1) I read from the Sencha site that the app can be developed locally using things like XAMPP installed on local Windows PC. Question -- Why need this local host when I can just use an external Web Host?
2) It was also mentioned that for Windows may not need XAMPP if Window's Internet Information Server (IIS) is already running. How do I know if my computer is running this and so don't need to install another local server? (I asking this because I had installed an XAMPP before on another computer and things got quite messed up and so I want to avoid doing it if possible).
You don't need to do it as a local host. Its an option. The benefit of developing on your local host is that you do not need to constantly upload your files to your external host as you make changes. If its just as convenient for you to edit them on your remote server, then by all mean that might save you some set up. But, running locally tends to also give you control over viewing what the server is doing in response to requests. There are other benefits as well, such as having full control over the configuration, lower latency while testing, ...
If you don't know if you have IIS running, most likely you do not. Its part of the Windows Server line and/or not enabled by default in other version of windows: http://en.wikipedia.org/wiki/Internet_Information_Services . XAMPP is just an alternative stack for you to install, if you windows OS isn't already running a web server service.