Ok
When you get the arduino board(not just the standalone chip)
It already has a bootloader and the fuses are already set.
What the fuse do is simple, it tell the IC chip that we use internal or external oscillator and the frequency range(along with a few other options like bootloader reserved space)
The bootloader, it allow us to program the chip through the serial connection of the chip wich are digital pin 0 and 1(with the use of a serial/usb converter, ft232rl) No programmer needed.
(it also take 2kb of memory space and about 1 or 2 second of delay at startup, wich are not a big deal)
So when you get an arduino board, all you have to do is connect the arduino/serial to usb converter/and pc. and your ready to compile and upload your code(you dont need a ISP programmer just the serial/usb converter FT232RL). (this is the method i use)
Now when you get a bare chip.
Some of them already have the bootloader and fuse set. (in that case its same thing as above with arduino board, its ready to go just need power and external oscillator)
Like this one:
https://www.sparkfun.com/products/10524
(again with this one you dont need the ISP programmer just a serial/usb converter FT232RL)
Some/most of them do NOT have the fuse set and bootloader. (like the one you posted)
When you have the bare standalone chip that do NOT have the Fuse set and bootloader).
You have to set the fuses to use it. (default setting for the arduino uno"328p" is 0xFF, 0xDE, 0x05)
Or you can use a fuse calculator like i posted above(for custom fuses settings).
To set the fuses you need the ISP programmer.
For the ISP programmer you can use an arduino as an ISP programmer.(i think that's where you got confused)
that is not our case we will simply use a ISP programmer. so the process is still the same(we just dont need to program one more arduino as an ISP programmer, since we just use the one you posted).
https://www.sparkfun.com/products/9825
Now to set the fuses there is 2 way, one easy and one less easy(both method use a ISP programmer).
The easy way is simple, you just use the arduino IDE to upload the bootloader(that will also set the default arduino fuses settings)
and we are ready to go. In this state its just like the working arduino board above.
The hard way is using avrdude and command lines. its not really "hard" but it allow us to set custom fuse settings.
Once these step are dones.
If you used the hard/avrdude method, obviously there is no bootloader, so you have to upload the code through the ISP programmer.
If you used the easy method(arduino IDE) you have the bootloader and fuse Set and you now have 2 more options.
You can leave the bootloader in there, that will allow programming and re-programming of the chip through the serial connection(using a serial/usb converter ie: FT232RL).
OR you can upload the code using the ISP programmer, that will overwrite the bootloader(fuses will still be set)
And the only way to program and re-program will be using the ISP programmer(You can add the bootloader back in there if needed). But the ISP header also use our PWM output pins so.. if you want the ISP header to be working after final assembly on the PCB your going to need a solder jumper pad to digital I/O 11(to disconnect our output pin from the circuit while we are using the ISP headers).
(if you want to allow people who are going to use the product to be able to re-program it themself then leaving the bootloader is a good idea)
Now, we need it running at 16Mhz so we will use the 16Mhz fuses settings and 16Mhz external crystal oscillator.(i guess you know that)
BUT, with the bare chip, when you first set the fuses, you also need that 16Mhz crystal oscillator.(i may be wrong there maby)
If you let the chip use the internal oscillator while you try to set the fuses for 16Mhz, i don't know what outcome it could have. Need to do a bit more reading/homework. But if it was me, i'd get a second pair or 16Mhz xtal and capacitor for the ZIF/programmer.
Also this is in AVR not a PIC.
Yes they are pretty much the same thing, but there still some differences besice the manufacturer.
Also Atmel(AVR) and microchip(PIC) fused together, they are now one business. (Can't wait to see the new gen of microcontroller).