It means you have to give the path to source of whatever you're trying to install.
What directory did you decompress your binary in? If you had uncompressed it in the /usr/local directory, your full path to libiconv might be:
/usr/local/libiconv
(Notice I used the words "might be"--it all depends on what/where you uncompressed)
So according to the info you quoted from the PHP manual, you'll need to include the following line when you do ./configure:
--with-iconv=/usr/local/libiconv