The move by the world's largest software maker comes amid a steady decline in PC demand as people turn to tablets and other mobile devices.
Microsoft Corp. CEO Steve Ballmer said in a memo to employees Thursday that the changes mean the company is "rallying behind a single strategy" and organizing the company by function.
Microsoft's new divisions include engineering, marketing and business development.
The company named Julie Larson-Green the head of its devices and studios engineering group, overseeing hardware development and games, music and entertainment. Terry Myerson will lead its operating systems and engineering group, namely Windows.
Microsoft shares rose 50 cents to $35.20 in morning trading.