Content Layering :: Using Site Architecture To Improve SEO - This is a...
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This is a great way to organize a smaller site because it allows you to place topical pages together, and promote links within the pages to help improve overall positioning of these sections.
Further, it helps reduce the dilution factor often felt by sites that attempt to cover multiple topics in a flat file structure.
For example, if you sell widgets you could organize the sections by some common element, such as color. That way your site could be: http://widgetts.com/blue/page1.html and all blue widget pages would go into this sub-folder. You'd then organize all other sub-folders in a similar style.
Like I said, I think this is a very effective strategy for a smaller or medium site. There would be a much greater chance of blue widgets ranking highly in a structure like this.
However, I feel that for larger sites there's an even more effective way to organize your content.
Through the use of sub-domains one could further organize this content. This would make it even more relevant to search queries and more likely to rank. If one sold a larger variety of widgets yet still wanted to organize them by color then the structure of the site would be: http://blue.widgetts.com and all site content relating to blue widgets would appear within this sub-domain.
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