ANALYSIS By Tim Weber Business editor, BBC News website

There are two drawbacks to being a company that has a virtual monopoly in its biggest markets.

For starters: where do you find growth?

And there is always the nagging worry that someone out there is working on a rival product that just might blow you out of the water.

As Andrew Grove, one of the founders of computer chip giant Intel, once put it: "Only the paranoid survive!"

Software giant Microsoft is working hard to address both problems.

Why go-faster stripes won't do

MICROSOFT Founded: 1975 HQ: Redmond, Washington Staff: 71,000 Sales: $44.3bn Operating profit: $16.5bn Windows sales: $13.2bn Office sales: ~$10bn Financial year to 30 June 2006 Source: annual report 2006 Microsoft boss interview

Domination is probably too weak a word to describe Microsoft's stranglehold on the markets for both desktop operating systems and office software such as spreadsheets and word processors.

But to keep customers coming back for more, Microsoft is forced into a constant cycle of innovation.

Where there is no revenue stream involved, the company can be a tad sluggish in updating its products - for example Internet Explorer, which languished until rivals like Firefox became serious competitors.

According to Microsoft, it has been a $20bn (�10bn) investment to develop Office 2007 and Vista, the latest incarnation of the Windows operating system. That would be about a year's worth of profits from the two divisions that produce the Windows and Office software.

After all, having a mediocre new version of Word - maybe adding a few go-faster stripes - just won't do when most customers are perfectly happy with the software they bought three years ago.

Vista is a case in point. Yes, it looks much nicer than its predecessor XP. But the biggest tweaks have been made under the bonnet, with a complete redesign of the way the operating system works.

Microsoft claims that Vista will be much more secure - and faster - than its predecessors.

What's your lifestyle?

Combined with Office 2007 and the latest version of networking software Exchange, companies are promised that it will dramatically improve the productivity, workflow and data management of corporations.

Microsoft boss Steve Ballmer celebrates the launch of Vista

Corporate IT managers will be able to clamp down on data theft through iPods and other USB drives; remote power management keeps the cost of running computers down; and new integrated search tools promise to put an end to office workers wasting about 30% of their time trying to find information.

Home users, meanwhile, are promised a new entertainment experience - although for now, Microsoft executives are very cagey when asked how they will pitch Vista to consumers.

Hoping not to spoil the Christmas business of its hardware partners, Microsoft is keeping its marketing powder dry until just a few weeks before the consumer launch of Vista at the end of January.

Cynthia Crossley, UK director of Microsoft's Vista programme, speaks only vaguely of a "scenario approach" that shows consumers how Vista fits in with their digital lifestyle.

Develop software, need anthropologist

Much of Vista's look and functionality may be terribly familiar to people using Apple's OS X operating system.

Vista's release is two years late

Where Microsoft really makes a difference is its new Office software.

Most of us are probably in the same boat: we use just a few percent of Office's potential.

Jacob Jaffe, director of Microsoft's Office enterprise programme, is hoping to change that.

A new "ribbon" of icons at the top of the application changes constantly depending on which task users try to accomplish.

No hunting through drop-down menus and option boxes anymore, says Mr Jaffe. "With this approach we expose the commands that users need... and reduce the number of clicks needed to perform a task."

Microsoft, he says, did not rely on test labs. The firm sent out teams of anthropologists to observe users in their homes and offices to understand where they got stuck.

During the hunt for bugs and usability problems, 3.5 million testers used early releases of Office, and 1.5 million tried out Vista, says Mr Jaffe.

When paranoia hurts rivals

It is not just paranoia that made Microsoft invest $20bn into updating Windows and Office.

The company has been caught out several times in its 31-year history.

It missed out on the early growth of the internet; it failed to find the right solution for the world of digital music; it has to run very fast to grow its share of the market for server software; and its place in the world of games consoles is not secure yet.

Little wonder that Microsoft is working hard to keep its grip on the computer desktop.

We are working closely with competitors and the European Commission to understand the Commission's expectations and that of third-party providers Gordon Frazer, managing director, Microsoft UK

But what makes life easier for corporate worker bees is causing headaches for Microsoft's competitors.

There once was a time when applications like e-mail programmes, firewalls, and collaboration software all had to be bought and installed separately.

These days, all this and much more comes in two big bundles - Windows and Office. At the same time, Microsoft works hard to make its software work together, but less so for third-party applications.

Companies such as internet security providers McAfee and Symantec have complained loudly, and competition watchdogs like the European Commission have taken note.

When challenged about their company's impact on rivals, Microsoft executives lose their confidence and evangelical fervour.

Circumspect and carefully choosing his words, Microsoft's UK managing director Gordon Frazer speaks of "working closely with competitors and the European Commission to understand the Commission's expectations and that of third-party providers".

Microsoft bosses have learned that the side-effects of corporate paranoia can be costly.

So far, the Commission has hit Microsoft with two fines for anti-competitive behaviour, totalling 777m euros (�522m; $1bn).

It may not have been the last time.