As Lord. has mentioned (paraphrased) your tone knob simply drops the amount of treble in the signal produced by your guitar,in effect the pot (potentiometer) and capacitor [which are affected by the knob] filter out treble frequencies as you turn the knob down.

Early Telecasters/Broadcasters were sometimes used as bass guitars because their ability to filter treble out was so good (sic).

An effects unit/pedal will boost/alter the gain(etc) and add various effects such as mentioned by dot.dot.dot.

For example mc9mm's crappy Hondo and 5w amp put through a fairly decent effects processor will have the ability to sound like Hank Marvin in a cave or Korny guitarizt meets EVH at a very heavy metal festival in Bonkersland,given the limitations of the guitar/amp.

Effects processors are the cheaper way into getting lots of different FX for your money,but i prefer pedals as the effects in my effects box ain't that exciting/affecting..

If you listen to some Jimi Hendrix you'll get an idea of what quality pedals can do for your sound.

Effects pedal of choice..Wah..Voodoo Chile(Slight Return)....etc.