The GPS built into the iPhone is definitely too weak; it won't do turn by turn navigation. It usually registers your position to be about a block behind where you actually are.
The lack of turn-by-turn has nothing to do with GPS hardware in the iPhone though. GPS receiver hardware provides your location. Everything else is up to the software, including your heading.
What you're referring to is the crummy Maps application that's built-in. You can use the Tom Tom software or any number of third-party navigation apps with the iPhone. It's even got a compass so that you can get a heading without moving forward.
The TomTom cradle allows you to use navigation apps with iPhone and iPods that don't have built-in GPS, plus it provides supposedly a better GPS chipset and an antenna with greater reception. What I don't know if how much better that all is in the real world.