Mercedes boss Toto Wolff says he expected the team's Formula 1 car to be more competitive in qualifying for the German Grand Prix as the W10 features a "solid upgrade package".
The Mercedes team came to its home race with a package that included revised aero and updates designed to help cure the cooling problems that compromised it in the Austrian Grand Prix.
Ferrari had topped every practice session going into qualifying and Wolff conceded that without technical problems for Sebastian Vettel and Charles Leclerc, Mercedes would have been unlikely to have placed at the front.
"I think we were expecting to be much more competitive," said Wolff. "This weekend we put a very solid upgrade package onto the car. We knew that the straightline speed would go against us here in Hockenheim.
"But with sector three, [which is] similar to Barcelona, and the overheating issue [addressed], we should have stood out.
"And we didn't, all weekend. Fundamentally we are not happy with our performance, and it could have looked much different if Ferrari had finished qualifying."
Asked if Mercedes understood why it had underperformed, Wolff said: "No, it's not understood.
"I think we see that the upgrade package has delivered, we see it on the pressure tappings, but there are so many factors to consider - the specific circuit layout, the Tarmac, the heat, have we completely understood how to tune the car for the aero upgrade.
"So there are many variables which we need to find out and analyse before going to Budapest."
Wolff added that Mercedes was also unsure as to how the car improved from practice through to Q2.
"Sometimes with all this data, and sensors, and the cleverest engineer on the planet, you can't really answer the questions," said Wolff.
"I think we've seen outlap preparation is probably important, and Q1 is crowded, you're not always able to get it right.
"I think that the drivers need to adjust also and, in a Mercedes, maybe Q1 sometimes is not the main priority, but it's more about settling in and preparing yourself for Q2 and Q3.
"We don't know, I think the update package threw another unknown into the equation, another variable, and hopefully by Budapest, we'll understand a little bit more."
Wolff highlighted Max Verstappen as a potential threat in the race, with the Red Bull driver set to start second on the grid.
"It's [the threat] called Max Verstappen, and it's driving well on rough Tarmac, in hot conditions.
"I think Max, and the Red Bulls generally, have shown great race pace. They're handling the tyres well, and definitely a threat tomorrow."
Mercedes had been prepared to replace Hamilton with reserve driver Esteban Ocon after the reigning champion became ill.
Explaining the illness, Wolff said: "There's a flu going around I think in the paddock and he wasn't feeling great.
"It was clear that Esteban was coming from the UK to make sure that if it was going worse, that we were prepared. No more [to it]."