Basically, there will be (optional) separate tactical battles; when two armies meet on the strategic map, a new tactical map opens up where "simultaneous turn based combat with tiles" occurs. Unfortunately we know relatively little about combat, it's going to be one of the last features implemented (just before modding tools).
Most of what we do know comes from this post, which is interesting reading.. but most of it is a debate about the specifics of combat, we haven't received any final answers to the questions that get argued over (as far as I know). We probably won't know the details until the tactical combat beta (Beta 3, the next one).
An excerpt:
Originally, Elemental was going to have continuous turn combat. That effectively meant real-time. Ultimately, after playing around with it, we decided to implement turn based (simultaneous turns based on combat speed) with tiles.
