(FORTUNE Magazine) – If you want to impress the CEO of a European fashion house, tell him (and they are mostly hims) that you're going to meet Patrizio Bertelli, the CEO of Prada. Eyebrows climb skyward, eyes widen, mouths gape and then shut. "He's a brilliant businessman," says Domenico De Sole, the CEO of rival Gucci. "You can quote me on that."

When Bertelli began working with Prada in 1978, the company was best known for luxury luggage. It had one store, in downtown Milan. Now Prada makes everything from lingerie to ski pants and owns 132 stores around the world. Bertelli can take much of the credit for that transformation, but success is just one of the reasons his peers are intrigued by him. Bertelli is also an enigma who fires employees on whim; a notorious control freak who insists that the desks, chairs, lamps, paper, trash cans, pencils, pens, and even staples in the U.S. office be imported from Italy; a feisty Tuscan who once smashed a mirror because it wasn't installed to his specifications. And lately Bertelli has exasperated industry colleagues by making inexplicable business decisions that somehow work out. Most annoying.

For instance, last summer Bertelli spent about $260 million, much of it borrowed, to buy 9.5% of Gucci--a company nearly twice Prada's size. Fashion gossips had a field day. Prada couldn't afford to take over Gucci, they noted. As for Bertelli's musings about exploring synergies, how naive could he be? The companies were competitors, for crying out loud! Gucci released a press notice saying "no discussions are contemplated" with Prada.

Bertelli had the last laugh, grossing $140 million when he sold the shares in January. To add salt to Gucci's wounds, he sold them to Bernard Arnault, chairman of LVMH Moet Hennessy Louis Vuitton, furthering that company's attempt to take over Gucci. The deal "changed their perception of me," Bertelli says of his peers. "They think that I can see the future."

Bertelli may not be able to see the future, but that deal put him in the role of the one to watch. Now he has his sights set on bigger game--forming his own luxury-brand conglomerate. In March, Bertelli struck a deal worth as much as $40 million with New York-based Austrian designer Helmut Lang for 51% of his trademark for the next three years. Bertelli also formed a joint venture (Prada owns 49%) with the De Rigo Group to make Prada sunglasses. And in August he announced the purchase of 8.5% of Church & Co., an English shoemaker. Recently Bertelli announced he was acquiring a controlling stake of German designer Jil Sander, making Prada Italy's first privately owned luxury-goods group. And not just any group--Lang and Sander occupy the same space on the fashion continuum as Prada. If the organizing principle of LVMH is luxury, Prada's is hip modernity.

What makes Bertelli rare among fashion moguls is that he is a hardheaded manager who is also integral to the creation and maintenance of the Prada look--a look that has influenced everyone from Giorgio Armani to the Gap. Prada is known for its cutting-edge design--and Prada wouldn't be Prada without Bertelli.

When Bertelli met his future wife, Miuccia Prada, at a trade show in 1978, it was, among other things, business at first sight. Bertelli was the owner of a leather factory in Arezzo; Prada was looking for someone to manufacture her bags. What she found at Bertelli's stall were knockoffs of her own creations. "You copied my stuff!" she yelled at him. Bertelli, the story goes, was indeed copying her designs--and doing it so well that Prada contracted with him to produce a new version of her bags. As they worked together, Bertelli began to guide her on ways to grow the business, which was little changed from the company her grandfather had founded in 1913 to make things like walrus-leather trunks. Eight years after the stormy meeting at the stall, they were married. In 1996 their respective businesses merged too, under a new holding company called Prapar B.V. Bertelli officially became the CEO of the Prada group. In fact, he had been effectively running the company almost from the moment he met Miuccia.

The Bertelli-Prada combination was a match made in business heaven. Miuccia Prada was determined to take the company's products into the modern age. And she did just that. The breakthrough was a simple black nylon bag she created in 1978. The women who tried it became addicted. It was light and indestructible, and matched everything. Perfect.

Bertelli recognized that the appeal of such products was wider than that of walrus leather and broadened the company. In 1983, Bertelli began to open more Prada stores. First came a second outlet in Milan, a sleek and minimal place that could not have been more different from the baroque design of the original store. In 1985 came a collection of shoes and another fashion breakthrough--a quilted black nylon tote bag with a gold-chain strap that was a takeoff of the famous Chanel bags. In 1989 Prada branched out into clothing.

By the end of the '80s Prada had stores in New York, Paris, Madrid, and Los Angeles. In the 1990s, Prada pulled out of several retail accounts as its own stores began sprouting up like luxury Gaps. This expansion had the advantage of allowing Bertelli to control the environment in which the products were displayed. (Control is a strategy he is fond of: Everything Prada sells is made by it or by a company it controls.) In terms of the product, too, Bertelli kept innovating. In 1993 the company introduced a less expensive line called Miu Miu, the nickname of Miuccia. In 1994 it was clothing for men and in 1997 a line of activewear called Prada Sport, which is on track to sell $200 million of goods this year. Cosmetics and home furnishings are planned. Not everything worked quite as intended. The 1996 burnt-orange and avocado-green prints, for example, were well represented at discounters the next season. But Prada's track record is so good that even its bad ideas are regularly filched--fashion's highest form of flattery.

To understand what makes Prada so influential, you have to understand what it is not. Prada is not beautiful like Dior, classic like Armani, sexy like Gucci, or tacky like Versace. But at various times it is each of those things. Prada, when it is on its game, is the perennial Next Big Thing. To the untrained eye, Prada products look a bit, well, strange. The skirts can seem dowdy, blouses baggy, shoes ungainly. Orange-suede drawstring booties and black mink vests with nylon hoods are not for everyone. But to the fashion intelligentsia, Prada is fashion's future--and its objects are works of art. A Prada store even looks like a gallery. The walls are a soothing tea green, the shoes are displayed like sculpture, a pair of bikini pants and a bra are exhibited under glass. "They're far ahead of everyone," says Stacey Kaye, the merchandise manager at Henri Bendel.

Prada needs to be. Customers looking for the Next Big Thing are a lot harder to please than the customers of all-American style. Prada's core customers take fashion very seriously. To meet their demands, Prada must change constantly without veering off into the banal or the unsellable.

Bertelli is responsible for managing this balancing act. Miuccia Prada is the head designer, but Bertelli oversees everything the company's designers do. And when he and Miuccia disagree? The yelling begins. This type of management is unusual in a fashion CEO; typically, the business brains leave the creative to the creatives. Bertelli "is very much into the product," says Patrizio di Marco, a senior executive at Louis Vuitton and former president of Prada's U.S. operations. "He can redo completely a collection of bags in an afternoon." As unusual as a CEO-designer is, what really makes Bertelli stand out is that he knows how to push fashion to the edge--think Lucite shoes and rubber dresses--and also to sell it. Many fashion houses are so ahead of the times they can barely meet the payroll.

By comparison, Bertelli says Prada's revenues have grown on average 25% a year for the past five years, and he expects them to reach nearly $1 billion this year. (Prada is a private company, but Bertelli provided FORTUNE with audited annual reports.) In 1998, the figures show, Prada had a net profit of $77 million. That's not a great return, but Bertelli maintains that his costs are high because he's aggressively expanding the business. Overhead, for instance, had increased from 38% of sales in 1997 to 43% in 1998. Unlike other luxury-goods brands, Prada pretty much held its ground during the Asian downturn: Some 33% of its revenues came from the region last year, vs. 37% in 1996. Bertelli slashed prices in Asia to maintain market share during the slump, a decision that looks wise now that things are improving. And thanks to the new stores, revenues in the Americas were up 48% in 1998.

Bertelli loves products, but to keep the Prada demand at fever pitch, he is ruthless with them. To get the pick of Prada, you've got to get to the stores early because the must-have items of the season go quickly. And they won't necessarily be back. In 1994 Prada's bestselling bags were those black quilted nylon totes. Bertelli decided to phase them out. Why would anyone kill their most popular line? To move on to "next."

Next is usually the instinct of youth. Bertelli is 52. What kind of 52-year-old could be responsible for the Teflon-wool hiking skirt in stores this season? Well, he has gray hair, and when he met with FORTUNE he was wearing a white, short-sleeved, button-down shirt (he's said to love Brooks Brothers), with pencils in his breast pocket. Black-rimmed glasses rested in front of him on the table. This is the man whose name stirs up jaded fashion execs? This is the visionary behind one of the most influential fashion companies in the world? He looks like a professor.

To stay ahead of the fashion world, Bertelli sucks information, impressions, all he can, from everyone and everything around him. "He is an intelligent sponge," says di Marco. Bertelli puts it more floridly: "It is not fashion that changes lifestyles," he says. "It's lifestyles that change fashion. Many designers have not realized that yet." The results of Bertelli's constant search for inspiration can be seen in Prada's chic take on the fanny pack and its Technicolor L.L. Bean-ish boots. "Anytime an object communicates something, it can become fashionable," Bertelli believes.

Bertelli's roots belie his fascination with things arty and modern. He describes himself as "a normal guy" but admits he has workaholic tendencies. His father died when he was a boy, and his mother ran a shoe store in Arezzo. When Bertelli was still a teenager he started his own business--making and selling bags and belts. By 20 he had three people working for him. "I have always worked," Bertelli says. "And I have always had fun." Eventually Bertelli had fun making shoes and other leather goods under the names Sir Robert and Granello. Then he met Miuccia.

The couple and their two sons live in her family's 19th-century villa, which is filled with contemporary art by the likes of Dan Flavin and Brice Marden. Bertelli's friends say he is an excellent cook who invites favorite staff members home for dinner. He's an avid sailor who has spent some $50 million of the company's money--again to the consternation of his peers--to enter a Prada team in the America's Cup race next year.

But according to former employees, Bertelli is also a nightmare of a boss: a micromanager with a temper. He is known for frequently shouting at anyone who doesn't follow his instructions or at, well, anyone who is around at the wrong time. "The environment is very unprofessional, terror-stricken," said one recruiter who has worked with the company.

The big question for Prada's future is, Can a man with Bertelli's obsessive need for control manage a group of diverse brands from different countries, each endowed with a visionary of its own? Even Bertelli isn't sure. "The issue of managing another brand is a mystery to me," he admits. There's also the danger that if you take Bertelli's attention away from Prada, you take the spirit away from the company. And then, of course, there is the perennial question asked from the sidelines of the runways each season: Can Prada still deliver the Next Big Thing?