Diess said that he will work to increase the efficiency of synergies across the group's companies, highlighting the importance of streamlining decision making processes in order to adapt to the fast-changing auto industry.
The carmaker said it will reorganise its 12 brands by creating six new vehicle divisions and a special arm devoted to China, its largest market.
Mueller, who formerly headed Porsche, unexpectedly took over as chief executive officer in September 2015 when Martin Winterkorn resigned over cars that had been rigged to cheat on emissions tests.
Dieselgate has so far cost VW more than ß25-billion (R370-billion) in buy-backs, fines and compensation, and it remains mired in legal woes at home and overseas.
Diess made the disclosure at his first news conference as chief executive at VW's headquarters in Wolfsburg, Germany, on Friday.More news: Mary River Turtle: Rare 'Butt-Breathing' Reptile Joins Endangered Species List
The new structure will include three brand groups: volume products, premium and super premium. The strategy also mandates that the automaker introduce 22 new electric models by the middle of the next decade.
Hans Dieter Potsch, Chairman of the Supervisory Board said, "Matthias Muller has done outstanding work for the Volkswagen Group".
However, in May 2017 prosecutors in Stuttgart said they were investigating Mr Mueller over suspicions he may have known about the diesel cheating before it became public.
Shares in Volkswagen closed almost two percent higher to 176.60 euros ahead of the closely-watched board meeting, outperforming the Dax index of leading shares that was up almost one percent.
Osterloh's comments come after repeated clashes over Diess's drive to cut costs and improve profits at the carmaker's core VW brand, where Diess was handed the reins only three months before the Dieselgate emissions scandal erupted.
"Diess has no problem making enemies", the Sueddeutsche Zeitung daily wrote, recounting how the "tough-as-nails" executive drove a hard bargain with suppliers as head of purchasing at BMW. He helped steer the company out of its diesel emissions scandal and into a new era of investment in electric cars.