Starting off the new year with pink slips is never fun, but it looks like it will be a necessary move for Yahoo (YHOO). Reports that the “other” search engine will lay off hundreds from its workforce of about 14,000 surfaced earlier this week. Although company spokesperson Diana Wong would not specifically confirm or deny the rumors, she did say that “Yahoo has embarked on a multi-year transformation that includes making tough decisions about the business to help the company grow” and that the company “plans to invest in some areas, reduce emphasis in others, and eliminate some areas of the business that don’t support the Company’s priorities.”

As we all know, “tough decisions” and “reduce emphasis” are code words for layoffs, so expect some downsizing to occur at the Sunnyvale-based company, most likely later this month when it releases its fourth-quarter earnings.

At a party in Palo Alto Monday night, several Yahoo employees joked about who would volunteer to take severance packages. But the layoffs are a serious matter – in addition to sluggish revenue growth and a plunging stock price, Yahoo hasn’t delivered exciting new products in recent years. At the Consumer Electronics Show in Las Vegas earlier this month, the company failed to generate a lot of buzz in spite of the fact that it had a much bigger public presence than rival Google – CEO Jerry Yang gave a keynote speech and the company had a giant white tent set up at the show for media briefings and partner meetings. Yang did unveil a cool (though far from revolutionary) futuristic mail service that will combine e-mail, text and instant messaging along with multiple social networking accounts, but he didn’t say when it would be available. He also announced that the company would open up its mobile platform to outside developers. While welcome, neither one of these are quick fixes to anything.

What’s more, while Yahoo leads in display advertising and its various sites get more monthly visitors than Google (according to ComScore), it lags in search and other services. It’s got plenty of lackluster products that need to be dropped or consolidated, including Yahoo 360 (a largely unpopular social network), auctions and music. The popularity of social networking sites like Facebook and MySpace certainly hasn’t helped the Web portal either.

So at least theoretically, concentrating on its search engine, e-mail service and growing its online ads and mobile deals could be good for the company. Last June, when Yang took over as CEO of the company, he said that his “immediate and overarching priorities are to realize Yahoo’s strategic vision by accelerating execution, further strengthening our leadership team and fostering an even stronger culture of winning.”

Layoffs rarely instill a culture of winning among employees, but at least it’s looking like Yang is finally on his way to refocusing Yahoo’s efforts on the things that matter.