As with most security mechanisms, the aim is to make it difficult for unauthorized access to occur, without inconveniencing legitimate access. Need-to-know also aims to discourage "browsing" of sensitive material by limiting access to the smallest possible number of people.
The Battle of Normandy in 1944 is an example of a need-to-know restriction. Though thousands of military personnel were involved in planning the invasion, only a small number of them knew the entire scope of the operation; the rest were only informed of data needed to complete a small part of the plan. The same is true of the Trinity project, the first test of a nuclear weapon in 1945.
This term also includes anyone that the people with the knowledge deem necessary to share their knowledge with.
Need to know should be considered a Law and a consideration when designing any system.