Maybe I've thought of a more organized way to put it...
Power as described here will flow to the point of least resistance assuming no devices to interfere.
AWD / Center diff unlocked = Power to front OR rear
4WD / Center diff locked = Power to front AND rear
4LO / Center diff locked = Power to front AND rear PLUS gear reduction
At that point when power goes to the axle, the same principle applies there with the axle diff:
Axle diff unlocked = Power to left OR right wheel
Axle diff locked = Power to left AND right wheel
3rd gen 4runners have about the same system with the "multi mode" t-case. In that case it is:
2WD = Power to rear ONLY
Press 4x4 button - AWD Center diff unlocked = Power to front OR rear
Shift lever to 4HI - Center diff locked = Power to front AND rear
Shift lever to 4LO - Center diff locked = Power to front AND rear PLUS gear reduction
In practical use, AWD is useful on mixed surfaces which vary between hard and slick. A half snow covered road is a good example, one curve may have snow on it, the next dry pavement. In this case the power can freely travel to any wheel and if any wheel binds or slips power will have somewhere to flow other than building pressure against a mechanical part. However given the power flows to any wheel it is delivered more evenly and provides better traction. Coupled with traction control systems which can overcome the "power to the point of least resistance" rule, this makes for superior control on surfaces that are variable and unpredictable.
4HI is useful on entirely slick surfaces where you need more traction than one powered wheel can provide, or need traction directly at the front axle. You are guaranteed one wheel in the front, and one wheel in the rear have power at all times. Given the slick surface, if any difference in pressure builds between front and rear, the tire can slip on the ground to release it.
4LO is for when you have the same conditions 4HI is useful for, but need additional torque to turn the wheels, or extra control at slower speeds. Assuming a 2:1 gear reduction ratio you will travel half as fast with twice the torque, or power to turn the wheel. This also halves stresses on the engine and transmission, making the vehicle feel unburdened where it might otherwise be having difficulty maintaining power or pulling itself. This is useful for climbing or descending grades, overcoming obstacles, or simply to make driving easier by going slower. It's also great for preserving your vehicle on trails by making it work less to accomplish the same amount of travel. (roll along at 1000rpm vs. 2000rpm)
For even more difficult conditions, then locking the axles comes into play, guaranteeing power to more than 1 wheel per axle at a time.