The plan calls for a reorganization of Microsoft into three large divisions led by individual presidents, each reporting to Steve Ballmer, Microsoft's chief executive.
Jeff Raikes will head up the company's Business division, which will house Microsoft's Information Worker group (which includes its Office product line), and its Business Solutions packaged applications group.
Kevin Johnson and Jim Allchin will be co-presidents of the Platform Products and Services division, which will comprise Windows Client, Server and Tools and the MSN division. Microsoft saidwill hold that new position until he retires, once the company ships Windows Vista at the end of next year.
Robbie Bach will be president of the Entertainment and Devices division, which will oversee games and mobile device development.
The huge reorganization is designed to streamline the company's decision-making process and improve product development, Ballmer said in a statement.
In the past several months, some insiders and former employees have said that Microsoft has become too bureaucratic and process-driven to compete with nimbler competitors such as Google.
"Our goal in making these changes is to enable Microsoft to achieve greater agility in managing the incredible growth ahead and executing our software-based services strategy," Ballmer wrote in an e-mail sent to employees on Tuesday.
The restructuring will help Microsoft jump on opportunities that arise, said Israel Hernandez, an analyst at Lehman Brothers.
"There's not a reason they can't dominate a lot of these emerging markets themselves," Hernandez said.
The massive change indicates a deliberate shift within Microsoft to emphasize hosted. By bringing its MSN group into its main product unit, Microsoft intends to accelerate a move to hosted software-based services, Ballmer said in a statement.
"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," the CEO said.
Ray Ozzie, who joined the company as one of its three chief technical officers earlier this year, following Microsoft's acquisition of Groove Networks, will expand his responsibilities to drive the software-based services strategy.
"Under Ray's technical leadership and weaving together both software and software-based services, I see incredible opportunity to better address the changing needs of our customers' digital lifestyles and the new world of work," Ballmer wrote in the e-mail.
The reorg has been in planning stages since August, when, a former Wal-Mart Stores executive, to take over as chief operating officer, according to sources.
At the time, Microsoft said that Johnson, who was serving as sales chief, would move to an unspecified new role once Turner joined Microsoft this month.
Early reaction to the reorg was generally positive. "The alignment makes very good sense, given what people are doing now and what their strengths are," said Michael Gartenberg, an analyst at Jupiter Research.
Gartenberg said it was too early to say whether the move marks a dramatic shift in Microsoft's overall strategy: "We know who the players are--now we have to find out what their game plans are."
Mark Stahlman, a software analyst and technology strategist for Caris & Co, agreed the reorganization makes sense for the software maker.
"Microsoft ties everything together," Stahlman said. "Having these crosslinks in their technology makes sense for them to map it out in their management structure."
But another analyst questioned the effect the change would have on the linked development of Office and Windows.
"It looks like they did, to some extent, what the Department of Justice couldn't," said Gartner analyst Michael Silver, referring to a split between the Windows operating system division and the Office division that was a possibility from the federal government's antitrust lawsuit. "I could see where this could make it harder for Windows and Office groups to work together, and they do need to."
But Silver doesn't expect smoother operations out of the plan. "We're skeptical that this will change their execution at this point," he said.
Follow the leader
The promotion of Ozzie, who will report directly to Chairman Bill Gates, underscores just how important services have become to the company. "Microsoft sees software as a service as a part-answer to the maturing software market," said Rob Helm, director of research at Directions on Microsoft.
Ozzie's background means he is suited to the task, said Jamie Friedman, an analyst at Fulcrum Global Partners. "Ray Ozzie is a valuable technology resource, and his role now will be more delineated," Friedman said. "It's a better use of Ray and his skill set and training."
Another significant aspect of the reorg is the promotion of Eric Rudder, who is seen by some observers as a possible future leader of the software giant.
Rudder will take on a new role, focusing on the company's overall technical strategy. He'll report directly to Gates. Rudder, who heads Microsoft's Server and Tools division, will move into his new post following the shipment of new versions of Microsoft's Visual Studio development tools and SQL Server database later this year.
One potential downside to the reorg is that morale among Microsoft's rank-and-file could be adversely affected, since Allchin and Rudder, two of the company's top technical experts, will depart key leadership positions, analyst Helm said.
"Microsoft is maturing, and they really need marketing and sales people at the top, but I am not sure employees want to hear (that)," Helm said. Johnson, heir to Allchin's throne as Windows chief, is not a geek, but has a sales background.
With the realignment, the new Platform Products and Services division, which includes Windows, will cover roughly 60 percent of Microsoft's revenue.
The Business division is expected to be the source of roughly 28 percent of the company's revenue, while the Entertainment and Devices Division will make up roughly 10 percent of the company's business.
Shares of Microsoft were virtually flat at $25.86 a share in later afternoon trading on Tuesday.
CNET News.com's Joris Evers and Dawn Kawamoto contributed to this report.