Before diving off into the mechanics of how Word supports XML integration, let's review some of the reasons why this might be useful:
Preparing content that can easily be repurposed in new ways? If there were a way in today's business environment to calculate the cost of reentering and reprocessing information, it would be mind-boggling. If the data can be created originally in a structure that is consistent and can be queried for analysis, then the cost of using the data in new ways can be significantly reduced. Word provides this capability by allowing these original documents (trip reports, product orders, expense reports, and so forth) to be integrated with an XML schema.
Working with other productivity applications that recognize XML? How many times have you tried to use a particular document type on a computer only to find out that the application needed was not installed, or that the right converter was not available to let you use it? The nature of XML structured documents is such that the content of the document can be modified without affecting the underlying structure needed by the specific application. Word provides this capability by allowing these XML files from other applications to be opened and edited while maintaining the original XML structure.
Generating data for business applications and processes? As more critical business applications and processes become dependent on XML, the capability to generate data directly to support them becomes essential. Word provides this capability through XML Solutions by supporting one or many XSLT transformations to be integrated with the XML schema.
Using programmed "Smart Documents"? Smart Documents are documents that include integrated programming to help you while you are using them. Existing templates in Word can have Smart Document programming added to them so that they become "process aware" and know at any given time what stage of the process they are in. This programming can include database access to store or retrieve information if needed. Smart Documents are implemented through XML Expansion Packs in Word.