/\
||
\/

Let´s say you have a shape like this (top view and every character is a polygon) and want hard edges at the tips but smooth shading on the sides. That´s not possible with the smooth flag. (This is just one example. I could list more issues.)

With smoothing groups it would be possible. Put the left side into smoothing group 1 and the right side into smoothing group 2. At the borders of the smoothing groups there will be hard edges. That´s how smoothing groups work in 3dsmax.

Actually smoothing groups aren´t that nice to work with though. I prefer how it works in Maya where you can set smoothing information directly on the edges. But there is no edge struct in the WMB format so probably it would be simplest to include normals with the vertices. Then the exporter could handle smoothing correctly. The smooth flag would be obsolete then.