The way I see it, nearly the entire world is extremely aware of Israel's military abilities. People on both sides are, or at least, were, convinced that Israel has the capabilities to eliminate any possible threat to it. In my opinion, there are two major factors preventing this.

• International Opinion: Israel has always longed to be a fully accepted member of the global community. As a developed country, Israel is held back by the numerous international charters is has joined. Existing in such a politically volatile area, while being the only fully democratic government in the area, exposes Israeli actions to both international and internal scrutiny in its dealings. Poor international representation (the fabled hasbara) had led to a global conviction of Israel being a bully. Israel is suffering from what is known as a "weaker strong country". Think America's failure in Iraq. Israel cannot use its strength against a guerilla army.
• Lack of internal cohesiveness: Israel has become a neo-liberalistic democracy. Valuing human rights (which is in itself, obviously a good thing) has overshadowed the raison de' etre. When a state can no longer freely act in its defense and suffers from internal issues, it cannot commit itself to defense. A poorly created defensive strategy, a lack of initiative and too many "doves" held back Israel's hand. Ironically, this will make Israel appear weaker, bolstering Nasrallah's confidence and undoubtedly leading to more and more skirmishes to look forward to. Yay.