I think that there were less perfectly matching armies in the real Medieval times, so I like a bit more variation and mixing.
That being said, you gotta have teams. The various sub-factions with each faction I view sort of as the houses/clans within the kingdoms.
I am actually working on a book in my spare time and thus try to model them after the peoples in the book - although I do not wish to restrict my book to LEGO factions, so it is not a perfect matching.
Anyway, these are the basic groups that I do:
Black Knights, Dragonmasters, Kingdoms Dragon Knights
Crusaders, Royal Knights, Kingdoms Lion Knights
Wolfpack, Forestmen, Bull Knights
I also use some of the fright knights, KK2 soldiers, Samurai/Ninjas, and misc pirates, etc for additional variation.
I really don't like using orcs/trolls/skeletons/etc so those end up being sold.