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In a military context, the chain of command is the line of authority and responsibility along which orders are passed.
The line will generally go from a higher ranked soldier who gives the order, i.e. an officer, down to a lower ranked soldier who is ordered to do something, i.e. a common soldier.
In general, military personnel give orders to only those directly below them in the chain of command, and receive orders from only those directly above them. For example, a common soldier who has a problem with carrying out an order is likely to get disciplined for not observing the chain of command if he skips the officer who is in direct command of him, and directly appeals to a higher ranked officer in his chain of command.
It also implies that a higher rank alone does not entitle to give commands. For example, an officer of a given military unit is not in a position to directly command common soldiers of another unit, as this officer is outside of their chain of command. If the officer needs something from the soldiers of another unit, he would generally be expected to approach an officer along their chain of command.
The term is also used in civilian context describing comparable hierarchical structures of authority, i.e. in management.
See also:
military rank (http://en.wikipedia.org/wiki/Military_rank).
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