"We want to create a slimmed down company with strong brands", Diess said, explaining that Audi would form the group's core brand in the premium segment with a goal of overtaking Mercedes-Benz and BMW.
He takes over from Matthias Mueller, who was appointed in 2015 at the height of the diesel emissions scandal.
The promotion of Diess to the top job was widely expected after he helped reinvent the VW brand as a more profitable enterprise, though Mueller had been expected to serve for a longer period.
The crisis has so far cost the company more than 25 billion euros ($31 billion) in buybacks, fines and compensation as well as massive reputational damage.
Analysts cheered Mr Diess' appointment.
Diess, who has been head of the VW brand since moving from BMW in 2015, will also assume direct responsibility for research and development and vehicle connectivity.
Turkey says was informed ahead of air strikes on Syria
The Turkish Foreign Ministry has commented on the operation launched by the US, UK and France against the Syrian regime. Erdogan told May that the only way to long-lasting peace in Syria was a "political solution", the source added.
Sanford Bernstein analyst Max Warburton said Diess' track record of cost-cutting points to a more efficient VW under his leadership. The executive and supervisory boards "have resolved to extensively revise the group's management structure", VW said.
"We will emphatically address the special challenges that lie ahead of us, especially in electromobility, digitisation and new mobility services", he told a press conference at the group's Wolfsburg headquarters. Poetsch said that, whatever moves the company makes with the truck operation, Volkswagen won't cede control of the division.
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 scandal erupted.
The company made other changes in top posts.
Hans Dieter Pötsch, chairman of the supervisory board, said Diess was the right manager to ensure VW Group secured its position as an global vehicle-maker, as well as being instrumental in shaping the future of personal mobility.
Gunnar Killan, formerly secretary-general of the VW Group Works Council, has been named to the Group Board of Management for Human Resources. Lastly, Porsche sports auto division head Blume has been promoted to the top management body of the entire organization.