In-game, the guitar will have two modes. On the neck of the guitar are colored frets similar to Guitar Hero and Rock Band. In the normal mode, colored frets will appear onscreen and you have to play that fret on any string. In advanced mode, the colored frets will also include a number telling you which string you have to play. It isn't nearly as advanced as Rock Band 3's Pro Guitar mode, but it is certainly a step up from typical plastic instrument music games.
That was the hope, at least. In practice it didn't turn out so well. See our review of the Power Gig guitar here.