The flexibility of linking GPOs teaches us three lessons. First, targeting the GPO at a specific context lets you create smaller, task-specific GPOs. These GPOs can be applied at the appropriate level in the AD. That's in contrast to lumping all policy settings into monolithic GPOs at the site, domain and OU levels. Under this scenario, copies of the same policy settings would exist in more than one place, creating a maintenance nightmare.
Second, linking GPOs is useful for testing your configuration, since you can target the GPOs at a test OU and then verify the settings before re-linking them to the OUs in which the actual users and computers reside. Third, the OU structure in your AD tree layout should be organized in a manner conducive to the application of GPOs--it's difficult to apply firewall settings to only Windows XP workstations, for example, if both servers and workstations exist in the OU to which the GPO is linked.
So in what order is each GPO applied? Group Policy works from the "outside in," first processing any local policies, then applying the site, domain and subsequent OU GPOs and working its way toward the object's resting place in the Active Directory tree. If any policy settings conflict along the way, the last setting applied rules. So, for example, with a computer object in the PMG/Computers OU in Active Directory, the local computer policy is applied first and then from there any site GPOs, any domain GPOs, the GPOs of the PMG OU and finally, any GPOs linked to the PMG/Computers OU. Similarly, policy settings applied to user logons do the same but follow the path to the user object's resting-place in AD. AD overrides policies set on the individual computer.
Tools of the Trade
Your Windows Active Directory environment has everything you need to get started with Group Policy, including the GPO editor for configuring policy settings inside the actual GPOs, as well as the Active Directory Users and Computers tool for linking GPOs at the domain and OU levels. But, as anyone who has tried to loosen a screw with a butter knife knows, there are far more suitable tools for the job.