Hello
By factions I mean, groups that oppose each other. For example zombies will attack raiders (And vice versa) while both are still hostile to you.
In addition, faction that's hostile to other factions but not to player would serve as NPC allies in combat. Very important for multiple scenarios, for simplest example to not have player-spawned summons require extra player attention.
Finally, "always flee" enemy does that - no combat capability, if within (range) of enemy will run out of sight/range. Useful for chase scenarios (multi-stage boss fight), hunting (some wild animals flee instead of attacking back) or city defence missions (how many civilians are you able to save from invading forces?)