The improvement of the Fritz engine is for the most part the result of implanting a huge amount of chess knowledge into the program.
The properties of a chess position are largely determined by the pawn structure, and this is where Fritz has received much more generalised chess knowledge than its predecessor. Another touchy point is king safety. Unlike human beings chess programs tend to be oblivious to dangers looming against the king until these dangers are revealed in concrete variations which the program can calculate. This weakness is not immediately obvious when you play computers against each other, but when they encounter strong opponents it may spell their downfall.
Fritz has also been greatly improved in this area and can detect long-term threats against the king long before they appear in the search tree. This does not just lead to better defensive play, it also causes the program to sense potential dangers to the enemy king and lauch devastating attacks based on these weaknesses. So it becomes more and more difficult to play “anti-computer chess” against the program, while at the same time it has become an even more dangerous opponent for human players.
Finally the search algorithms have been greatly improved, with the new data structure allowing the engine to use its chess knowledge very deep in the tree. That is probably the most significant improvement. Fritz can now find meaningfull moves even in very balanced positions when there are no tactical motifs to guide its choice.
There was always a danger that these improvements would lead to better strategic play against human opponents, but it could fail when Fritz was up against other computers. Fortnunately this was not the case: first tests are showing that it is considerably stronger than its predecessor against other chess programs as well.