Significance of the universal form of Lord Krishna
Lord Krishna is considered as one of the 10 incarnations of Lord Vishnu. Etymologically, Vishnu means "All-Pervading" i.e. an entity that is present in all. Lord Vishnu is spread out in the universe in all and incarnates in some form to establish righteousness from time to time.
Bhagavad Gita Chapter 4, Verse 7 & 8
"Whenever whenever there is decay of righteousness, O Bharata! and exaltation of unrighteousness, then I create Myself.
For protection of the good, and destruction of evil-doers, for the sake of firmly establishing righteusness, I'm born from age to age."
What the universal form means
The universal form of Lord Krishna is the link between God and the universe as we know it. The clear inference is that God and the universe are not different from each other. The first name in the Vishnu Sahasranama (The 1000 names of Vishnu) is Viswam which means "The universe". The idea is so important that the name Viswam is given the 1st position, even before the name Vishnu, which comes next.
How the universal form of Lord Krishna is
In the 11th chapter of the Bhagavad Gita, Lord Krishna shows to Arjuna the universal form on his request. This chapter needs to be taken metaphorically rather than literally. When Lord Krishna says that He gives Arjuna the divine vision, it means He is giving a new way of looking at things. Initially, Arjuna is excited to see the various faces, colours, ornaments, scents and weapons of the cosmic form. He looks at the infinity aspect of the universe. He looks at the different Gods in their respective roles. however, his excitement turns into fear as he watches the way the wrong-doers are punished. The universe burns and some get crushed beneath underneath. Even the Gods become alarmed at this terrible form of Lord Krishna. In this form, Lord Krishna establishes His omnipotence and total unacceptance of wrong-doers.
Arjuna finds Drona, Bhishma, Jayadratha and Karna killed. This is a pre-determination of things to come. Lord Krishna tells Arjuna that He has already determined the outcome of the war. Arjuna is merely a tool and need not feel guilty of committing a sin in killing his enemies in the battle. His duty was to execute God's orders and enjoy the fruit that God has allotted him.
When Arjuna becomes terrified seeing this terrible form, Lord Krishna placates him by giving back the normal vision of Him. lord Krishna tells Arjuna that He showed the universal form because He was pleased with Arjuna and that even the Gods were too eager to see it. Lord Krishna revealed His universal form to His mother Yasodha when she asked Him to open His mouth when He was a child, to Bhishma when he was lying on his deathbed of arrows and to Karna after he was shot by Arjuna and was about to die.