I would say the reason for requiring an update of Tools is that VMware makes improvements and fixes in Tools to correspond to improvements and fixes in their hosting products (Fusion, Workstation, Player, etc.). To get full benefits the hosting platform and Guest utilities (Tools) need to be in sync.
In general the Tools upgrades have gone smoothly for me, but in those cases they did not I simply uninstall Tools via Windows Add / Remove Programs Control Panel in the guest. Restart the Guest (Cancel any Found New Hardware Wizards that may come up), then do an install of Tools which requires another restart when complete. I just did that to one of my VMs last night and it took me less than 10 minutes and everything worked fine when it was complete.
In my case the access to the shared folder on the guest broke with the 2.0.5 update on just one of my VMs, uninstalling / reinstalling Tools fixed the problem.
