I have not used this myself but I believe you enter the relevant directories, separated by a comma in the cfg file, like so,
DatabaseDirectory="c:\tm1dims;c:\tm1cubes"
The documentation stresses that this does the following:
Therefore, you may want to for example, place the dimensions in the tm1dims directory and the cubes in the tm1cubes directory.Accesses cubes and dimensions from each of the specified directories. If there is a duplicate object, Cognos TM1 accesses the object from the first directory specified.
Writes changes to the directory where the object is located. When you create a new object, Cognos TM1 writes to the first directory you had specified.
I suppose the use case for this is simply for structure and manageability.
I would certainly need to see a stronger use case than the above to actually ever use this.
regards,
Mark