Microsoft chief executive Steve Ballmer will retire within the next year, as the company struggles to reposition itself in the ultra-competitive tech sector.
"There is never a perfect time for this type of transition, but now is the right time," Mr Ballmer said in a statement.
"My original thoughts on timing would have had my retirement happen in the middle of our company's transformation to a devices and services company."
He added: "We need a CEO who will be here longer term for this new direction."
Microsoft has lost its once-dominant role as a software provider and has also suffered embarrassing software release problems, including the recent Windows 8 release.
The company said its board had appointed a special committee to direct the process of appointing a new CEO.
The committee is chaired by John Thompson, the board's lead independent director, and includes Microsoft founder and chairman Bill Gates, as well as other board members Chuck Noski and Steve Luczo.
During Mr Ballmer's lengthy time working at Microsoft it has grown from 30 employees to more than 100,000, with the firm's value rising from $7.5m to $78bn.
More than one billion people around the world now use the company's products.
Microsoft will now consider both external and internal candidates and is working with executive recruiting firm Heidrick and Struggles.
Investors welcomes the announcement, with share prices surging in pre-market trading in the US.
Microsoft shares rose around 9% in pre-market trading and was up 7.5% at $35.00 (£22.00) in early trades.
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