Go to here:
http://www.webopedia.com/TERM/5/5_4_3_rule.html
for a decent explanation.
This does not apply to switch based networks, only shared-access mediums.
For a switched network, the maximum number of hops any host should take to get to another host on the LAN is 7. Disadvantages of more hops is obviously degraded performance and potentially more problems than on a network with a smaller diameter. Also, if your using spanning-tree for redundancy a smaller diameter should converge quicker..