Microsoft chief executive Steve Ballmer is to retire from the technology giant within the next 12 months.
Shares in Microsoft, criticised for its slow response to the booming market for mobile devices, leapt 9% on the news.
Mr Ballmer, who last month unveiled a restructuring to address the criticism, said in a statement: "There is never a perfect time for this type of transition, but now is the right time.
"We need a CEO who will be here longer term for this new direction."
The world's biggest software company has created a special committee to find a replacement. This committee includes Microsoft founder Bill Gates.
Mr Ballmer, 57, succeeded Mr Gates in 2000. The two men met in 1973 while studying at Harvard University, and Mr Ballmer joined the company in 1980.
Microsoft emerged as the undisputed leader in the technology sector, and became the world's largest company by market value.
But the company had been criticised by investors recently for not reacting quickly enough to the way Apple and Google have led the way in mobile devices.
Microsoft struggled as consumers began to shun desktops and laptops in favour of tablets and mobile devices.
While its Windows software is used on the vast majority of PCs, Microsoft made little impact in the fast-growing tablet and smartphone segments.
Microsoft's transformation plan, announced last month, is trying to address that.
In a memo to staff last month, Mr Ballmer said that the changes meant the company was "rallying behind a single strategy as one company - not a collection of divisional strategies".
The aim, he said, was to react faster to changes in the market.
Andrew Bartels, analyst at Forrester Research, said Mr Ballmer has been rightly criticised for being "caught flatfooted by the shift to tablets".
But he added that he should get big credit for successful products such as the Xbox and Bing.
"The problem for Microsoft is its revenue primarily comes from sales to business. It should be viewed more like IBM, but is viewed as consumer, like Apple," he said.
Mr Ballmer's planned departure comes shortly after activist investing fund ValueAct Capital Management took a small stake in the company, and started agitating for a change in strategy and a clear succession plan.
Despite the recent criticism, the timing of his decision to go surprised analysts.
"Yes, this was a surprise, especially considering how close it is to the recently announced strategic overhaul towards devices and services," said Sid Parakh, an analyst at McAdams Wright Ragen.
Born in 1956, Mr Ballmer grew up near Detroit, where his father worked as a manager at the Ford motor company.
Having graduated from Harvard with a degree in mathematics and economics, he worked for two years at Procter & Gamble as an assistant product manager and attended Stanford University Graduate School of Business before joining Microsoft.
The company has more than tripled revenues and doubled profits under Mr Ballmer's leadership.