Can I share a secret with you? I have an affinity for collecting guitar exercises that borders on the unhealthy. You know what I'm talking about—these are the kinds of guitar maneuvers that are less about music and closer to fretboard gymnastics. They aren't something you would want to hear but they can be fun and rewarding to play. But they need to be deployed with a healthy sense of artistic balance. If you focus too much on them you start to sound like a robot, which is presumably not what you're after.
Let's get the obvious statement out of the way first: if all you do is practice exercises you're going to sound like an exercise every time you play. I think we can all agree that this is not what most of us want to do. We want to play music .
With that out of the way the next question is if there is a place for the mechanical exercise? There's a viewpoint held by some of the most influential musicians ever that such exercises are a waste of time. Certainly it's hard to argue with their results. But I think with the right perspective mechanical exercises do have a place as long as we recognize their strengths and limitations. How much (or little) of them you include in your practice is a matter of personal choice.
So what are these exercises trying to achieve? If we stand way back and try to broadly categorize them, I think we can split them into two camps: warmup exercises and training exercises.
Warmup exercises prepare you to play at a given moment. They limber up the muscles and get you mentally prepared to play. They allow you to "get in touch" with your instrument and get a feel for how your hands, guitar, amp, and environment are all responding today.
Warmup exercises are not going to make you better before you perform. They're a preparatory ritual that transitions you from hum-drum daily existence to time focused on playing music. They won't make you faster, cleaner or more musical.
Think of any athlete getting ready for a game. Whatever they're doing on the field isn't going to improve their technique between when they arrive at the stadium and when the game starts. But the acts of running, kicking, and throwing all help that athlete prepare mentally and physically.
On the other hand, training exercises are focused exclusively on practicing and optimizing some mechanical movement. The dangerous thing about training exercises is that they're pretty divorced from actual music. If you spend too much time on them you run the risk of getting really good at performing un-musical things (and only those things).
So to get the most out of them (assuming you're interested in the first place) requires understanding their limitations and putting them in the proper perspective. I view training exercises as ways to simplify a tricky mechanical issue. If I can't figure out how to train myself with a musical example, I'll resort to something more "geometric".
For example to groove alternate-picking the best place to start would be to develop and master your own home-grown batch of face-melting alternate-picking licks. But then you have to deal with note selection and tricky fingerings as well as navigating various scale patterns. So to simplify things you can resort to "dumbing down" the fretting hand to repeatable geometric shapes and just getting your fingers to wiggle the same across all of the strings. Hence the dreaded "quasi-chromatic" exercise:
It's not very pleasant to listen to, but it is a great way to get your hands working together on alternate-picking. Once you start to get this down you should probably think about transitioning to something more musical—even something as pedagogical as running scales up and down. You can keep this exercise around, but use it as a warmup and treat the scales as your "self-improvement" exercises.
As you continue to graduate from one technical challenge to the next, don't keep around the old exercises. They're simply bridges to the next plateau or like booster stages on a rocket. They propel you to your next destination, but are pretty useless once they're spent. Figure out how to enhance or mutate them into something more musical.
Working on sweep picking? Once you get a basic three-string sweep down (above), figure out how to create a cool little progression out of it and play the hell out of it. This is where you'll start to mine some very rich creative territory for developing your own licks, style and repertoire. Here's an example of the same basic three-string sweep applied to a (roughly) E Dorian kind of sound:
Too shreddy-sounding to you? Take this as a creative challenge and figure out how to turn that mechanical motion into a musical idea that really speaks to you. When you start marrying expression with technique (which does not necessarily mean "speed") you are starting to get into some pretty deep, heady territory with your instrument.
If you're not careful, you might get lost for hours in a deep meditative state with your instrument and your own creativity. Damn. What a shame that would be.