The review, which will alter much of the organization of the Department of Homeland Security, is the first change to the agency since its inception in 2003.
"I have concluded that some structural changes are needed at DHS to improve mission performance. Our department must drive improvement with a sense of urgency," Chertoff said Wednesday. "Our enemy constantly changes and adapts, so we as a department must be nimble and decisive."
Chertoff stressed the alterations were based solely on the department's efforts to minimize the dangers terrorism and other catastrophes pose to Americans.
"DHS must base its work on priorities driven by risk," said Chertoff. "Our goal is to maximize our security, but not security at any price. Our security regime must promote Americans' freedom, prosperity, mobility, and individual privacy."
Under the newly realigned agency, functions and departments will be placed into three general areas intelligence, operations and policy.
The shakeup includes the creation of a new undersecretary for policy who will be charged with a broader array of responsibilities, including planning, international affairs and private-sector offices.
He also ordered the creation of a stronger directorate for preparedness. This new division would oversee grants to state and local governments, and include a new chief medical officer to coordinate bioterrorism issues and responses and a new assistant secretary for cybersecurity and telecommunications.
Chertoff additionally outlined a modified approach to intelligence within the agency under a new chief intelligence officer who reports directly to the secretary.
"A new Office of Intelligence and Analysis will ensure that information is gathered from all relevant field operations and other parts of the intelligence community; analyzed with a mission-oriented focus; informative to senior decision-makers; and disseminated to the appropriate federal, state, local, and private sector partners," DHS said in a statement.
"We are not trying to rearrange the deck chairs," one senior official told the Washington Post ahead of Chertoff's announcement. "We are trying to look at what the mission is and understand very specifically how we need to be structured to accomplish that mission."
Chertoff launched his review of the sprawling agency less than two weeks after assuming the top job from the first Secretary of Homeland Security Tom Ridge.
The department's announcement came as the Bush administration and Republican leaders continued to draw fire from Democrats for not supplying enough money to protect the nation.
"We cannot seem to get the leadership, the planning, the money and the values right to do homeland security the way it should be done in our country," Sen. Hillary Rodham Clinton, D-N.Y., told a news conference Tuesday.
Both Democrats and Republicans have moved to add substantial money to the $32 billion homeland security budget to bolster security on the nation's subways and rails following last week's deadly bombings in London.
"Rail has been abjectly neglected," Sen. Charles Schumer, D-N.Y., said according to the New York Times. Schumer pointed out that an average of $7 is spent on security per airline traveler, while that spending only averages one cent per rail passenger.
The move to add money to homeland security budget comes as political fighting between large states and smaller populated states continue to flare on the Senate floor.
On Tuesday, the Senate roundly rejected efforts by Sen. Dianne Feinstein, D-Calif., and other large-state senators to direct more homeland security money to higher-profile targets, like New York, San Francisco and Chicago.
Instead, the upper house approved a proposal by Sen. Susan Collins, R-Maine, that allocates some 70 percent of the funding be allocated based on the Department of Homeland Security's risk assessments while preserving significant grants for smaller states.
During his speech on Wednesday, Chertoff called for more flexibility in how the department spends its preparedness dollars, saying, "Federal money should be distributed using the risk-based approach that we will apply to all preparedness activities."