Wayne Gretzky, who owns a share of the team and is its managing partner, will return for a third season as coach next fall.
But the front office felt the fallout from the team's third consecutive last-place finish in the Pacific Division. Also dismissed were director of hockey operations Cliff Fletcher and assistant general manager Laurence Gilman.
"The bottom line was how would we best be served going forward," Coyotes chief executive officer Jeff Shumway said at a news conference. "We believe we need a general manager that can help us build from the inside out."
The Coyotes finished last in the Western Conference for the first time since the franchise came to Arizona and their 67 points were the team's fewest since that move. Phoenix hasn't made the playoffs since 2002.
Barnett, Gretzky's close friend and his agent for 21 years, had signed a four-year contract extension before last season. He had been general manager since 2001, when Gretzky - the NHL career scoring leader - joined the organization as managing partner.
"This is probably one of the harder days of my life," Gretzky said. "Mike Barnett's meant more to me than probably anybody other than my father."
Shumway and Gretzky said the team was in far better shape than it was when Barnett took the job five years ago. But Shumway didn't believe Barnett and the others were best suited for developing a young team after failed attempts to build a contender via free agency.
"The future of this team is young, talented players," said Shumway, who took the Coyotes job after Jerry Moyes took over controlling ownership a year ago. "We need a general manager who has experience building a franchise from the inside out. The franchises that you see now that are successful start off with their own talent that they can develop in their minor leagues."
The Coyotes want to hire a general manager from outside Gretzky's vast circle of friends.
"Let's put it this way," Gretzky said. "It probably is a benefit to the franchise if the person who comes in, that I don't know him. I want to get the best person and hopefully somebody I don't know."
That would help Gretzky be more forceful in decision-making, Shumway said.
"Wayne is the most respectful person I have been around in my life," Shumway said. "He is very careful to never use his notoriety to push an idea or to overwhelm a room or to get his way. He is just very deferential and very respectful to people. I think that as we go along, Wayne will get more comfortable in being a little louder in his opinions."
Shumway declined to name any candidates, other than to say that most work for other NHL teams and many are in the playoffs.
Gretzky expressed support for the decision, even though it meant firing Barnett, a man he has known for 31 years.
"I talked to Jeff many a time over the last month about the good things that have gone on in this organization," Gretzky said, "the positive things we have done as a group here, and the good things that Mike Barnett and his staff have done.
"On the other side, I understood where Jeff was coming from. New ownership came in, and this group wants to win, and I told them I would support them 100 per cent. No problem."
Fletcher, inducted into the Hockey Hall of Fame in 2004, was hired as Phoenix general manager in 2001 and promoted to executive vice president of hockey operations the following year. Fletcher was general manager of the Calgary Flames for the first 19 years of the franchise's existence. He oversaw the start of the team in Atlanta in 1972 and its move to Calgary in 1980.
He was chief operating officer, president and general manager of the Toronto Maple Leafs from 1991-97.
"Had it not been for Cliff and him being here back in 2000 and 2001, this franchise might not be here," Gretzky said. "He was the guy that really was the glue that held this franchise together when it was in desperate times."
Gilman spent 13 seasons with the Coyotes, the last six as assistant general manager. Earlier, he held several positions, including director of hockey administration and legal counsel.