The path forward for Microsoft following news of chief executive Steve Ballmer's departure remains murky as the tech giant seeks to get back on the edge of innovation.

Microsoft said it will look at both internal and external candidates to succeed Ballmer within 12 months, but some analysts say it needs to make dramatic moves.

"The world has moved faster that Microsoft's licensed software business model could respond," said Forrester Research analyst Ted Schadler.

"I think it's a good decision for Steve to step down and pass control to someone else, probably an outsider. Microsoft will then face its IBM or GE moment: Keep the company together or break it apart?"

Roger Kay at Endpoint Technologies Associates said Microsoft "is too big and ungainly and has competing goals" and might be better off broken up into smaller units.

"One thing Microsoft has suffered from is the inability to look honestly at itself," Kay said.

"They say they're going to be the king of search, but they're not. They need to look at the businesses not working and turn them off."

And because of Microsoft's size and diversity of businesses, Kay said, "it's hugely problematic to find somebody capable of taking over Microsoft."

When Ballmer took the reins in 2000, Microsoft was the undisputed tech sector leader and the world's biggest company by market value. But in recent years it has failed to keep up with a fast-changing tech sector.

Microsoft's Windows remains the world's main operating system for PCs, but it has had little impact in the fast-growing segments of tablets and mobile phones.

It has been successful with its Xbox gaming and entertainment console, and has mae inroads in cloud computing and business services, but its efforts to get into the tablet market with its own branded Surface have flopped, resulting in an embarrassing writeoff of $900 million.

Analyst Jack Gold at J. Gold Associates said Ballmer was "a masterful salesman" but lost touch with the market, and argues that Microsoft now needs a dramatic change.

"What they need is a leader with a new direction -- a visionary who can bring back innovation and provide products people are willing to spend money on. Unless such a leader is found, Microsoft is in for a continued, albeit slow, decline."

There is no clear heir apparent at Microsoft, yet some analysts have circulated names of current or former top executives who would be candidates.

Some of the names circulated include the former Windows chief Steven Sinofsky; a former Microsoft executive at Google, Vic Gundotra; or executive vice president Qi Lu. But many Microsoft watchers are betting on an outsider.

Citi analyst Walter Pritchard said new blood is likely: "We expect the company to focus exclusively on outside candidates, meaning that is it very difficult to predict who could be CEO and what direction they will take the company."

Kay agreed, saying: "Ballmer has been effectively driving away top tier talent for years, so basically what you've got in the shop now is the 'yes men.'"

Microsoft appears to be in the same pattern as some other tech innovators who lost their visionary leader.

Yet few expect a return of Bill Gates, who remains chairman but has left the operational side to concentrate on philanthropy.

But Kay noted that "it's probable that Gates as the chairman will come in and organize things and it will be a stabilizing factor" during the search period.