When the light rays are scattered by being reflected or by passing through a translucent material that light is diffused. Diffused light provides a more even light and softens shadows in your photograph. You can diffuse artificial light using utensils such as reflectors, diffusers, umbrellas, and softboxes. You can also use diffusers and reflectors to help soften natural light. However, for natural light, the best diffuser is a strong cloud cover, which lessens the intensity of the sunlight as it reaches your subject.
What diffusion does is change the size and intensity of the light source. When shooting outdoors, the sun is a very small, intense light source that creates hard, sharp-edged shadows. When clouds diffuse direct sunlight, the effect is to create a large soft light source. This light has softer shadows and is more evenly dispersed over the area. Cloudy and overcast days are great times to shoot outdoors. People, flowers, buildings all look better when lit with a softer, more even light.
Have a look at other articles describing the influence of lighting conditions on photography:
The Color of Light, Light types, The Intensity of Light, Light Direction,