Microsoft, the world's dominant supplier of computer software, but criticised for failing to grasp the importance of the internet fast enough, has responded to criticism by making wholesale changes to its internal organisation, sweeping seven business units into three divisions.

Steve Ballmer, Microsoft’s chief executive, said: "There’s a whole set of decisions that might have had to percolate to Bill Gates," the company's founder and chief executive, "...because the seven business groups are now contained in these three divisions, I think that ought to lead to crisper, faster actions on certain kinds of decisions we need to make."

Under the changes, Ray Ozzie, a veteran of the software industry, takes charge of improving Microsoft's web-based services. He moved to Microsoft in March when it acquired his company, Groove Networks.

Its Information Worker unit, which is responsible for Office software under the newly formed Microsoft Business Division, headed by Jeff Raikes.

Robbie Bach will lead Microsoft’s entertainment and devices unit, which will deal with the company’s home and entertainment activities and its mobile and embedded devices efforts.

Mr Ozzie, who is best known for writing the first versions of the popular Lotus Notes software, later bought by IBM, will be responsible for services including Windows Update, Microsoft’s online security tool. It is possible that he will be charged with overseeing the distribution of future versions of Windows over the internet.

Web-based applications are widely regarded as essential for Microsoft’s future. The shake-up coincides with the 30th anniversary of Microsoft's founding, and comes when it is facing its biggest challenges from the likes of Google and Yahoo!

Google, the internet search and advertising company, has introduced online communications and e-mail services which overlap with Microsoft products. The move piled pressure on Microsoft, which controls around 90 per cent of the desktop PC market through its Windows software, to move into new markets.

Microsoft also faces a threat from opensource software groups, such as the Mozilla Foundation. Mozilla developed Firefox, an internet browser available for free over the internet, which has taken market share from Microsoft’s Internet Explorer.

However, Microsoft insiders today questioned the short-term impact of the reorganisation. Noting that the company's former seven-way division will still be reflected in profit and loss reports, they indicated it may be some time before the full effects of the moves will be felt at an operational level.

Microsoft shares fell 16 cents to $25.84 in trading yesterday on the Nasdaq Stock Market.

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