While the following discussion strictly applies to steel string acoustic guitars, the basic theory is the same for classical and electric guitars, as well as a wide variety of other fretted string instruments.

THE FOUR ADJUSTMENTS:
There are four, and only four, basic, universal adjustments that affect the playability of every guitar. These are as follows: adjusting the amount of relief (or "bow") in the neck, adjusting the string height at the saddle, adjusting the string height at the nut and adjusting the intonation. These four adjustments are what I refer to as "basic guitar set-up".

In contrast with "repair" work, which is work that may need to be performed on a specific instrument in order to maximize the playability of that particular instrument, set-up work is a series of adjustments that need to be performed at least once on every guitar. Very few manufactures take adequate time to properly perform these adjustments. Even when manufacturers do, the set-up is very general and aimed at the "average" player, rather than the specific preferences of an individual player.

Continues:
http://www.guitarnotes.com/notes/noteget.cgi?basic_guitar_setup