Setup is much like how you would setup say, your armchair. Or your car. Or your pc.
You want the object to be setup to your preference or to perform in a certain.
So for guitar, some people like high action and enjoy fighting with the guitar. Some, like me, like low low action and want the guitar to play like butter. Etc etc.
Setups are very personalised.
Factory Setups are usually off because:
1) Only so much time @ a factory to setup the guitar - hundreds more in queue
2) Shipping from 1 climate to another can cause wood to shift/move.
3) Not personalise.
As for the steps to setup or what constitutes to a setup... best you google.