What the ISO does is it could re-build the recovery partition that contains all the necessary drivers and optimizations. For example, you installed Linux and for some reason you deleted the recovery partition, the ISO file could take care of that.
So why not the vanilla Windows ISO? Stock Windows ISO might not contain all the necessary drivers for a particular device. For example, the stock ISO from Microsoft doesn’t have the driver for the Surface Pen, and worse with the Pro 4, not even the touchscreen works. (Last time I tried it was a year ago, I don’t know if they have added it later down the line)
If you use the “Reset Windows” feature, the installation will be replaced with image from the ISO, which might be missing some drivers if it was the vanilla Windows ISO. If I remember correctly, they will also ask for the DVD since Windows doesn’t make a recovery partition by default.
It might not be a big deal for us, but if we are giving it away later to (less tech-savvy) family members, or youre simply selling it, it might be a big deal for them. Vanilla Windows installation is not the most convenience option for them. Or simply when you have a system error that forces you to reset the device, you could survive without internet if you have all the necessary drivers in the recovery partition