Microsoft reshuffled its management team on Tuesday in an effort to make it more nimble as the company tries to lift its growth and compete with fast-moving rivals like Google.
Under the plan, seven business units will be collapsed into three divisions, each led by an executive who will carry the title of president.
The idea is to push more decision-making down into the businesses, and that means that the company's two longtime leaders -- Bill Gates, co-founder and chairman, and Steven Ballmer, chief executive -- will have to delegate more authority to their chief lieutenants.
"We need to improve agility," Ballmer said in an interview.
Microsoft portrayed the reorganization as a step to exploit the growth opportunities of the coming year, when the company will introduce a flurry of new products including a new version of the Windows operating system, an upgrade of its Office productivity suite, developer tools and the next generation of its Xbox video game console.
But the move also comes at a time when Microsoft is facing many challenges from competitors who are not like the traditional software companies that Microsoft has consistently beaten back over the years.
Google, for example, has made Microsoft look sluggish as it has consistently outpaced its larger rival in Internet search and seems to have taken an early lead in new technologies like satellite mapping services and desktop search. And much to Microsoft's irritation, Google, the Silicon Valley start-up turned powerhouse, has successfully wooed some of Microsoft's leading engineers.
The Linux operating system, developed by programmers freely sharing code, is a very different sort of challenger from what Microsoft has faced. Other newcomers, like Salesforce.com, are delivering technology used by businesses to do things like track customers over the Web instead of as a software product.
All these rivals are exploiting the Internet and increasingly customers prefer software that is delivered as a service over the Web. Microsoft clearly recognizes the shift. And as part of the reorganization, Microsoft announced that Ray Ozzie, a pioneering software technologist who joined Microsoft when his company, Groove Networks, was acquired this year, will serve as chief technology officer in charge of driving the software-and-services strategy within the company.
Ballmer described this blending of software and services as "a bit more a paradigm shift" than some of the transitions Microsoft has made in the past.
Microsoft's competitors, industry analysts say, can often move more quickly because they can bring new technologies to the marketplace over the Web, while Microsoft's business strategy has been to try to bundle most of its innovations into its flagship product, Windows.
Yet as the Windows operating system has become larger and larger over the years, the sheer tasks of building and debugging it have become enormously complex. The next version of Windows, called Vista, includes an estimated 50 million lines of code, and will be introduced next year, five years after Windows XP.
"Microsoft faces a huge bottleneck problem," said Michael Cusumano, a professor at the Sloan School of Management at the Massachusetts Institute of Technology. "Microsoft has to change. There's no doubt about it. But who knows how far and how deep this will go."