In a nutshell, the phrase, often attributed to Henry Kissinger, refers to the idea that Germany, by virtue of its relatively large population, natural resources, and central geographic position in Europe is much stronger than any of its continental neighbors (eg Italy, France, Belgium, etc.). The second part of the epigram (too small for the world) contends that whatever Germany's power in the continent of Europe, it was unable to match great powers who have to ability to project power globally (eg the British Empire, the US, USSR). Thus, as the saying goes, Germany is caught in a geostrategic dilemma is that while it can dominate its neighbors, it cannot translate that domination into Weltmacht (global power). Therefore, Germany could win small localized wars like the Wars of German Unification quite handily, but stumbled during the two World Wars.

It's a pithy epigram, and there is some degree of accuracy to it, but it takes a very narrow definition of power and a somewhat deterministic view of German history by implying both that Germany would inevitably grasp at Weltmacht and was foredoomed to fail at such attempts.