent weapon is the generous support Gillette throws behind new offerings. Zeien is convinced that fledgling products require adequate advertising and promotion to thrive. To deliver an essential boost, he has devised a formula that calls for R&D, capital investment, and advertising expenditures--which he refers to collectively as "growth drivers"--to rise in combination at least as fast as sales. In 1995, spending on growth drivers rose 16%, vs. 12% for sales.

This incessant attention to innovation, along with the Duracell acquisition, is aimed at broadening the company's consumer-products base beyond razors and blades. Gillette's edge has long derived principally from a single blockbuster product: the Sensor family of razors and blades introduced in 1990. Hundreds of millions of Sensor razors and billions of blades have been sold, enough to deliver Gillette 68% of the U.S. market in wet shaving, 73% of Europe, and 91% of Latin America. Though Sensor cannibalized earlier hits, like Atra and Trac II, Gillette has flourished. The reason: Sensor, and an improved 1993 version called SensorExcel, command lush margins. Says Harvard business school professor Pankaj Ghemawat, who has written a case study on Sensor: "This product has been astonishingly successful and has driven Gillette's entire performance. There is nothing else like it in consumer products."

Launching Sensor was so complicated and expensive--the company was awarded 29 patents and spent $275 million during design and development--that no competitor has even attempted to knock off an imitation. Bic and Warner-Lambert's Wilkinson claim significant shares of the disposable-razor market, and Warner-Lambert's Shick, Philips Electronics' Norelco, and Remington Products compete effectively in electric razors with Gillette's Braun unit. But with Sensor, Gillette dominates the burgeoning cartridge sector. Observes Bear Stearns analyst Constance Maneaty: "Basically, Gillette is marching around the world without any competition." That sort of market dominance is not an unalloyed blessing, of course; it establishes nerve-racking, stomach-churning expectations. Analysts, investors, competitors, even company managers continually question whether Gillette can sustain its performance and repeat the Sensor miracle.

The company's chances of doing so are greatly aided by its near-ubiquitous global presence. Having won the loyalty of more than 700 million shavers around the world, from Kashmir to Tierra del Fuego, the company can amortize hefty development costs over fast-growing worldwide markets. Says Harvard's Ghemawat: "I don't think any other company has Gillette's global reach." More than 70% of sales and profits come from overseas operations in 200 countries. The company's technique is to establish shaving goods in a new market, then pour a steady stream of other Gillette products through the same retail pipelines. Gushes Harvard business school professor Rosabeth Kanter: "Gillette does internationally what every company should be doing." Zeien prizes Duracell for its ability to slip right into that system. "The products are small and point-of-purchase driven," he says. "We will have a powerful impact at checkout counters."

The most elegant theories in the world, of course, are only abstractions without a leader with the passion to push his vision throughout the organization. Zeien lacks charisma--a Boston banker calls him "marble mouth"--but his focus, devotion to the benefits of long-term research, and boffo results have made him a much-respected commander of Gillette's global enterprise. For guidance, Zeien looks not to consumer-products brethren but to drug concerns: "Pharmaceutical companies harvest products that are ten years old at the same time they are launching new ones. Meanwhile, future offerings are in the testing phase." He has adopted a similar technique that keeps Gillette's pipeline full: The company refuses to okay a prototype for production until a mockup of the next big project is ready for testing.

Zeien's total immersion in Gillette is legendary. Though he wastes no time on small talk, he waxes enthusiastic about the smallest aspect of the company. Take, for example, plaque, the noxious gunk between our teeth and gums. Zeien loves to describe how his company's Braun and Oral-B researchers developed an electric plaque-removing toothbrush: "We found out the effectiveness of the toothbrush was on the reversal. Scrubbing didn't do anything. Only when a toothbrush reversed itself and threw out the bristles a bit was plaque dislodged. We said, 'Holy heck! Now that's not hard to do electrically!' " The Braun-Oral-B partnership will generate $700 million in sales this year.

The landscape is littered with land mines that could explode Gillette's plans. Ghemawat, for example, suspects that even though Zeien talks bravely about introducing a quantum shaving advance next year, it's more likely to be 2002 before technology has advanced enough to shape a big winner like Sensor. Even with a steady flow of new home-grown products, the company will have to integrate Duracell successfully into its mix and continue expanding overseas to sustain its momentum.

Perhaps the toughest hurdle ahead is effecting a smooth succession after the energetic Zeien retires. Because he is already a year beyond normal retirement age, the board renews his contract annually. Zeien refuses to say when he might step down, and no heir apparent has been identified. But whenever that day arrives, his fierce focus on fundamentals may be missed. The CEO's intense belief in the rightness of Gillette's path surfaced some months ago when a trio of McKinsey consultants arrived to unveil a plan to motivate employees. Recalls Zeien: "After about three minutes, I suggested that they go down to the plant in South Boston and ask the first three people they meet, individually, what our stock price was at ten o'clock. I told them, 'If you don't get the right answer from all three, you come back.' "

The consultants never returned.