Ligatures, kerning, hyphenation, etc. can be enabled in Word:
http://jeffhuang.com/better_word_papers.html
It's just not on by default which is a shame.
It's just not on by default which is a shame.
I've heard that Word doesn't play as well with the text layout component as the component authors would prefer. It's possible that this will improve in the future.
As for TeX vs Word, that's a great question. I know that the authors of Word's text layout engine are familiar with Knuth's dead-tree works on typography, but beyond that, I don't know.