Why Companies stagnate and fail in a challenging markets with high competition?

you have givin the answer in your question,they fail because they invest time,money and energy in a high competitive saturated market where the life cycle of products they compete through are at the saturation and declining stages.

that is why it is wiser to apply  blue ocean strategies when investing and not red ocean strategies.

it is all in the planning stages,if you plan wisely you will reap the benefits.

Companies must feel the pulse of changing market and have innovation strategy to align with what market needs. Market needs keep changing with quickly due to different market segments like, loyal old customers to young generation, who has different lifestyles.

Failing to catch upon this make companies to stagnate and often fail.

Having market team with different taste for different segments is very important to identify what Market needs today and to predict what could be future product for growing generations. They also should have a strong innovation and Development team who can build on the future needs.

Without this survival becomes very challenging with raising competition even from unknown segments. We have many examples of this - Kodak, Nokia, Motorola, etc

The primary reasons of this failure are:

1-  Lack of Market Focus (a.k.a. Segmentation) Emerging high-tech companies often do anything possible to generate revenue and in the process try to be all things to all people. Worried about losing business they avoid segmenting the market and refuse to focus on one or two key segments. As a result the company is unable to adequately serve any one market segment and management is suddenly swamped with support problems and competitors.

2-  Excessive Pace of Product Improvement High-tech equipment is generally used over an extended period of time, is integrated with complementary products, and imposes learning costs on the end user. As such, customers require time to digest and recover their investment in high-tech products and the overall systems in which the products are used. The rapid introduction of new and improved versions can make a customer regret a previous purchase, delay all new purchases, and agonize over similar purchases in the future, none of which are in the long-term interest of the producer.

3-      Incomplete Products Customers view products very differently than the people who create or supply them. In technology-based companies the tendency is to try to sell products on the basis of price, special features and technical specifications. These technical factors are often favored by the engineers and scientists who typically run high-tech companies. The problem is that most customers consider factors such as product support and company reputation to be more important. So the feature rich products created by techies are seen as incomplete in the mind of the customer. Rather than competing on features alone a company should focus on the "intangible" factors that are especially attractive to most customers.

4-      Undifferentiated Products Most high-tech products that fail do so because of a lack of differentiation. Successful companies differentiate their product from all other products on the market. Differentiation is possible on the basis of five fundamental factors: function, time utility, place utility, price, and perception. These five elements can be mixed into an almost infinite variety of patterns.

5-  Channel Mismanagement There's more to channel management than just matching distribution to your target customer or segment. Specific skills are required to effectively manage each type of distribution channel and those skills must be developed internally before significant selling can begin. For example, success with a dealer channel requires a top-flight sales vice president or leader who can guide account or market development, and can introduce dealers to key buyers. And once leadership skills have been developed, it is then necessary to overcome the inherent weaknesses of the dealer channel:

                     i.        Manufacturer has no control over priorities

                    ii.        Loyalty is a function of the dealer's interest in a given product which is determined by demand and the economics of the marketplace

                   iii.        Sales coverage is limited to the dealer's circle of contacts

                  iv.        No motivation to penetrate key territories or accounts

                               v.            Unique management challenges exist for each primary type of distribution channel: direct selling, dealers, manufacturers "reps" or agents, OEMs, alliance partners, and inside sales

6-      Failure to Establish the Right Competitive Barriers Traditional barriers to competition, as defined by economists, are of little value in high-tech. These conventional techniques are mostly designed to prevent market entry and tend not to work in technology-based business. The most effective competitive barrier in high-tech is the perceptions held by customers, prospects, and the supporting infrastructure.

7-      Using Price Alone To Drive Market Transformation It is easy to misinterpret the role price plays in market transformation. And it is a mistake to believe that a high-tech product would be widely used and adopted if its cost was low enough. Price reduction alone does not guarantee mainstream market acceptance. See: the illusion of price-driven market transformation

8-      Improper Use of Advertising More money is wasted on advertising than any other marketing activity. A company cannot establish credibility or create a position in the marketplace with advertising. Advertising is also a poor choice if your target audience is skeptical or if the message you are trying to communicate is complex. Think of advertising as a way to reinforce positive differentials that already exist.

9-  Misinterpretation of the Technology Adoption Lifecycle Model There are two versions of the technology adoption lifecycle model. The original version (introduced in1957 at Iowa State College) describes the market acceptance of new products in terms of innovators, early adopters, early majority, late majority, and laggards. The process of adoption over time is illustrated as a classic normal distribution or "bell curve."

The second version is an adaptation of the original that includes a gap in the bell curve, between early adopters and the early majority. This essentially splits the adoption process into three distinct phases, an early market and a mainstream market, separated by a period of time called the valley of death.

Both versions of the technology adoption lifecycle are useful tools for understanding the way markets unfold and mature. However the second (valley of death) version typically applies to discontinuous innovations, meaning the product forces the user to change behavior.

This is an area of great confusion because not all high-tech products are discontinuous, in which case the original technology adoption lifecycle applies more than its successor.

Another misinterpretation occurs when marketing folks refer to a market as characterized by "all late adopters." Because both technology adoption models are expressed in terms of a standard bell curve, it means statistically, a random sample of any given market or population must contain:2.5% innovators,13.5% early adopters,33.4% early majority,33.4% late majority, and16.0% laggards. So even if an industry is conservative by nature, there will always be a sequence of adoption by different types of buyers.

In either case, the technology adoption model is like Chinese food--you'll be hungry for more guidance in a very short period of time.

Irrelevant Market Research Companies routinely perform the wrong type of market research. Statistical surveys of customer demand do not provide the qualitative information that is needed most. Because the judgments of your target audience often rely as much on perceptions as on facts, qualitative research intended to identify existing perceptions has much greater value in assessing, planning and executing a company's marketing strategy.

Mainly because they don't have an effective competitive strategy to compete in those markets. They either have a valid competitive strategy to enter such markets or don't attempt to eneter them.

10 Reasons why stagnate and fail  in challenging markets with high competition.

1. Complacency. An important aspect of corporate culture, a popular topic these days, is how driven the company is. A small company is usually a reflection of the owner’s needs, desires and personality. Some owners want to take over the world, and some are happy making a living. Still others just want to golf as much as possible. There’s nothing wrong with that — unless you work there and want to grow with the company.

2. The right people. You cannot build a company without the right people. This requires both a great hiring protocol and the stomach to make the changes that become necessary as the company grows. This is easier said than done — especially when it turns out that people who were “right” at the beginning are no longer “right” in their roles as the company grows. The ability to manage these issues might be something of a gift, although it’s also nice to have some luck. But it mostly takes dedication to the process.

3. Lack of standards and controls. This covers a lot of territory, including quality, service and problem resolution. Whether a company enjoys a97 percent customer satisfaction rate or a93 percent rate will have a significant impact on the size of a company over the long run. It’s not enough to have high standards without implementing the control systems that assure those standards are met. Without the controls, you will have good intentions accompanied by bad results.

4. The customer attitude. Not the customers’ attitude but the company’s attitude toward its customers. I can think of few things that are more destructive than employees who regularly dismiss difficult customers as “crazy” and conclude that there is no way to make them happy. The problem is that most crazy customers have sane friends, and word of mouth travels fast these days. Aretha Franklin has the answer: R-E-S-P-E-C-T.

5. Technology. It can be both a blessing and a curse for small businesses. New technologies can do many wonderful things but can also be overwhelming and expensive. Occasionally, they can be nightmares. This might be one of the biggest differences between running a large company and small one. Amassing the financial, technical and staff resources necessary to solve a technology problem can be very difficult for a small company. But there’s not much choice; the market does not stand still.

6. Marketing. This includes everything from branding to advertising to market analysis. How a company executes may be the major driver of its success, but how it is perceived is also crucial — perception, as they say, is reality. The other reality is that small companies can have a difficult time finding resources to help them with this critical part of their business. That means that the success or failure of a small company’s marketing frequently comes down to the abilities of the entrepreneur. Few people are good at everything.

7. Stale products or services. Whether you are talking about products or customers, the market is always changing, and your products and services have to change with it. If you are lucky, the changes are slow and subtle; sometimes, they are dramatic.

8. Lack of investment. Whether it is for more inventory, new technology, a bigger facility, more employees or more equipment, growing companies suck up more cash than non-growing companies. Getting this cash may require borrowing money, finding more investors or using up whatever cash is on hand. It never stops, much to my chagrin. Some entrepreneurs tire of the demands and decide to slow down the investments — and that slows down growth.

9. Stubbornness. It is stubbornness that helped the entrepreneur get the business off the ground, get through the learning curve, survive the recession and cope with every problem along the way. At some point, though, dogmatic adherence to what you know can limit a company’s ability to adapt to change and get to that much-romanticized next level. Policies and strategies that might have worked when you had20 employees can be a detriment when you have50 — for example, when you start to hire higher-priced managers who have different expectations than a $12-an-hour employee.

10. Leadership. This includes vision, courage, fortitude, attitude and of course the ever-important corporate culture — all of which should create an inspired staff. And of course there’s the over-used word that is sometimes called the secret to it all, passion. Here is the real secret: passion is critical, but it can’t make up for deficiencies in the other categories. I have seen many people fail in business, and they were all passionate. It is not enough.