In a statement on the Adelaide website, the Crows said the decision to "part ways" after three seasons came after an extensive review of the club's entire football operations.
The sacking comes despite Sanderson having two years left on his contract.
In his first season in charge in 2012, Sanderson took the Crows to within a goal of the Grand Final - they were beaten in a preliminary final by five points by Hawthorn.
But the Crows finished 11th last season and 10th in 2014.
Chairman Rob Chapman, directors Andrew Payze and Mark Ricciuto, head of football David Noble and Sanderson were involved in the post-season analysis, which came after players, including key forward Taylor Walker, reportedly criticised the coach and some of his assistants in their exit interviews.
"Brenton is a quality person and accomplished coach, but recent weeks have unearthed a need for change," Chapman said.
"Both parties have realised they have different perspectives on where we are at as a footy team.
"It is a tough decision but one the club feels pushes us closer to realising our ambitions.
"We would like to thank Brenton for his contribution and wish him every success."
The statement said the club would carry out a nationwide search for a new senior coach.
The decision to sack the 40-year-old was described by Adelaide's inaugural captain Chris McDermott as "the most brutal decision this club has made".
"Other people at this football club must fall on their sword for respect to Brenton Sanderson," McDermott said on his sports show on Adelaide radio station 5AA.
"Decision-makers must also say 'I'm party to this ... I have failed in my duty to the Adelaide Football Club'.
"Brenton Sanderson had enough ticks in the boxes, enough credits up, to see out his contract for the next two years."
Last December, Sanderson extended his contract with the Crows until the end of the 2016 season.
Sanderson, 40, leaves the club with the highest winning percentage of any Crows coach, after 39 wins and 30 losses.
Former Adelaide captain Simon Goodwin, now senior assistant at Essendon, is among the likely candidates for the coaching role.
Goodwin has already been approached by Melbourne about the successor to coach Paul Roos at the end of 2016.
Interim Essendon coach Mark Thompson is also likely to be sought after although on Thursday morning he denied any interest in the position.
Sanderson's sacking comes two days after the appointment of Andrew Fagan as CEO.
"We've got to look at the football program and ensure that we've got the best football program in the AFL – that's a controllable for me," Fagan said on Monday.
"In my time in rugby, in my time at the AIS, that is a controllable – you can't always control injuries, you can't control the decisions of officials but what you can control is putting the right people in the right seats.
"From that success will come."
Sanderson played 209 matches with Adelaide, Collingwood and Geelong between 1992 and 2005, and was appointed Adelaide coach in 2012.
Sanderson will front the media in Adelaide on Thursday afternoon but chairman Rob Chapman will also conduct a separate media conference on Thursday morning to fully explain the club's sacking of its coach.