It is usually best to operate policies on a system-wide level, unless you are talking about a personal computer that is not attached to a network.
There are 3 options:
1. Computer - affects the computer on which you are editing the policy. Everyone that uses the computer will get the settings you put here, so think carefully. Everyone includes the administrator.
2. User - affects a particular user (as defined in User Manager for Domains). This is great if you are setting up a home PC for different family members.
3. Group (which does not appear by default) - affects a pre-defined group of users. This is extremely useful for corporate networks, and is something I make extensive use of with Citrix MetaFrame.
The policy in an NT4 networked environment is a file held by default on the PDC, and propagated to BDCs via replication.
The location of this file, usually called ntconfig.pol, can be re-defined in the Computer policy.
Note: Every setting you make in a policy file is applied to a users profile, by adding keys to their personal copy of ntuser.dat, which gets loaded as a hive into the system registry.
I hope this information is useful.