You're right, to the extent that if there were no good "Michigan Man" candidates out there and it limited us to hiring Notorious MDB or his ilk we'd be screwed.
But there are real benefits to the Michigan Man attribute. First, there is the fact that the alumni and the media eat that shit up and will trip over themselves giving said Man some extra slack. Related to the alumni angle, Michigan Men will be more plugged into the alumni network (both football-specific and university wide), which can only help with recruiting, donations, etc. In Hoke's specific case, being a Michigan Man is what connected him to Greg Mattison and convinced the man to leave the Ravens and come to Ann Arbor. Finally, I would venture to guess that having deep ties to the university and the football program can only help on the recruiting trail - Hoke will always be a little bit more credible when talking about how sublime Michigan is than someone like Rodriguez.
Of course, if said Michigan man doesn't know how to coach, or how to hire assistants, he'll still be useless. Also, it might be more important to have ties to Ohio and Michigan high schools than to Michigan alumni specifically. I Just wanted to point out that the idea might not be totally vapid when it comes to coaching hires.