City surrendered their Premier League crown to Chelsea last season and were knocked out of the Champions League at the last-16 stage by Barcelona in a tie which Pellegrini feels highlighted the difference in quality between his side and the European champions.
“We need to improve the squad because the club wants to keep progressing year after year and not for the lack of titles,” Pellegrini told Chilean newspaper Mercurio.
“Teams always need new faces and there is a qualitative leap that City has to make.
“That was demonstrated against Barcelona. But I’m in a club that is growing because it has the economic potential to.
“There is a great distance even with major clubs in Europe and we are trying to do to shrink it.”
City’s priority targets this summer are believed to be Raheem Sterling, Paul Pogba and Kevin de Bruyne, in stark contrast to 12 months ago when Financial Fair Play regulations restricted their actions in the transfer market.
“When you need a team to be strengthened is when it comes out champion,” added Pellegrini. “It is important renewal.
“It is not an excuse, but we did not have to be the favourites when Chelsea, Liverpool, Arsenal and Manchester United could spend what they wanted.”