The best way to do this is probably to use the "Quickload" function.
You can access that by clicking on the mulit-pane 'window' icon and choosing Quickload, hitting CTRL +F, or right-clicking in the main window.
This allows you to create your own category folders in any way you want, and then drag the instruments into the folders.
Looking at the "Files Tab" on the left pane you can browse and drag whole instruments into your category folders.

I decided to put all my libraries in there, so I made a full category list.
Then I dragged whole "Instruments" folders into the category folder. Then i looked at the subfolders and .nki files... and usually just highlighted (shift and arrows) and dragged them back under the "Instruments" folder, then delete the empty "Instruments" folder.

That folder is actually located in your ...Users\*username*\AppData\Local\Native Instruments\Kontakt\" folder.
You could start out making a template of folders and subfolders but when it comes to actually putting the instruments in, it is best to use Kontakt so you can see how it will look, and rename folders to make it more tidy (usually abbreviating).
Here is a pic of how mine looks: (I loaded up Exosphere to make the Kontakt GUI go wider to show the folder structure)

I use Quickload for everything and I do not miss the pretty wallpapers