The early Luftwaffe under its chief of staff, Walther Wever, toyed around with the concept of the Uralbomber, large four-engined bombers that would conduct strategic bombing of the Soviet Union. There were some resulting designs, such the Ju-89 and Do-19, but the Germans soon abandoned these efforts. Both during the war and after there was significant hand-wringing over the Luftwaffe's to build on the Uralbomber designs as a lost opportunity for Germany. Wever's death in 1936 eliminated a prominent advocate for strategic bombing, but also the limitations of German aviation industry arguably played a larger role in the abandonment of the four-engined bomber than Wever's death. German industry could not produce large numbers of four-engined aircraft, especially engines which were an enormous bottleneck for German industry. German bomber doctrine after Wever increasingly embraced the Schnellbomber concept of fast medium bombers that could quickly reach their targets before any interception.
Producing these advanced medium bombers was well within the means of German industry and the Luftwaffe entered the Second World War with a large force of medium bombers like the He-111. Although wartime experience proved many of the concepts behind the Schnellbomber false, it became one of the principles for German approach to designing bombers during the war. The basic idea of a Schnellbomber was that its speed meant it could evade enemy defenses and achieve surprise against enemy targets. Many of the wartime medium bombers hewed to this conceptualization of the bombers as a fast and maneuverable plane that would strike hard and strike fast. The He-111 was quite fast at the time of its introduction in 1937/38.
But in many ways, the Luftwaffe was adapting a design doctrine- the Schnellbomber- around Germany's own limitations and industries. Some of these limitations were non-technical in nature. The enforcement of the Versailles Treaty in the end proved rather toothless, but the early Luftwaffe and German aviation industry treaded very cautiously when designing its early generations of bombers. This meant that some of these aircraft began their life as purportedly civilian crafts such as airliners (He-111) or mailplanes (Do-17). This also suited German industry quite well because there was considerable inexperience with designing large military aircraft for mass production. Twin-engined designs were much safer to produce in mass numbers as they were not outside the experience of German industry to both design and set up mass-production lines.
German industry ran into a considerable problem though in not only meeting the ever-increasing production goals set by RLM but also in terms of designing new aircraft models quickly. In theory, the He-111 and Do-17s were to be phased out of production by the end of the thirties for the Ju-88. But failures in Junkers production as well as the firm's overselling of the 88 led to the older bombers remaining in production. There was also a huge bottleneck in the form of aero-engines. The DB 600 series soon emerged as the forefront of German engines, but the demand for these engines was such that Daimler-Benz never could deliver. The He-111 P series, which was using the DB 601 engines, had a curtailed production run as the H model, powered by less-powerful but more plentiful Jumo engines, became the dominant wartime He-111 variant. The problems the Germans had with production on all levels made a four-engined bomber force something of a nonstarter. German industry not only could not deliver enough of the easier to produce medium bombers, but shortfalls in the production of engines would have further weakened a hypothetical four-engined bomber force.
Although there is a lot of focus on the myopia and failures of German industry and RLM with its design and production strategies, such criticism sometimes loses sight of the fact that these policies did give Germany a rather strong and advanced bomber force by 1939. Williamson Murray's rather trenchant take on strategic bombing and the too sharp line distinguishing between tactical and strategic airpower:
For the purposes of {Strategy for Defeat: The Luftwaffe 1933-1945}, the use of the term "strategic" bombing is enclosed within quotation marks, as this author believes that the use of the word by airpower enthusiasts to connote a particular form of bombing distorts the classical meaning of the word. The difficulty in which the misuse of this word had led historians might be best characterized by the following question: In May 1940, given Germany's military situation, what was the best strategic use to which the Luftwaffe could be put: supporting the army's drive to the Channel and the crushing of French and British landpower, or attacking French factories and cities? The answer is clear in a classical sense. Within the existing definitions of "strategic" and "tactical" bombing, it is not so clear.
Williamson also notes that strategic bombing, despite Douhet's promises, is a form of attrition warfare, requiring a force structure which German production could not supply. So it does make a degree of strategic sense for the Germans to focus on building aircraft their industry could supply and adapting a doctrine that was more suitable for these bombers.
Part of the problem with evaluating the German bomber force's performance during the war is that many of its bombers were flying far past their intended replacement period. A 1939 decision to focus all future production on only four aircraft types- the He-177, Me-210, Bf-109, and Ju-88- proved to be disastrous as only the latter two aircraft were able to resolve technical hurdles to become operational. A good deal of the blame for this problem was the leadership of Ernst Udet at the RLM technical office. Udet, who replaced Wever after the latter died in a crash landing, was like Göring an flying ace from the last war and chosen for his job largely because of his connections to the Reichsmarschall. Udet was patently unsuitable for his job and often wasted precious time and resources on dead-ends and chimeras like making every bomber capable of dive attacks. Udet's leadership further exacerbated RLM's tendencies towards focusing too much on technical issues and solutions at the expense of the bigger picture. The National Socialist organization of industry also played a role in that it gave far too much leeway to manufacturing chiefs in the design and production process. Additionally, Udet and the RLM's leadership as a whole were incapable of thinking flexibly about new roles and uses for aircraft despite their focus on high-technology solutions. Roles and the aircraft for them sometimes had to be implemented on the ground as opposed to Berlin. Such was the case with the FW-200 which was derived from a Japanese order of a militarized version of the airliner and came into service largely at the behest of Hauptmann Edgar Petersen, an officer of the X.Fliegerkorps (the unit tasked with maritime strike), after he visited a Focke-Wulf plant in September 1939 to ascertain whether or not civilian aircraft could be used for this role.
The He-177 was the baleful culmination of this process in which a large strategic bomber had to maintain the speed of the Schnellbomber and perform similar tactical missions like dive-bombing. The result was a technical monstrosity that performed none of its tasks very well. The US entry into the war meant that Luftwaffe planners had to think in a more expansive geographic scale which prompted the Luftwaffe to rethink the Uralbomber concept and resulted in the so-called Amerika-Bomber design competition. These were large four-engined bombers with enough range to theoretically fly to New York from advanced bases in Europe. The most famous Amerika-Bomber design was the Me-264. Yet the Amerika-Bomber could not escape many of the problems that hamstrung its predecessor as German industry had difficulty in producing large, technically sophisticated aircraft. The war exacerbated many of these difficulties, creating enormous shortages of high quality materials. The Amerika-Bomber prototypes were largely disappointing aircraft and the program turned out to be a diversion of German resources.
Sources
Corum, James S. The Luftwaffe: Creating the Operational Air War, 1918-1940. Lawrence: University Press of Kansas, 1997.
Homze, Edward L. Arming the Luftwaffe: The Reich Air Ministry and the German Aircraft Industry, 1919-39. Lincoln: University of Nebraska Press, 1976.
Militargeschichtliches Forschungsamt. Germany and the Second World War, Volume I: The Build-Up of German Aggression*. Oxford: Clarendon Press, 1990.
Murray, Williamson. Strategy for Defeat The Luftwaffe, 1933-1945. Maxwell Air Force Base, Ala: Air University Press, 1983.
Cheaper to run, cheaper to build, cheaper to pay the salary of a smaller crew, cheaper to buy fewer bombs to send off fully loaded, cheaper to buy less fuel for a full tank, cheaper to build shorter runways to base them off of. While being able to carry enough payload to ruin a lot of peoples day over a far larger area vs smaller fighters and strike aircraft armed with just a single bomb or clutch of much smaller ones. They were the good middle ground.
Now in some cases that is hyperbole but you get the idea. Big heavy bombers were expensive to design, buy, and keep flying. And in many cases could be overkill. If you didnt need to be going a 1,500 miles in a B-17 why try to equip a squadron to do it when some B-25's could do the job and have a smaller footprint at the same time, especially as it would take many squadrons of fighters or dive bombers to carry the same ordnance a sortie of medium bombers could handle. While more squadrons of medium bombers could also generate more sorties against more targets than an equally costly but smaller force of heavy bombers.
The cost could also be markedly different, a B-25 cost about 100k in 1945, a B-17, 275k, and a B-24 350k. Thats a big difference that also carried over to carrying half the crew as well for still being able to carry about 1/3-1/2 the payload of the bigger birds. Its also worth remembering that big heavy bombers require robust development programs and they arent easy to design, something that hampered virtually every nation but the US and UK and forced the medium bomber to the fore as the biggest that could be fielded in large numbers with a quality design.
Certainly, if you compare and contrast light and medium bombers with more specialised counterparts, such as dive or strategic bombing aircraft, they do seem somewhat lackluster. However, the intrinsic value in bomber of this type is primarily derived from their versatility, as where a high-level, high-payload strategic bomber can easily flatten a wide area, it lacks a deal of precision, whilst dive bombers suffer from the opposite problem, having a lack of payload to deliver punch. A medium bomber however can fulfill both the role of close air support and strategic bombing, if perhaps not as well as a more specialised variant. This can actually be seen in the deployments of the He111 which, far from restricted purely to strategic bombing, fulfilled roles as encompassing as maritime patrol, air transport, strategic bombing (for which the Luftwaffe lacked any significant number of actual strategic bombers), and tactical bombing.
This latter case is also worth appreciating, as between the two extremes of strategic bombing and close air support, tactical bombing was where mid-range aircraft such as the 111 were most useful, attacking installations, columns, and other immediately vital war assets that might fall outside the remit of close-attack air assets. In the North African desert for instance, the Bristol Blenheim, as well as the B-25 and B-26 bombers, launched attacks on enemy airfields as well as port installations, contributing greatly to Axis supply issues in the region, rather than committing to direct combat, to which these somewhat larger, slower aircraft were less useful than fighter-bombers.
There are a number of studies on the He 111, one of the most recent being Robert Forsyth's. With regards to the utility of bombers, I would recommend Gladman's 'Intelligence and Anglo-American Air Support in World War Two', which covers air operations in the theatre I work on, and helps to highlight how the Allies began to develop a sophisticated and centralised air force in the MTO, including potent bomber units.