A dear folk, Kohei Yoshida, in LibreOffice Dev mail list answered this question with a long, crystal explanation:
First, when you initially create a pivot table with source data within
your Calc document, the table output is created with however many
fields you may have in the source data. Let’s say you have the
following field values:
Field1 1 2 3 4 5 6 7 8 9 10
then the pivot table will create a field for this Field1, initially with no hierarchy i.e. the raw values will get shown.
You can assign grouping to this field, by moving the cell cursor to where this field data is displayed within pivot table, and either press F12, or select Data → Group and Outline → Group from the menu. For this set of values, you can only create a numeric range group, to group the values in some specific intervals. If you have a set of date values, you can also apply date-based grouping i.e. years, quarter, months, days, and so on.
This grouping is what is referred to as hierarchy. The two are interchangeable, but in the source
code, this is referred to as hierarchy pretty much exclusively.
Under normal circumstances, each field can have only one hierarchy, or none at all, as far as I know. Someone please correct me please if this is not accurate, but I’m certain this is the case.
As Steve said (prior in the maillist), this option is always grayed, because it will get active only when the field has more than one hierarchies, which, as I said above, almost never happens under normal circumstances.
Having said this, here is a scenario where that option may become active, but it needs a bit of an explanation.
Calc’s pivot table implementation is split into two parts. You can refer to them as the front end and back end portions. Some people may hate these terms, but I don’t care. The back-end part takes care of defining the structure of the source data, in terms of fields (or dimensions as they are referred to in the code) and the structure of each field. Each field consists of three layers - first layer > is hierarchies, the second layer is levels, and the last layer is members. A hierarchy is the type of grouping applied (i.e. value range, years,
quarters etc), a level is a specific bucket within the defined hierarchy, i.e. range 1-4, year 1980, month of
August etc. A member is an original value.
The front-end part receives this structure provided by the back-end, and displays it in sheets, or recently
in charts, and/or provides various dialogs for tweaking the parameters. The back-end part is implemented as a UNO component, and in theory it can be swapped with one implemented by an extension. But when your data source is Calc’s own sheet, you are using Calc’s own back-end implementation, and this one does not allow multiple hierarchies in a field. This is why that hierarchy option is always grayed out.
Because the UNO API itself allows each field (or dimension) to have multiple hierarchies to be defined, in theory if you use an pivot table data source extension, that extension can define multiple hierarchies for some fields, and then that option will become active. Having said that, I have never seen any pivot table extension in existence, so I have never seen it active myself. At one point I almost wrote a pivot table data source extension myself as an experiment, but I never got to finish it up to see the light of day.
Then, for the purposes of Calc Guide, another dear folk, Steve M Fanning, summed up the info to be put in it: