NEW YORK, (

TheStreet

) --

Nokia's

(NOK) - Get Report

Microsoft

(MSFT) - Get Report

strategy will include a new split business structure (mobile phones and smart devices), "significant" job cuts and a narrowing of margins.

Snubbing

Google's

(GOOG) - Get Report

popular Android software option in favor of a partnership with Microsoft to make phones on Windows Phone 7 system, CEO Stephen Elop said the industry will now be "a three-horse race."

Stephen Elop

The move will "change the dynamics of this industry forever," Elop said as he outlined his turnaround strategy for Nokia during the company's analyst day in London Friday.

Nokia's three-year inability to design competitive smartphones and win partnerships in the U.S. has been crushing to the No. 1 phone shop. Not only does it lag behind the leadership of

Apple's

(AAPL) - Get Report

iPhone and Google's Android devices, it has started to fall behind in low-end markets with the rise of Chinese manufacturers.

Investors didn't exactly applaud Nokia's move to Microsoft's Windows, a smartphone system that has had limited success in the four months since it was launched. Nokia shares, which fell 8% Thursday on early reports of the Microsoft shift, fell another 9% Friday on concerns that it will be a long, risky transition to the new so-called Microsoft ecosystem.

As predicted by some analysts, Nokia has decided to take a combined product path for the near-term. Nokia says it will continue with its Symbian phones in the low-priced market and it will bring a MeeGo phone to the market this year with a transition to Windows phones at some future date. The Symbian effort will be phased out over time in what Nokia calls a "harvest" mode.

Nokia says gross margins will take a hit as it pays Microsoft royalties for the Windows Phone 7 system. But, said Elop, those expenses will be offset somewhat by the contributions to the partnership from Microsoft in marketing and development.

The move does eliminate a huge amount of research and development needs as Symbian winds down and MeeGo efforts shift to Microsoft Windows. Elop declined to offer any specific cost cut numbers but said he anticipates "significant job reductions."

Elop said Android and Microsoft were the two best options and that Microsoft stood out as the best way for Nokia to establish a different offering compared to the one-of-many Android devices already in circulation.

Elop said Nokia will contribute in areas like cameras and Navteq GPS mapping service, while Microsoft will power elements like Bing for search and Office applications for mobile.

During his presentation, Elop also detailed a new organizational structure for the company, with two women heading Nokia's two main divisions.

Mary McDowell will continue to run the mobile phone business with a focus on cheap phones for developing markets. And Jo Harlow will run the smart devices unit, which will handle the transition to Windows and presumably the development of superphones and tablets.

A few executives will be bounced out in the shuffle. Though no names were mentioned, Elop said executives in Nokia's North American and China operations will be replaced.

--Written by Scott Moritz in New York.>To contact this writer, click here: Scott Moritz, or email: scott.moritz@thestreet.com.To follow Scott on Twitter, go to http://twitter.com/TheStreet_Tech.>To send a tip, email: tips@thestreet.com.