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SEATTLE/SAN FRANCISCO (Reuters) - The sudden departure of powerful Windows boss Steven Sinofsky this week is the first step in a plan by CEO Steve Ballmer to remodel Microsoft Corp as a much more integrated operation in an attempt to take on Apple Inc and Google Inc at their own game.
After nearly 13 years at the helm of the world's largest software maker, which just launched its first own-brand computer, sources inside the company say Sinofsky's departure signals Ballmer's new-found focus on co-operation between its self-sufficient - and sometimes warring - units.
"What I'm hearing over and over is collaboration and horizontal integration is the new mantra," said one Microsoft insider, who asked not to be named. "They (top management) understand that, if they don't move to a model where devices and software are more integrated across the entire Microsoft system, they are in a weak position."
After floundering for most of the last decade, Microsoft is trying emulate the way Apple's software and hardware - such as iTunes and the iPhone - work perfectly together; or how Google's online suite from Web search to YouTube and Gmail are seamlessly joined.
Microsoft - which Ballmer rechristened as a "devices and services company" last month - has all the parts, analysts say, but has failed to put them together. Now Ballmer looks set to reshape the company to try to make that a reality.
"I certainly expect the org chart to look a lot different six months from now," said Brad Silverberg, who ran the Windows unit during its massive growth spurt in the 1990s. "There will be attrition from Steven's (Sinofsky's) people and Steve Ballmer will have a chance to create a more harmonious organization."
Ballmer replaced Sinofsky with two executives with a reputation for co-operation. The move marks the third time in the last few years that Ballmer has replaced a single unit head with two leaders sharing responsibilities.
"Sinofsky really centralized all the power under himself. We'll see how it shakes out from here," said one manager in the Windows unit.
More fundamental organizational shifts could be in the cards.
"A lot of things are up for grabs," said David Smith at tech research firm Gartner. "How the management is structured - there could be more changes."
Sinofsky, a 23-year Microsoft veteran, built up a walled empire around his Windows unit.
His hard-charging but methodical style, which took on the name "Sinofskyization," alienated other groups in the company, especially the Office unit, the other financial pillar of Microsoft's success.
"Steven is a brilliant guy who made tremendous contributions to Microsoft," said Silverberg. "But he was also a polarizing guy and the antibodies ultimately caught up with him."
The decision not to share the latest internal test versions of Windows 8 and keep the Surface tablet a secret until just before its announcement especially upset the Office group, which insiders say accounts for the lack of a fully featured Office suite on the Surface RT tablet.
"All good leaders create friction, but my guess is the cost of doing business with Sinofsky ended up outweighing the benefits," said a former Microsoft staffer who saw Sinofsky operate at close quarters.
"If you work in Steven's team, you love him," said a former colleague who now works for a financial technology firm in Seattle. "If he's outside of your team? That's where his reputation of being hard to work with came from."
Ballmer has made it clear that executives have to work together better. Next year, top managers will get bonuses based on company-wide performance, not just their own unit, which Ballmer hopes will lead to "deeper cross-organization collaboration."
But there is no guarantee Ballmer can radically redirect almost four decades of culture at Microsoft - which he is partly responsible for - that gave Windows primacy and intentionally pitted teams against one another to get the best results.
Nothing will change without new leaders from outside the company, said Trip Chowdhry, managing director at Global Equities Research.
"Microsoft is clinging to the past and they keep bringing in the people from the past. This is a fundamental flaw in the logic," Chowdhry said.
Despite urging collaboration, Ballmer - a 32-year Microsoft veteran who took over as CEO from Bill Gates in 2000 - does not let any junior executive get too close to challenging his authority.
Sinofsky, widely touted as Ballmer's successor for the past three years, was just the latest in a line of would-be CEOs. Over the last five years alone, Ballmer has seen off a clutch of rising stars that were discussed as potential leaders.
Windows and online head Kevin Johnson went to run Juniper Networks Inc, Office chief Stephen Elop went to lead phone maker Nokia, while Ray Ozzie - the software guru Bill Gates designated as Microsoft's big-picture thinker - left to start his own project.
"They've gone through quite a bit of senior management talent in the past few years. The bench is not what it used to be," said Smith at Gartner. "The overall management structure, career path, replacements, succession planning - a lot of that is an issue for Microsoft."
Ballmer's promotion of Julie Larson-Green and Tami Reller to jointly fill Sinofsky's role may only be temporary, Microsoft-watchers say.
"The question is what comes after, like in the next three years," said Rob Helm at Directions on Microsoft, an independent firm that advises business customers on how to deal with Microsoft.
Reporting By Bill Rigby in Seattle and Alexei Oreskovic in San Francisco.; Editing by Edward Tobin, Martin Howell and Andre Grenon