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There are several answers to these questions:
1. Google has a number of weaknesses as applications provider.
1a. To be sure, it has a strong brand, but it is not focused on applications development. As a matter of fact, you can start to question googles overall focus - they have not tried to place advertisements in all the places where they could, which they would do if they were focused on providing an avenue for advertising.
Right now, they seem to be focused on providing services to run in their data centers.
1b. The fact that Google Docs and Spreadsheets run off Google servers is another problem. Not only are you dependent on Google for the applications development, you are also dependent on them to run the applications. This is a problem for anyone who thinks twice about securing the future of their company. It is even worse if you plan to use Google as a platform - you become totally dependent.
1c. Microsoft may be evil, but they have a clear roadmap for their applications development, and they show commitment to it. Where is Googles roadmap and committment?
1d. And this is not even talking about the technical difficulties - you can always fix those....
2. A small company who wants to enter the area should do four things:
2a. Build on Open Source, and use office suites which are file compatible with established office formats (Microsoft if you have to, but Open Office seems to become more established).
2b. Develop for specific niches, and dominate them. It is often claimed that one reason Microsofts office applications contain such droves of code and features is that they address specific niches. Well, steal a niche from them. Once you have learned to adapt the platform to a niche, you can add more niches.
2c. Add a specific feature. Not only does this mean adding a patent or two (which helps the valuation of the company), it also means profiling yourself within the niche to the companies in that niche.
2d. Of course, targeting a niche means that you should build a community in that niche. A community probably exists, it may be pronounced or not, but if the niche is there, there is a community which can be leveraged.
If you stand close to the customers, the giants will seem very small to them - because they are far off. Do not worry about them, worry about catching the customers.

Hope this helps

//Johan

I haven't used Google docs and spreadsheets to a large degree, so I can't tell you anything from a functionality angle, however, there's a good reason for that. I (Product Manager) thought they would be a useful tool for our (small) company to use for sharing information quickly and efficiently. The CTO immediately vetoed the idea as he didn't like the idea of the documents leaving the company. He was concerned that any ideas we had, or information we shared would become the property of Google, and even paranoid that they might show up in searches. This is of course being overly paranoid, but in a marketing war, it's a great piece of FUD (Fear, Uncertainty and Doubt) you can throw out there. People are great conspiracy theorists, and this would be a great conspiracy theory - Google bringing down other businesses by revealing their secrets. 

The great strength of the Google offering is exactly its weakness. The fact that documents are available from anywhere also makes them open to attack.

Pitching against Microsoft however is a different matter. The problem is, they are already the de facto standard in all Office areas. You need to do some proper segmentation of your product, work out if there is any extra functionality you could add which MS doesn't have for one particular sector. You might have something specifically geared towards the financial sector for example, or templates for healthcare or pharmaceuticals with the relevant security built in.

Something to think about is DRM. Microsoft have struggled with it exactly BECAUSE they are the standard. When something is that popular a lot of people will spend a lot of time trying to crack any digital rights around their product. A smaller company would not attract nearly so much attention, and the security would be valid for a short time at least. This is encouraging security by obscurity, which as a security specialist I should not do, but as a Product Manager, I would look at it as a USP.

Smaller companies also always have the benefit of being more nimble and responsive to their customers. Find some big companies with a specific need which MS can't or doesn't address, and fill a gap quickly, then build on it. 

I don't think that the technical weaknesses that Google Docs and Spreadsheets may have will likely contribute much to the success or failure of it's platform. Googles main strength is brand recognition and to an extent brand trust (the built up and oft-repeated mantra of "do no evil"). Additionally there's the bundling aspect which is that everyone with a gmail account automatically gets a google docs & spreadsheets account so their userbase grows quickly without people necessarily specifically looking for that service. Obvsiouly then when they come to need an online docs/spreadsheet service it's much easier to use the one they already have, rather than sign up for a new one (even if it's not quite as functional) The main weakness I see with Googles pitch in this area is that it's vulnerable to scare stories about users worries of giving all their data to one company. If they're reputation for "do no evil" changes then that brand recognition they have may well end up playing against them. To answer the second part of the question, my feeling is that smaller online office software players really need to look at bundling/promotion heavily to build that brand recognition. At the moment online office suites don't seem to be seen as a stand-alone "killer app" so bundling/partnering with other related services seems vital. Partnering with online e-mail providers is one obvious option, but perhaps partnering with some of the social networking startups would also work well in this vein. At the moment I don't see the offline office market as being particularly ripe for people to move into as the incumbant (MS Office and to a much lesser extent OpenOffice) are well established.

This is an unenviable - but not hopeless - position to be in.

Historically, there have been any number of office products that performed better than MS Office but weren't able to capture share. As a small player, it is extremely unlikely that your fate will be any different - don't expect to beat Microsoft and Google at their own game.

Your approach, therefore, must be to develop a fantastic product targeted at a specific niche. The weakness of Google and Microsoft is that they are mass-market products and serve everyone adequately, but no one well. Choose either a niche market segment or a specific functional area - and dominate it. For example, mid-sized law firms, or word process that integrates with CRM for sales folks. If you develop best-in-class applications for a niche, not only will you have a compelling value proposition and easily identifiable target market, but it is much easier to achieve critical mass and become the dominant player.

One point to note: interoperability is key. There must be seamless, flawless opening and saving of Microsoft apps. There's the old saying within Microsoft that the next version of office isn't ready to ship until it breaks previous compatibility standards. It's your job as a competitor to fight them in this arena - to stay up to date so that your users won't experience any headache when interacting with the other 98% of users.

 

 

Google Documents and Spreadsheets is not the only alternative to Microsoft Office, while Google has a great on line suite of technology, from spreadsheets to documents to power points, there are others working in this space. Zoho is an excellent on line system that provides the same services that Google docs and spreadsheets provides. Then there are other alternatives to the on line solution, specifically Open Office. Other programs that have little to no market share like word perfect are still floating out there as an alternative.

 

Google has taken care of a number of issues that cropped up early, like saving locally, there are still some privacy implications, in that sharing of the document when published is not restricted. For example, I can e-mail a document to someone and insert DRM or other rights management into the e-mail, and into the document for truly private material, that is company critical. In the Google documents solution, the user is presented a URL on google.com, with no other restrictions.

 

Alternatively, the user is presented with the ability to publish the file to a blog, which in some ways (if it is a privately held blog) can have access restrictions to the blog itself if not necessarily the file. Given the lack of ability to share the file securely, much like Zoho and other on line solutions, the ability to restrict access or sharing is severely limited. While not every document needs protection, for companies that deal with confidential information (for example I would not do a customers security report on Google docs).

 

There is also no way to paste in a picture. In some lines of work doing a screen cap is important part of documentation. There is no way to get a screen cap and dump it into Google docs. While the computer buffer recognizes that there is data that can be pasted, Google docs does not understand the data, and does not paste the screen cap in. this is a basic functionality. When using excel to documents I can not push in a general graph from the data, nor is there an option to embed an image without having to resort to a URL, which means I am saving the images from screen cap into word, then saving as HTML, then finding a web server (blog maybe) to upload those images to. In other words, easier to remain in word for graphic or statistic’s heavy work for tables, captions, images, artwork, and other objects that go into every day work documents.

 

One other interesting part to the experience with Google docs and spreadsheets was the preview mode in the program. When preview mode is used to view the document, all the navigation disappears as shown in the screen cap below. With the loss of navigation in preview mode, hitting the backspace key is a given, but not everyone is going to figure that one out immediately, and they might panic. Most of the issues noted are basic functionality, things that have been around for many years within both Word, Open Office and Word Perfect. Manipulating images, graphs, tables, captions, and other types of objects outside of simple text, links, highlighting, and word art effects makes this a difficult sell for a business user. Making it more difficult is the inability to restrict access to the document once it is published.

 

A smaller group like Zoho offers essentially the same services as Google, but the main differentiator is that I can upload a JPG image, or use from a URL. Meaning still done in word, still saved as HTML, then images and documents are uploaded to the on line system. But still stuck with the same old concept, with business documents, most people have gotten very used to doing things like screen caps, importing graphics, and others (like keyboard short cuts) that for the most part do not work within the on line document framework.

 

For new and upcoming systems, making the online experience as similar to what happens with a hard product like Word, or Open Office is what is going to make the product stronger in the market place. While the java entry screen for on line word processing is familiar, on line colleges, comment systems, and others all use the same kind of interface with the same kind of options. The current java implementations feel like the are ephemeral, they have no permanence, and are great for schoolwork or for comments on blogs. People expect a lot of their word processing and spreadsheet applications, Microsoft and Open Office have delivered. People will want the same kind of experience before they really start adopting an on line program.

 

To promote is to differentiate, Zoho goes a long way by having a button that allows a person to upload an image into the document, and this is something that Google does not have surprisingly enough. If you look at Google apps and Zoho side by side, Zoho looks more polished, more professional, and more capability than Google docs. They could promote those differences in the user interface. Any company taking on either of them should address the UI, and make it look like word or open office.

 

The killer part is for people who are using this to make confidential or private corporate documents is to restrict access by domain, have a DRM type solution, have a private mode, or any way to restrict access to the document. This would be a killer differentiator, and something that no one else in the market has. Which ever company decides that they want to have part of the on line document space needs to bring a lot of quality to their web product, look, feel, and ability. If you look at Google Docs and Zoho Docs side by side, there is a visible noticeable difference. Who ever makes the next on line application needs to take on Zoho, make it better than Zoho, and market the differentiators. Their marketing material should have screen caps from each one of the sites, even better, is if the marketing material is made using their on line software solution.

The key is to attract the right kind of early adopters. Get your features on Digg, StumbleUpon and TechCrunch. Hire an internet marketing consultant to make sure your brand and features are shown on these social networks.

It is these tech savvy early adopters that blog about products and tell their offline friends. 

Without the right kind of publicity it doesn't matter what features you have it will be impossible to compete.

Office suites with viral applications that work on facebook seem to be doing well so creating widgets for the facebook api would be an ideal way to promote your services.

1) the weknesses of google docs etc... mirror exactly those of office. There's still the old mentality, both services are designed around individual descreet areas of work, word / excel / etc.... They all do different jobs and though they integrate, the integration is a process thing not an end user thing.

2) By designing the software around the end user. For example, why should word processing be a stand alone piece of software? I need word processing in my email client, it would also be nice in a database reporting tool. I work in PR, my meetings tend to involve an agenda, a press release, a seriess of cuttings and a template for next month's PR plan.

Why then can't I drag and drop a word processed agenda, a spreadsheet press list, pdfs of some cuttings and a word template to a calendar date and time so that when my meeting pops up I have every thing I need?

Word, excel etc... and Google too are good but they're pretty inflexible. If you make a product that takes context into account then you're away.

Also, google "scrybe" for a brilliant example of online marketing the video is awesome.

1) Google lacks a fluid workflow in the integration of its offerings. Also a small feature with big annoyances is the lack of standard copy-paste features. For instance I cannot copy an entire column of email addresses to use in a different place. The user interface and experience is confusing as you switch between their productivity applications. It lacks consistency which doesn't help it pass the mom test.

2) Usability. Design. Integration with third party applications and web services.  Allow me to integrate with my blog platform and social networks, etc