Mueller took over the CEO slot at VW in the wake of the fallout from the emissions scandal and was tasked with restoring public and shareholder confidence in the company.
Senior works council members previous year had their salaries cut and bonuses suspended after public prosecutors investigated alleged overpayments at the carmaker, a move that labour leaders are blaming on Blessing, one source said.
The scandal surrounding the Volkswagen associated with intentional understatement of the level of harmful emissions from diesel engines, has erupted in the fall of 2015.
VW's goal is "to safeguard its position among the leaders of the global automotive industry with innovativeness and profitability", said chairman of the supervisory board, Hans Dieter Poetsch in the statement.
As the names suggest, the brands will be divided according to product value, with the likes of Volkswagen, Skoda and SEAT found in the Volume category, while Lamborghini, Porsche and Bentley will make up the Super Premium segment of the business.
Volkswagen Group's new structure will now be composed of six divisions, as well as a specialist China-focused group.
Diess made the disclosure at his first news conference as chief executive at VW's headquarters in Wolfsburg, Germany, on Friday.
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The restructuring comes at an important time for the group as it continues to implement its future growth and technology plan, Strategy 2025, which includes major electrification projects.
Separately, VW said it is preparing its truck and bus division for the capital markets, a step that could include selling shares in the division.
Diess, known as a "very good cost manager", would be "the best solution as a successor for the next five years", he said. In 2015, Volkswagen admitted it had used special devices created to skew results on USA emissions tests.
"We believe we can not control and manage this century, but our group activities will be co-ordinated and our political relationships will be well maintained", said Diess, when asked how the company plans to stay ahead of a constantly evolving auto industry.
Gunnar Kilian who has served as Secretary-General of the Volkswagen Group Works Council until now has been appointed as the new member of the Group Board of Management for Human Resources.
Also, the CEO of Porsche, Oliver Blume, will join the fundamental VW board.