Several years ago I optimized a business site for a business in one city/metro region for something like "widget polishing"
Initial efforts were to optimize for the generic terms not the generic term/city name/state name.
Got excellent results and still maintain some very high rankings in all engines and currently some #1's in the various engines for highly targeted industry terms without the location words.
Long experience suggests that the best targeted terms with the highest conversion rates are those where the searches include location/business term.
Very very important to do what I've seen described as keyword expansion....wherein you have all the secondary terms such as widget polishing/widget cleaning etc etc. Include stemming such as adding plurals and variations like widget polisher(s).
Do keyword expansion on all possible location names in the region including state/city and local towns/counties etc.
Structurally in terms of separate pages I think it depends on the size of the site, the content, etc.
Research has suggested and my experience from having the high rankings without the local geo phrases is that many many searchers don't use the local phrase for widget polishing. Of course they may not find good results the first time and do a second search with a more refined and specific long tail phrase--ie widget polishing "specific state or city"
Alternatively have ppc campaigns for widget polishing that are focused on widget polishing city/state.
The other thing, especially with google and yahoo injecting some varying element of maps within organic search its critically important to not only be in maps but get a high ranking. Anecdotal evidence suggests that not being in the top 3 in maps may be brutal to a business--even if the manage to get the #1 organic listing directly below the map insert.
Speaking of that, with google changing the character of maps to show 10 businesses as opposed to 3--that will have a different effect. I think it is too new to get feedback on this impact.
Oh yeah...one other thing. There is other powerful anecdotal evidence that suggests that an "authoritative" one box map insert in google for something like "widget cleaning city name" absolutely rocks for a business.
In my case I haven't seen big differences and my version of widget cleaning city name/or state name controls #1 in organic--has at times had an authoritative onebox--at times been accompanied by a 3 business map--and now is subject to a 10 pack map.
In any case, good luck.