Without a doubt, terrorism and the threat of terrorism is an effective means of deterrence to a more advanced military structure. There are many terror organizations; Hezbollah, Hamas, Zapatistas, and the Timor Tigers that have effectively run their campaigns against a larger stronger military force. These attempts are not to defeat the superior military force, which they know they cannot accomplish, but to diminish the will of the military power, its government and its people.
For instance in a 2004, Osama Bin Laden described to Aljazeera that the Al Qaeda strategy was not to militarily defeat the US forces, but to over extend the US forces throughout the world and defeat the will of the American people. He believes this technique along with an increase in oil prices from Arab countries will cause the US government to go bankrupt. He compares this technique with the success of the Mujahedeen against the Soviets in Afghanistan in the 1980s. However, Bin Laden is forgetting a few key differences, the Soviets were involved in the Cold War, the US were backing the Mujahedeen, the Soviet Union was having internal conflicts and uprisings, and the Soviets were a socialist economy. But still Bin Laden clearly started with this goal and whether or not he is successfully accomplishing it against the US is debatable.
We also have cases in which terrorist organizations have won the support of a large population and have become somewhat legitimized. For instance Hezbollah has won the support of a many people in Lebanon (Stewart). These people no longer (if they ever did) see them as a terror group. The same can be said of the IRA during the 1900s. The people that emphasized with the IRA did not if ever saw them as a terror organization. These people were freedom fighters for their cause. Moreover, the IRA or Hezbollah built a sense of community within their sphere of influence (community projects, roads, hospital, orphanages, etc) and made their opponents seems like the aggressor, they did turn more people over to their side. There are many organizations that started out as terror organizations (as called by their opponents) and became somewhat legitimized, for instance the Stern Gang and Haganah.
Terror organizations become even more complicated when a terror organization is supported by a state entity such as Hezbollah and Iran. These terror organization can (and do) act as a mean of deterrence to further the host countries objectives. This sometimes occurs with the host supporting country remaining covert to world eyes. Hezbollah cells are located worldwide, and in America. Iran uses this association with Hezbollah as their form of deterrence since the Iranian government does not have nuclear deterrence capabilities. Iran knows they do not have the capabilities to successful conduct a CBRN or conventional attack on the US, therefore they use this threat of civilian chaos created by Hezbollah as deterrence. If enough fear in the general public can be made in that it creates doubt in the effectiveness of that government to protect its population, then the terrorists may have achieved their goals (for instance the Spanish Election in 2006).
Terror organization can successfully conduct asymmetrical warfare against larger more successful opponents.
Author unknown, (2004). Bin Laden: Goal is to Bankrupt US. Retrieved 9SEP2010 from http://www.cnn.com/2004/WORLD/meast/11/01/binladen.tape/
Stewart, S. (2010). Hezbollah, Radical but Rational. Retrieved 10 AUG 2010 from http://www.stratfor.com/weekly/20100811_hezbollah_radical_rational?utm_source=SWeekly&utm_medium=email&utm_campaign=100812&utm_content=readmore&elq=99ac4126097840f287027150d5c004e0