The memo, leaked to The Wall Street Journal, was entitled "The Peanut Butter Manifesto". It was written by Brad Garlinghouse, senior vice-president at the company, and is named after his theory that the company is spread too thin.
The memo said: "We lack a focused, cohesive vision for our company, we lack decisiveness. We want to be everything -- to everyone." It went on to say that "heads must roll" and that "change is needed and it is needed soon".
Garlinghouse said Yahoo! should cut its staff by as much as 20% as part of a plan to reshape the current business with overlap being eliminated.
"There are so many people in charge (or believe that they are in charge) that it's not clear if anyone is in charge. I believe we must embrace our problems and challenges and that we must take decisive action," the memo stated.
He focused on the need to get rid of a variety of duplicated groups that pit established business units against new initiatives, including music, photos, search, applications, social networks, global strategy and even fundamentally who controls the Yahoo! homepage.
Garlinghouse is understood to have received support for his memo and has been given a team that will look into some of his areas of concern, including job cuts.
The memo comes at a time when faces serious threats from rivals, such as , and , which was bought recently by Google for $1.65bn.
Currently, Yahoo! has more users than its rivals because of the number of its pages, which range from online dating to fantasy sports games, but it is seen as being less focused.
However, its position of leading its rivals is not expected to last with the success of Google. The search giant saw its shares reach an all-time high last week, while Yahoo!'s shares fell so far this year.
In October, Yahoo!'s quarterly results showed a 38% drop in profits to $155m, compared with Google's successful posting of a 70% rise in profits to $733m.
Terry Semel, the Yahoo! chief executive, admitted that its display advertising revenue growth was being hurt by the inventory being made available on rivals such as MySpace and YouTube.
At the time, Semel said: "I am not satisfied with our current financial performance and we intend to improve it. We are not exploiting our considerable strengths as well as we should be and we are committed to doing better."
has also been criticised for its slow progress in negotiations to buy social networking site , understood to be valued at $1bn, following Google's quick acquisition of video-sharing site YouTube for $1.65bn.
Following this news, Yahoo! is also reported to have made a deal with seven US regional newspaper groups, which will mean around 175 regional papers will start putting their job ads on Yahoo's HotJobs classified site from December.
The co-operation will later expand to involve other types of advertising and news content.
The groups are Hearst Corporation, EW Scripps, Belo, MediaNews Group, Cox Newspapers, Lee Enterprises and the Journal Register, which own papers such as the San Jose Mercury News, the Atlanta Journal-Constitution and the Dallas Morning News.
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