I don't like entirely like the implementation of Collections, but greatly prefer them to file-system based folders.
For example my 'Current Reading' collection can include items that are also in 'Technology'. But these two collections are not subsets of each other, so there's no way to create a hierarchical structure where an item can be shown in more than one category (short of file aliases, but nobody uses or understands them).
This was all discussed ad infinitum on Kindle discussions prior to the arrival of the Collections feature, and there was just no way to please everyone, because individual requirements are in conflict. I think Amazon did a decent job, but there is still some polishing to do. And there is a learning curve. It took me a couple of weeks to get comfortable with Collections, but I'd never want to go back to what was.
BTW somebody here is working on a Windows-based application to manage Collections on Kindle. There is a recent thread - please look for it.
Mostly what I'd like to see are 'smart' Collections (rule based collections) so you would not have to manually manage everything. Collection hierarchies could be an extension of this feature ('all items in XYZ or ABC').