The software giant will realign several existing units into three core divisions—Platforms and Services; Business; and Entertainment and Devices—that better represent Microsofts goals, said Steve Ballmer, Microsoft CEO.
In addition, Ray Ozzie, Microsofts chief technical officer, will assume broader responsibility for developing software based services across all three divisions as the company pushes to offer services and programs alongside competitors Google and Yahoo.
"These changes are designed to align our business groups in a way that will enhance decision-making and speed of execution, as well as help us continue to deliver the types of products and services our customers want most," Ballmer said.
"By bringing together the software experience and the service experience, we will better address the changing needs of our customers digital lifestyles and the new world of work."
Each new division will be headed by its own president.
Microsoft Platform Products and Services division will oversee the Windows Operating System, corporate server software and MSN Web offerings.
The division will be headed by co-presidents Kevin Johnson and Jim Allchin, currently vice president of Windows development.
"We are focused on creating exciting user experiences and enabling developers to build great applications with the combination of software and software-based services," Ballmer said.
"Our MSN organization has great expertise in innovating quickly and delivering software-based services at scale. The platform groups have great expertise in creating a software platform and user experience that touches millions of people. By combining these areas of expertise, we will deliver greater value to our customers."
The fusion of software and Web offerings is a play to improve Microsofts presence in the Web offerings market, where Google and Yahoo have done so well, Microsoft indicated.
Microsoft Business Division, formerly Information Worker business and Microsoft Business Solutions, will deliver software and software-based services for the business market. Jeff Raikes will serve as president.
Entertainment and Devices, a fusion of the current Home and Entertainment and Mobile and Embedded Devices divisions, will produce devices to deliver media for individuals at work, at home and when theyre mobile, Microsoft said.
The realignment comes as Microsoft prepares for a brisk 18 months of product releases and developments in the midsize business market and hosted solutions.
Microsoft also announced that Allchin will retire by the end of 2006.
"I absolutely love this company, and I am fully engaged in making great products," Allchin said. "My passion for Microsoft is as strong as ever. While I will call it a day at the end of next year after Windows Vista ships, Im confident the world-class team of people Ive been fortunate to work with will ensure we execute on our long-term mission."
Eric Rudder remains senior vice president, Servers and Tools, but will report directly to Bill Gates, chairman and CEO, on key development efforts and technical strategy.
Editors Note: This story was updated to correct Eric Rudders job description and to add information about the motives behind Microsofts reorganization.