They appointed Cloud Guy to run the show, at a time when Cloud was a buzzword. No big surprise there from a trendy board/investor point of view, but to anyone with technical chops that move went against basically every major strength Microsoft had left and played straight to their weaknesses.
Based on historical trends, I suspect MS get 2-3 disasters with Nadella at the top before he gets forced out. The difference this time is that now Microsoft itself can probably only survive 2-3 more disasters on the Vista/Win8 scale before it ceases to be a major player in the industry at all.
The worrying thing is that there is no clear successor, with neither Linux nor OS X having the application base to be comprehensive competitors to desktop Windows yet, while the average web app is still a child's toy in comparison to serious software (and often a child's toy with serious security and privacy concerns). It is possible that the 2010s will be remembered as the decade when progress in software development reversed and the industry became dominated by cheap, "good enough" software that left professional/power users out in the cold, though I have some hope that OS X and the relatively polished, diverse and sometimes disruptive applications running on it will take over before all is lost.