The throttling was a reaction to poor battery performance at the technical endish-of-life part of the product. After X cycles the battery recharge ability was limited, couldn't be fully charged. It also had increased internal resistance, meaning an increased power draw (eg CPU/GPU load increase) can't be sustained. If too much current is drawn, the voltage drops, and the result may be a brown-out event (voltage too low -> shutdown/reboot). Since the battery couldn't deliver, Apple limited use of the battery so it doesn't run into those brown-outs.

This is all sound and well and well-known, which is why you design in a safety factor so that you have plenty of margin even at end of life.

Why didn't they? Since no internal Apple discussions surface, I can just speculate it's either,

  * incompetence, they didn't anticipate this
  * cost-driven decision, despite Apple products being top-dollar devices and even low-range devices work better in this aspect
  * design-driven decision, larger battery would mean a larger device

I'm betting the last point. Someone (Jobs? Ive?) had a fixed upper size limit on the device, and at the same time a fixed minimum CPU/GPU performance limit to not feel sluggish.