The Phone Dialer action is used to make calls over a normal phone line via a modem. This action doesn't need an ISP, but rather calls a phone (a human who would recognize the Caller ID), perhaps an automated system, or an attached cell phone through which SMS messages can be sent.
The Phone Dialer can also optionally send DTMF tones (touch-tones) which could be useful for automatically navigating a phone menu system, and any other characters such as SMS message text.
The timeout values are important. Since there isn't a well defined audio protocol with humans and/or phone systems on the other end, you'll need to build in delays. This includes delays for the other party to answer. So be sure to specify enough pause after dialing the number for the number to go through, the other phone to ring and be answered.
The modem script is shown at the bottom of the dialog, and will work with most modems since it is built on the basic Hayes AT command set. Your modem may have other features and/or require other commands. Your modem documentation will list the commands it accepts. If you need to modify the script to work with your specific modem, check "Allow editing of command directly".
For sending SMS messages via a directly connected cell phone, you'll need to modify the script directly. Look in your phone manual for the commands for sending messages. In general you'll be using some form of the AT+CMGS command.