Mercedes must produce a car which performs "at all circuits and in all conditions", the team's technical director Paddy Lowe says.
Sebastian Vettel's surprise win for Ferrari last time out in Malaysia ended a sequence of eight victories for Mercedes dating back to last season.
Key to Ferrari's first win since May 2013 was the car's treatment of its tyres in the intense Malaysia heat.
And Lowe concedes Mercedes have "work to be done on that front".
"It is now clearer than ever that there is serious competition for this world championship, so we will continue to work flat out for performance gains," added Lowe ahead of this weekend's Chinese Grand Prix.
"We have a range of new aerodynamic developments for Shanghai and are targeting an improved performance from Malaysia."
Mercedes F1 boss Toto Wolff described Ferrari's Sepang win as a "wake-up call", even though the gap to Vettel was a modest one.
Lewis Hamilton finished second for Mercedes, just eight seconds back, with his team-mate Nico Rosberg a further four seconds behind as he completed the podium.
"This is something you cannot afford to happen often and, although we had two cars on the podium, we have been looking very carefully at every area where we could have performed better," said Wolff.
"Our opposition has raised its game and we must now raise ours even further. We have the weapons at our disposal - and we need to make the most of them this weekend."
|Chinese Grand Prix - past winners|
|2004: Rubens Barrichello (Ferrari)||2010: Jenson Button (McLaren)|
|2005: Fernando Alonso (Renault)||2011: Lewis Hamilton (McLaren)|
|2006: Michael Schumacher (Ferrari)||2012: Nico Rosberg (Mercedes)|
|2007: Kimi Raikkonen (Ferrari)||2013: Fernando Alonso (Ferrari)|
|2008: Lewis Hamilton (McLaren)||2014: Lewis Hamilton (Mercedes)|
|2009: Sebastian Vettel (Red Bull)|
Mercedes's decisions to make an early stop under a safety car and to race mainly on the harder Pirelli tyre were highlighted as contributing factors to Ferrari's win, and Hamilton said the race - and the weekend - had been "particularly challenging".
"I think ultimately we made the best choices we could - but there is always room for improvement," the two-time world champion added.
Team-mate Rosberg said: "We've definitely learned some lessons and it's time to take that to the track in China.
"It's not been a perfect start to my sixth year with the team and I'm determined to turn that around."