This option allows you to change machine types if the machine had multiple configurations. For example, the Space Invaders arcade machine was available in both upright and cocktail models. This option allows you to switch between the different models. On computers and consoles, this option allows you to switch between different model and revisions of the machine's hardware.
As you can see, if you switch Space Invaders to cocktail mode, when player 2 starts the screen in flipped as they would have been sat at the other end of the table.
For other systems, this menu may change hardware or have updated rom information. On the ZX Spectrum for instance, it changes between an issue 2 and issue 3 variant. On the Amiga 500 it lets you change the mouse and joystick options as they are not slot devices. You will need to check for each machine that you use.
One thing to note is that if you change anything on this menu then you need to use the Reset option at the bottom of the menu to enable the changes. This will do a hard reset on the machine and restart it.