...economic theory says dominant firms adopt strategies that undermine their dominance ...
This isn't an enthusiast site, and I'm not a car guy. My family didn't have a second car growing up so tinkering with one never became a hobby. My attitude is horribly utilitarian: a car's function is to get me from point A to point B. So my own vehicle is 24 years old, my secondary one is 14 years old (while my wife's is only 8 years old). When I go on long trips I try to rent a car. And when I visit auto suppliers as a PACE judge or otherwise do the limited travel in which a normal academic engages, I also rent cars.
That said, I have written on this blog about the logic of a leading firm to "never be first" (in its heyday this was the case at GM, and in the past two decades became an operating motif at Toyota). Furthermore, there is an internal bureaucrat logic at large companies. I've not interviewed people about this, so I'm not being my normal careful academic self in stating it, but I surmise that if you're an ambitious engineer / designer / marketer at Toyota, you wanted to be associated with the Scion (Akio Toyoda's pet project) and with Lexus (prestige and profits). To work on the Camry would be a ho-hum posting. You wouldn't be using it as a platform to launch new technologies. It isn't a platform for future products for developing markets.
That would be quite different at a Hyundai or at today's GM. Hyundai started out with a very small market presence, both quantitatively and prestige-wise and in the size of its cars. The Sonata received a lot of attention, details well done including NHV, but I've not driven one for a couple years so don't know the new model. GM needs to reconquer the sedan market. I've driven both the Malibu and the Impala -- the latter so quiet that I had to double-check that I'd turned on the engine, and with a "clean" interior. I was impressed.
Then there's the Camry – I drove a new one with a few thousands miles on it. It was noisy, wind noise in particular. Then there was an occasional vibration from somewhere in the instrument panel, a matter of both design and (poor) build quality. Next was the instrument panel itself. I counted 12 active functions in the speedometer area, a cacophony of visual information (the mixed metaphor seems appropriate). Speed. Tachometer. Miles per gallon performance. Engine temperature. Odometer. On and on. Other than the speedometer, you really had to take your eyes off the road to decipher these functions – and it wasn't clear why a driver of a modern, automatic transmission family sedan would want a tachometer or most of the other functions. Dysfunctions, actually. There was also a large and hard-to-use LCD display -- and the gas mileage information on it didn't match that found next to the speedometer. Furthermore, the hands-free phone function didn't work consistently, particularly dialing out. The developers clearly hadn't done their homework on testing the bluetooth protocols of various phones against their system. Finally, it drove like a modestly responsive boat. That may be what older drivers want – and by older, I mean those pushing age 80. I don't think that's really their target market in theory, and in practice age 70-something drivers wouldn't be particularly receptive to the boatload of gadgets confronting them every time they got in the car.
So, this is congruent with economic theory. A dominant player plays it safe, and puts its resources into growth areas and pet projects of senior management. Over time of course they lose their dominance. But this sort of thing is not easy to turn around, viz. GM's experience. Toyota has a well-entrenched bureaucracy, structured in ways that date back to when they were an exporter of models developed in Toyoda City. On the marketing side in the US there was Toyota, and Southeast Toyota, and Southwest Toyota, rather than a national structure. And they've bought into the upmarket strategy, with profits (and internal kudos) from Lexus and not small cars. That no longer matches their actual market base and production base, and it leaves them ill-suited to tap new markets such as China and India.
I strongly suspect that this is well-known at Toyota itself; after all, there was an internal coup in Toyota that elevated Akio Toyoda earlier than planned under the normal bureaucratic progression, even before the recall scandal. The Camry suggests however that organizational dynamics are deep-seated and have to date resisted change.