What the heck is Angela Ahrendts doing at Apple?

But right now, Ahrendts (Most Powerful Women, No. 16)—whose tailored jacket, crisp white blouse, crucifix, and towering heels provide quite a contrast to the T-shirts and sneakers of the store’s team (not to mention their colorful collection of beards, tats, and piercings)—must talk scents, after spending a good 20 minutes chatting, shaking hands, and posing for selfies.

The question poser, store manager Marc Flynn, receives the full Ahrendts treatment: intense eye contact. Beatific dimpled smile. Thoughtful pause. A deep breath. “The smell of a cigar,” she finally says with mock gravitas. “Cigars. My father smoked cigars his whole life, and my husband once in a while does. And when he does, it reminds me of my father. It’s a heartwarming thing.”

Olfactory preferences aside, there are lots of things people wonder about Ahrendts. Why did she, the celebrated architect of Burberry’s turnaround, give up her post as CEO and uproot her family to become, at best, the third or fourth most powerful executive at the $183-billion-in-sales tech giant? Here’s another: What does Apple (AAPL) think Ahrendts—whom it paid an astounding $73.4 million in stock and cash in her first year—brings to a company that has redefined the technology and retail sectors, one that, at this point, seems not to need a whole lot of anything? And a third: What has she accomplished so far?

On a visit to Apple’s Cupertino headquarters, Fortune spoke with Ahrendts, 55, and her boss, CEO Tim Cook, about her role and their longer-term plans. The first in-depth interview Ahrendts has given at Apple, it answers some of the questions above—and reveals a lot about the company’s evolving philosophy.

Ahrendts has implemented some important changes since arriving, including unifying previously separate units that handled online sales and store sales. But so far her impact on the stores themselves has been modest to the outside eye.

What Cook hired her for was not just her retail savvy—after all, Apple’s stores were already the most profitable in the world—but also her leadership. Ahrendts is the kind of person who can conjure passion from people selling scarves, trench coats, or—now—wearable computers disguised as watches. Says Sir John Peace, chairman of Burberry and Standard Chartered: “She motivates people. She inspires people. And she is the sort of person who wants to see things succeed as a team. It’s a rare quality.”

Cook lured her out West to bring even more shine to what is already one of the great successes of this—or any—era. Complacency has felled many legendary companies, and Apple, a place where transformative hits have become routine, knows it is not immune.

Ahrendts believes the key to the company’s future is not just marvelous products, but also engaging and energizing its nearly 100,000 employees, 60% of whom now work in the $21.5 billion retail division. “If you’re going to employ people anyway,” she says, “why not make them the differentiator? They’re not a commodity.” Now that there are 459 Apple stores in 15 countries, many people have their first Apple experience inside a store—a first impression that could forever tarnish the brand if it’s not good. “Burberry was about building a relationship,” she says. “But it was always about selling an amazing product that you would have forever. Apple is just a deeper relationship with a much broader constituency. Because it’s everybody.”

That human touch is one reason the Apple stores have been wildly successful from the start. Steve Jobs and Ron Johnson, who set up the original Apple stores in 2001, shook up retail with the Genius Bar and its helpful, highly trained workers.

Now Apple wants to go even further. It has slowly become clear that Cook, who took over just before Jobs’ death in 2011, is developing broader goals, in which the company uses its success to accelerate social change. The ideas, it seems, are just taking shape, but they involve enlarging the role of its stores. Apple has always intended for each of them to be a community center; now Cook and Ahrendts want them to be the community center. That means expanding from serving existing and potential customers to, say, creating opportunities for underserved minorities and women. “In my mind,” Ahrendts says, store leaders “are the mayors of their community.”

What would Apple’s late co-founder think of such touchy-feely ideas? Is Ahrendts onto something, or is she merely an executive at a high-flying enterprise with the luxury of $203 billion in cash to try out well-intended but possibly ill-conceived experiments? Apple is, of course, a publicly traded company, with the largest market value in the world. Is its reach for something beyond profits an example of corporations at their best? Or is it a sign of hubris, the equivalent of the old truism that a company has peaked when it decides to build a lavish new headquarters? (Speaking of which, Apple’s $5 billion Norman Foster-designed “spaceship” HQ is set to open next year.)

It’s far too early to say, of course. But one thing Ahrendts is adamant about: The initiatives will make business sense for the company.

“The more technologically advanced our society becomes, the more we need to go back to the basic fundamentals of human communication.”
—Angela Ahrendts

Ahrendts hardly needed a new start before she came to Apple. The small-town Indiana native had topped off a 30-year retail career, which included stops at Warnaco, Donna Karan, and Liz Claiborne, by becoming Burberry’s CEO in 2006. She managed an improbable feat, making the once overexposed plaid cool again with the global young and connected. She did it by understanding that that crowd was experiencing even brick-and-mortar retail through a digital lens, at the time a rare insight.

Ahrendts amped up Burberry’s online sales and brought technology to her boutiques—screening runway shows there, for example—and to her executives. On the first day iPads were available, she presented each member of her management group with one—and brought in Apple Geniuses to help with setup. She later provided one to every store worker. “She saw it all coming,” says Stacey Cartwright, Burberry’s former CFO and now chief executive of Harvey Nichols. Ahrendts was photographed for the cover of Fortune’s Asia-Pacific edition in 2012 holding not a Burberry trench coat but an iPad.

And then Cook called. After Johnson left Apple Retail to become the CEO of J.C. Penney (JCP) in 2011, Cook hired John Browett, a British retail executive, to expand the stores. Cook quickly realized he had made a grievous error: Browett, he says, was “not a cultural fit.” (Used to running chains with thinner margins, Browett inflamed Apple’s retail staff by cutting work hours and benefits. When he left after just five months, Cook reversed the changes.)

What the CEO wanted now was someone who could revitalize the retail culture—as well as integrate Apple’s online and retail operations, which were still, in 2014, run separately. He struggled. Then he checked out Ahrendts. “I visited Burberry stores and spent some time online. And you could tell that she got it at a deep level.” Cook was also fascinated by her 2011 TEDx talk, “The Power of Human Energy,” which laid out her vision of leadership, one more about people than process and the team rather than the hero—one that squares with Cook’s own vision. One key line: “The more technologically advanced our society becomes, the more we need to go back to the basic fundamentals of human communication.”

Says Cook: “The moment I met her, that was it. And then it was all recruiting.”

The courtship was a slow one. Ahrendts would have to relinquish her CEO title, move her husband and three kids—the youngest of which was still in high school—5,000 miles from London to the Bay Area, and change industries. She was nervous. She says she told Cook, “ ‘Don’t believe everything you read. I’m not a techie.’ And he looks at me, and he goes, ‘I think we have enough techies here.’ And I said, ‘But you don’t understand. I’m not even really a great retailer. I hired great retailers.’ And he said, ‘Well, last time I looked we were one of the highest-productivity-per-square-foot stores of any company on the planet. So I think we have a lot of those too.’ ”

The introverted Cook lights up when asked how Ahrendts has done in her 16 months at Apple. “It felt like she’d been here a decade her first day,” he says. “I knew she was going to be off the charts, but she’s even more off the charts than I thought. She came in so fast, there was no [learning] curve. I’ve never met a single individual like that before.”

Part of Ahrendts’s initial strategy for fitting in at Apple was to stay under the radar (the company agreed to participate for this article only when it became clear that Fortune was writing it regardless of whether she consented to be interviewed). As a result, few outsiders have a handle on what, exactly, Ahrendt has been doing, apart from small tweaks like new shirts for the sales staff (they can choose between T-shirts and polos), moving iPods to the back of stores, and deciding to no longer use the iPad to show prices on display tables. Says Marc Heller, who runs consultancy RetailSails: “My struggle with understanding what she does is I don’t know where her imprint is, other than the obvious.”

This was by design. “I didn’t dare say anything prior to six months,” Ahrendts says. “My dad used to tell me, growing up [citing Abraham Lincoln], ‘It is better to remain silent and be thought a fool than to open your mouth and relieve them of all doubt.’ So I kept remembering that and chose not to overcommunicate.” In the meantime, she embarked on a Hillary Clinton–style listening tour, visiting more than 100 stores, call centers, and back offices so far, answering questions, hearing complaints, and bestowing her infectious energy and empathy on employees. (You could call her Apple’s chief emotive officer.)

What did she learn from all that listening? First, that the store culture needed a jump-start. Morale had suffered with the management turnover, and employees complained about a lack of trust. For example, store workers have to submit to bag searches at the end of the day to ensure they haven’t stolen anything. (Apple says the searches, which continue today, are common industry practice.)

One of the first things Ahrendts did was institute a now-weekly video communication in which she lays out the game plan. It may seem small, but every Apple store employee I spoke with cited it as a welcome change. The video is a combination pep rally and strategy session, with three key thoughts expressed in a few minutes. (Ahrendts has training in pep rallies: She was a varsity cheerleader at New Palestine High School back home in Indiana.)

Last February, to better understand retail staffers’ perspectives, Ahrendts launched Share Your Ideas, an internal app in which they can propose improvements or lodge complaints. (Apple had a process before, but it was mostly ad hoc and not widely used.) Ahrendts says she reads every comment, and within 48 hours someone from her team responds.

One innovation to emerge from this program was the Genius Bar’s new Concierge service. Customers no longer must wait in the store; they can receive a text when the appointment is 10 minutes from starting and another one when the Genius is actually ready. The original idea came from an associate who saw it in practice at a department of motor vehicles office in Dallas. Says Carol Monkowski, Apple’s vice president of retail strategy: “I thought, ‘If the DMV is outdoing us, I am frightened.’ But the great news is they told us this, and we are now in phase 1 of it.”

Ahrendts is also creating a career path for Apple’s retail employees. Generally, only managers could be promoted to, say, run a bigger store. But last June, Ahrendts set an annual goal of moving 10% of employees around the world. Now Geniuses and regular associates can apply for transfers to, say, a store in China—or to headquarters. Says Stephanie Fehr, the company’s vice president of retail talent: “It’s just a huge developmental advantage for people here.” (Another obvious way to improve morale would be to boost compensation. Store employees receive $13 to $18 per hour, according to Glassdoor, much better than most other retailers but not exactly the kind of paycheck that builds a global career.)

There are signs Ahrendts is having an impact. Apple is notoriously stingy when it comes to releasing internal data, but the company says retail employee satisfaction has risen since Ahrendts arrived, and the latest numbers are the highest they’ve ever been. Says Fehr: “She is a uniter.”

“It felt like she’d been here a decade the first day. I knew she was going to be off the charts, but she’s even more off the charts than I thought. She came in so fast. There was no [learning] curve.”
—Tim Cook

Better communication was critical to Ahrendts’s biggest task so far: the integration of Apple’s retail and online sales groups. Even as its products allowed companies to streamline operations, Apple retained a bulky structure with separate leaders, staffs, and marketing plans. In the Jobs era, retail reported directly to him, while online reported to then-COO Cook. It was the classic Apple approach of creating small teams and having them focus on their own work. But it also created silos just as customers began to toggle seamlessly between physical and online shopping. “We always thought that having them separate, you would wind up with each one being better,” says Cook. “But at some point down the line the customer changes.” Ahrendts understood this at Burberry, and since more than 80% of the people who come into an Apple store have already visited its website, she says, it was silly not to operate the groups as one.

The internal merger was no easy feat. It required combining teams and cross-training Apple retail employees in online customer service, both in the stores and on the site itself. Associates were taught to use the site to help customers complete a sale if they preferred to buy that way, and online support teams needed to learn the way things work in the store. It also necessitated a different mind-set—one that put the customer, not the location, at the center.

The unified approach got its first real test with the April rollout of the Apple watch, the first product to be introduced since Ahrendts arrived. Initially, one could inspect the device in a store but order it only on Apple’s website. That was partly because of component shortages, it now appears, but with in-store staff ready to help customers place orders online, Apple says it avoided lost sales.

As of mid-June, you could buy the watch in any Apple store—and, as of August, at Best Buy (BBY), which has reported early sales far beyond expectations. Cook says Apple was able to begin selling in other channels earlier than he had anticipated, in part owing to the improved feedback loop. “Because the stores are so quick at learning what works and what doesn’t,” Cook says, “we’ve gotten to that point quicker. At one point I thought it might be the beginning of 2016 before we were in that position, so I feel really good.”

The launch also required that workers be trained to do things like put the watch on someone’s wrist, help make fashion assessments, and, of course, not lose track of the product—something that doesn’t happen with iPhones, which are connected to the table. These are all things that Ahrendts’s Burberry experience informs.

Ahrendts and Cook say watch sales have surpassed expectations. IDC estimates 3.6 million have shipped so far. A few surprises: People are buying more of the larger watches—regardless of gender—and several bands at a time. But not everyone thinks the product is a must. (I tried one and concluded the last thing I want is another device that constantly runs out of power exactly when I need it.)

Apple has always wanted its stores to play a town-square role in communities, hence the classes and events that have always taken place there. But these days, more than ever, Cook talks about the transformation his company’s stores can effect. “We started with a powerful view that the store was the place for service and support,” he says, “that it was a place to explore what products could do. But staying where you are is never a good solution.” As he puts it, “[Angela and I] have a common belief that the stores can play a key role in the communities that they serve.”

What do Cook and Ahrendts have in mind? They won’t talk specifics yet—indeed, the ideas still seem nascent—but it’s clear they want to attack the diversity gap in technology. “We’d like to have more women and minorities coding,” Cook says. “If we’re able to provide teaching to large groups, particularly underrepresented groups, then we can move the dial in a major way.” The store is a natural place to launch such experiments, he says. Needless to say, they could also benefit the company by expanding the quality and quantity of coders.

If these sorts of changes mean slightly less in profits per square foot in the short term, so be it. “There’s not a retailer in the world that pays what we pay to service customers,” says Ahrendts. “Trust me, I know. Nor do they pay associates to serve small and medium-size businesses in every community. We’re the IT department for the local dry cleaners.”

If successful, this community concept would create new and loyal customers and add to an already striking legacy. Not only have Apple’s products changed the way people interact, but its sheer financial and market clout is breathtaking, analogous to, say, Standard Oil and GM at their peaks. It is, in fact, incumbent upon its leaders to use that clout well. That helps explain why Ahrendts is happily fielding questions about smells at 8 on a Wednesday morning in Boston. “This is not retail,” she says, an evangelical quiver in her voice. “This is Apple.” 

To see the full Most Powerful Women list, visit fortune.com/most-powerful-women.

A version of this article appears in the September 15, 2015 issue of Fortune magazine.