When a computer boots, the BIOS transfers control to the first boot device, which can be a hard disk, a floppy disk, a CD-ROM, or any other BIOS-recognized device. We'll concentrate on hard disks, for the sake of simplicity.
The first sector on a hard is called the Master Boot Record (MBR). This sector is only 512 bytes long and contains a small piece of code (446 bytes) called the primary boot loader and the partition table (64 bytes) describing the primary and extended partitions.
By default, MBR code looks for the partition marked as active and once such a partition is found, it loads its boot sector into memory and passes control to it.
GRUB replaces the default MBR with its own code.
Furthermore, GRUB works in stages.
Stage 1 is located in the MBR and mainly points to Stage 2, since the MBR is too small to contain all of the needed data.
Stage 2 points to its configuration file, which contains all of the complex user interface and options we are normally familiar with when talking about GRUB. Stage 2 can be located anywhere on the disk. If Stage 2 cannot find its configuration table, GRUB will cease the boot sequence and present the user with a command line for manual configuration.
Stage 1.5 also exists and might be used if the boot information is small enough to fit in the area immediately after MBR.
The Stage architecture allows GRUB to be large (~20-30K) and therefore fairly complex and highly configurable, compared to most bootloaders, which are sparse and simple to fit within the limitations of the Partition Table.