Putting my thoughts back here from the other thread for posterity:
(these are mostly my thoughts, not 100% hard facts!)
NEC’s incremental hardware development strategy, mentioned elsewhere in this post, infected the industry (sega, nintendo) in different ways. But for NEC itself, it bit them in the butt, because they seemed to see the next generation (PC-FX) as incremental as well. Sure it was new hardware, but some of the internal components (soundchip, etc) were similar, making it feel like only a stutter step to the next gen. On top of that, the anime market they were courting was small - they dominated it, but it wasn’t big enough to sustain an entire platform, as Bandai saw with the Playdia.
the PC-88 and PC-98 were the dev hardware of choice for so many developers. It made a lot of sense to make games for NEC consoles and computers when you were using their products to make those games. So when they lost that market, they lost that edge of ease of use and relatively similar architecture.
Talking more about ignoring developers, the PC-FX clearly addressed none of their needs. So many publishers big and small were reliant on the PC Engine or PC-98 as their main market - nihon telnet, falcom, face, right stuff, masaya - when they made the PC-FX, very few publishers came along for the ride, which leads me to speculate they weren’t consulted about what they actually wanted from a next gen PC Engine. and when they failed to continue their PC line, these publishers had to scramble and abandon ship en masse, and of the major PC Engine or PC-98 publishers I can think of, only Falcom is still going today. You can point to the exact moment these publishers fortunes shifted as around 1995-1996, when 3D became dominant and NEC flopped out of the market (it took a bit longer with PC-98 though).
As @Pasokon Deacon notes, losing the PC battle was the biggest issue, and it’s because they, like everyone else in Japan, failed to predict the dominance of Windows. But they should have, because it was already in progress around the world. Had NEC created a “similar but different” approach ala Apple OS vs Windows, or a cross-compatible approach, we might have seen three major operating systems. I could envision a situation like with Yahoo Japan, where it exists as its own entity, though Yahoo has faded to dust. Ultimately NEC hopped on the windows bandwagon quite late, just reskinning boxes, when they could have been Japan’s IBM instead.
Ultimately it feels like they got too cocky with their position, but it also feels like bureaucracy must have gotten in the way, because they were doing SO well for SO long that it took a lot of fumbling, mismanagement, lack of vision, and poor execution to make that fall. They were THE market leader in Japanese PCs, so there may have been some hubris there, thinking they couldn’t be defeated, though they were within one generation.