Idea generation is a methodology which usually takes place in the Concept Design part of the creative process. This methodology combines divergent thinking (applying a stimulus to generate potential outcomes) and convergent thinking (bringing facts and data together and applying logic).
Iterations help divergent thinking by giving suggestions on how to process the output. They work as a set of guitar effect pedals to your process. There is an input, a set of ambiguous instructions that can be applied to this input, and an undetermined output created by these effects.
In Layman's Terms...
You sketch an idea, then draw a card. Then draw a new sketch based around your interpretation of what the card says. Then draw another card. Sketch another new sketch based on what the card says. And repeat.
The results can lead iterative sketching down new and innovative paths not normally reached through standard idea generation.