In all likelihood it's a little bit of both external and internal factors.
I disagree with the article that seems to want Ballmer's head on a platter for bungling Vista - that was a bad move for sure, but tossing out everyone responsible for that mess seems like tossing out all opportunities to learn from it.
Hubris has a lot to do with it, I think. There have been a remarkably large number of instances where Ballmer has said something that betrays the fact that he has no respect for his competition. Everyone's a lame duck competitor compared to the wonderful products of Microsoft... until they completely trounce MS in the marketplace. Then you might hear a half-hearted mea culpa from Ballmer, but after that it's swept under the rug.
Maybe it's the job of a corporate CEO to talk big about his own products - but I've seen few other CEOs so openly negative and dismissive of competitors' products, and IMHO this has probably a significant hand in MS's failures at tackling new product lines. His reaction to more-successful competitors seems to be unproductive: note his claims that Google and iPods are not allowed in his house. How can you compete when you are willfully ignorant of your competitors' products?! When someone is leading a market I'm trying to compete for, you bet your ass I'll have my hands all over their product.