In my opinion, the best use of substories (we call them that because they contain plot, theme, character, and genre) is to:

1. Develop story elements that are otherwise extraneous to the main story.
2. Use them as a device to get things moving when you've painted yourself into a corner in the main story.

The first use can be readily seen in Schindler's List. The main story involves Schindler saving the Jews from certain death. There is a substory that involves the commandant of one of the concentration camps and his exploration of being more humane to his prisoners. In the main story, this commandant would be one of many Nazis and wouldn't warrant the amount of screen time given to him. I believe the writer and Spielberg added the substory to explore an important EMOTIONAL expectation that their audience might have, namely to give a face to Nazism and explore the thematics of the power over life and death. By diverting from the main story for a bit, the authors were able to comment on the how and why the Nazis could be the way they were (as represented by the beliefs and actions of the commandant) which satisfied the American audience's need to give this aspect of the war the proper "weight."

The second use can be readily seen in Star Wars. The Han Solo/Jabba the Hut substory pops in and out of the main story, often conveniently breaking story deadlocks. For instance, after the group has been pulled aboard the Death Star and are waiting for Obi Wan to power down the tractor beam generator, Luke and Han find themselves waiting around. Luke finds out that Leia is going to be "terminated" and wants to rush to save her. Han, in his Oppose manner, refuses to budge. Suddenly, up pops the substory. Luke goes for protagonist to temptation, while Han goes from skeptic to protagonist/main character. Luke entices Han to rescue the princess with the promises of great wealth. While Han in the main story wouldn't budge, Han in the substory does, thus moving BOTH stories forward.

The reason it's a good idea to develop a separate storyform and story file for your substory is so that you have the richness of a full story available to you--even though you will most likely only use a fraction of it in the finished work.

How does Dramatica apply to different lengths of fiction, i.e. how would one apply it to short stories and also to 'epic' fiction (e.g. Lord of the Rings, Shogun, etc..)???

Short stories are usually a subset of a Grand Argument Story. This means that they typically do not go to the depth of a full story, or the breadth (cover all of the throughlines) of a full story. "Epics" usually have one "main" story embellished with LOTS of substories -- stories that are outgrowths of the main story. These substories frequently have one of the objective characters act as the Main Character of the substory. Some "epics" have more than one main story going on. In these cases, it is necessary for the author to be clear about what storytelling belongs to which story. In addition, these stories frequently ALSO have many substories tagging along.