It appears to break a model up into groups of polys so that you can select and work with them easier. If you select a bunch of connected polys, then use the group tool, you can turn on the "select connected" tool and it will only select that group of polys. I've found it handy when a model starts to get complex, and you want to use the "hide unselected" tool to work only with the polys in the group.
Mark