Yes, you play this game with a "Real" (smaller) guitar, and it's great!
The game play for the guitar is quite as expected, you have the colored notes going up and depending on the mode you choose, there's no distinction on what string you use, it all works quite as the regular guitar hero guitar. It's quite tricky but when you get get used to the guitar it flows very well. I do play the regular guitar, so I guess I had a starting point for this and you can choose to use or not power chords, and those o take in consideration what string you use.
I also tried the vocal in this game with a mic that I already had, works just fine as a karaoke game. I only didn't try the drums, that really don;t look like fun to play and also I don't have them.
The career mode has a crazy but uninspiring story, that's just there to justify the progression of the game. It works, but really nothing special. Go thinking it's another guitar game, you're here for the music.
So you can justify to get this game for the game play, or if you're looking for a cheap guitar to play around, either way I don't regret my purchase and can see myself going back in the future.