Microsoft is working with hardware manufacturers and chipmaker Qualcomm to build low-cost phones for emerging markets.
The software giant's new designs would be offered to developers and handset manufacturers to build their own models, and would also collaborate with Lenovo to develop Window smartphones.
Microsoft's VP Joe Belfiore told Bloomberg: "Microsoft also plans to update its Windows 8.1 software and Windows Phone software this spring, helping it target lower-priced devices.
"Microsoft can be more healthy by widening our ecosystem.
"We care a ton about emerging markets."
Microsoft is also signing new Windows Phone licensing agreements with other handset manufacturers including China's Foxconn, Lenovo, ZTE and LG in efforts to boost sales of its OS, which still lags far behind Google's Android.
The US software major is also trimming down the price of Windows 8.1 licenses for low-cost PC and tablet makers by 70% to complete against low-cost products including Google's Chromebooks.