IMHO this kind of scenario indicates a missing feature in the application being installed, and is easier to fix in the application than hacking around with the MSI.
Admin Image
Let me first say that a simple way to "solve" this for your users, is to tell them to run an Admin Installation of your MSI. This will essentially extract all the files from the internal CABs and put all files in the specified folder:
msiexec.exe /a myinstaller.msi TARGETDIR=C:\AdminImage
Your users can then go directly into the extracted folder structure and update the file in question and then map the directory to other PC's and install the MSI. There could be side effects to this relating to the file having a hash value in the MSI (to avoid spoofing), but in most cases it works fine.
Run XML XPath Query
New versions of deployment tools such as Installshield and Wix feature built-in support for running XPath queries during the installation and hence write sections dynamically.
Application Update
Setting up an application on a PC involves several steps. First there is the deployment of content to the machine - this should be done using an MSI, no question about it. However, in most advanced applications several "post installation configuration tasks" similar to this "config file update" are required.
It is almost always better to defer these configuration tasks until the application launch, rather than to implement features in the MSI. There are many reasons for this, but the most important being that only the application EXE will be guaranteed to run in the correct user context. MSI files can be run with system rights, a different user account or via some other mechanism.
What we generally recommend is to use the MSI to get all required content onto the PC. Then tag the registry to indicate to the application that it's the first launch (for updates, you can increment a counter or write the new version number to HKLM). Then the application can perform the final configuration steps in its startup routine. It can copy a default config.xml file from somewhere in %ProgramFiles% and copy it to the user profile. Then it can read required values from HKLM written by the MSI, and then update the config.xml file with these values.
In general: avoid configuration steps performed by MSI or any other setup mechanism. Concentrate on writing the required files and registry items to the machine, and then let the application itself set up a proper runtime environment. This will allow much better deployment control. It is better "Encapsulation" if you like. The MSI sends a "message" to the application via the registry, and the application knows "how to set itself up correctly" based on the messages.