iOS and Firmware differences
Heres a short overview.

The term "firmware" for iOS devices covers some or all of the following items dependant on the device:


the baseband (the phone code implementing the cell tower
communications for voice and data)
the device firmware (akin to the BIOS) otherwise known as the boot
ROM
the device software (iOS itself)


Devices like the iPod touch and the non-3G iPads don't have basebands, however the builds for the devices may cover both the WiFi only and 3G enabled devices so will include the baseband update.

Builds that target different generations of devices may contain multiple baseband's for different versions of phones since the baseband chip may be from different manufactuer's as in Qualcomm for the newer devices or Infineon for the older devices.

So when the phone turns on, the code in the Boot ROM runs, it activates the hardware (the phone and the baseband), and then proceeds to start the software (iOS)