I think there's room for both, depending on what you want to do.
iWork's strength is making documents that look really nice. I like to use Pages for newsletters and Keynote for presentations. You can export them as PDF files if you need to share a final (read-only) version with others.
Office's strength is its ubiquity. Everyone has Office (or something Office-compatible). Most Office documents are formatted with the same fonts and templates that every Office user has, so documents tend to transfer their layout better. If you need to give editable files to others and collaborate with them, you want Office.
iWork (and OpenOffice) can read and write most Office files, but this works best if you think of it as a one-way conversion. e.g. You take the file, import it, fix it up to look right in Pages, and then keep it in Pages for the rest of its life cycle. If someone sends you a Word document that you open in something else, edit, re-export back to Word, and send back to them, there's a good chance that the document will now be completely butchered in Word, and that benefits nobody.
If you're a one-man show and you want docs that look slick: get iWork.
If you need to send/receive documents to be shared and edited by others: get Office.
If you do both: get both.