Lets start with the obvious:
Sensor size can only be compensated by even more sensor size.
Why ? Because any advancement that makes a smaller sensor perform as good as a larger sensor will also be available for the the larger sensor, thus the larger sensor will again perform better than the smaller sensor, for again the same distance as before.
There is no way to avoid this.
Second, you cannot improve ad infinum. You cannot reach more than 100% efficiency, and you cannot get rid of quantuum noise. Once these barriers have been reached, the race is over.
And what is true about the improvements for the sensor goes for the improvements of optics just as well.
Had a discussion with some friends and a few of them commented that DSLR's are dying because of the innovations of some compact camera's and smartphones. Is this true? I was in the market for an upgrade but they had gotten me thinking. Just some opinions from folks who are in the photography world but may or may not necessarily use DSLR's all the time.
LOL
And thats all there is to say about it.
Your friends might talk about the regular Joe, who might consider smartphones sufficient for his needs. But the regular Joe never used DSLRs in the first place, and the regular simply doesnt care that better cameras would give him better image quality.
Is DSLR slowly being bested by mirroless ?
Thats not what the OP asked.
The OP talked about "compacts and smartphones".
My understanding from reading articles over the past few months is a lot of vamera companies are going to stop making P&S cameras since cell phone cameras are improving so much. [...]
Wrong, they stop making P&S because they dont sell, since the difference in image quality between smartphones and P&S is too small. P&S typically lose a lot of potential image quality from the sheer fact that they have an optical zoom.