Kaellenius told investors that compact vehicles like the Mercedes-Benz A and B-Class vehicles had helped rejuvenate the brand, but would not be the main priority for devoting resources in future.
"This is not where the main thrust should go, we should not become a competitor of the volume makers," Kaellenius said during a virtual strategy presentation.
Investor confidence in Daimler gradually improved in recent months after the automaker navigated the unprecedented industry slump triggered by COVID-19 better than feared. But electric-car leader Tesla zoomed past all traditional manufacturers to become the world's most valuable automaker while Daimler and others wrestle with revamping their legacy operations.
Daimler said it will cut fixed costs, capital expenditure and R&D costs by more than 20 percent by 2025 compared with 2019 levels as part of a strategy overhaul of its Mercedes-Benz business.
Cost cutting and efficiency gains will help lower the company's break-even point, the company said. Manual gearboxes will be dropped as an option, and the variety of combustion engines on offer will be cut by 70 percent by 2030.
Luxury cars will also take less time to build. The new Mercedes S-Class takes 25 percent less time to assemble compared to the predecessor generation vehicle, Daimler said.
Margins should improve as purchasing costs come down. For its electric cars, Daimler is seeking to cut the cost of battery systems to below 100 euros ($117) per kilowatt hour by mid decade.
Daimler aims to release a new software vehicle operating system, known as MB.OS, by 2024 and to use over-the-air updates to generate an operating profit of 1 billion euros ($1.18 billion) by 2025 from digital services which include parking and charging transactions.
Mercedes has flanked its full-electric EQC utility vehicle with a plug-in minivan called the EQV. It plans to start output of the compact EQA hatchback later this year and rolled out a fresh version of its flagship S-Class last month.
The S-Class sedan will get a fully-electric sibling called EQS next year, which will be based on the company’s first dedicated electric-car platform.
Profits from large luxury cars will be key to financing restructuring costs aimed at making Mercedes more efficient. The brand has outsold luxury-car rivals for years, but returns have slumped below the level of mass-market peers such as PSA Group.
Reuters contributed to this report.