Here's how it works.
You start with your novel in one Word document. You send that Word document off to the people you want to review it for you. Please make sure you've already run Word's normal spell and grammar checks before you take this step - reviewers tend to get cranky if you haven't done that basic set of proofing before you ask them to take a look. You want it to be as perfect as it can be, and then ask them for polishing help.
Now this is what the reviewer does. These instructions are based on Word 2010, but the instructions would be similar for other versions or for other packages.
First, go to the "Review" tab. This is where all review related items like spelling and grammar are found.
Select the word or phrase you want to point out suggestions for.
Click the "New Comment" button.
At this point, the text you selected will highlight in red, and a dashed line will connect that phrase with a comment box on the right side of the page. It will even number the comment for you. Type in whatever comment you wish.
That's all there is to it. The reviewer isn't altering the base document at all - the document stays intact. The reviewer's notes are all easily seen by the author, so the author can decide if they want to take the advice or ignore it. No trees were chopped down, and it's incredibly quick and easy.
Here's an image of the screen showing a document being corrected. If you look in the menu bar you can see where the "new comment" button is - and you can also see how the author can use a "previous" and "next" button to easily hop between the existing comments to review them.
The green and blue underlining are Word's built in checkers complaining about what it thinks are grammar issues :).
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