what is the circle around friends location mean

It indicates the location accuracy. See the following from Find My Friends: See where your friends are

On the map, orange dots represent your friends (or their pictures). Your location appears as a blue dot . The shadows around the dots indicate the location’s accuracy (the smaller the shadow the better).

Think if it as the zone of uncertainty. Basically, the precise location could be anywhere within the circle, since the system inherently has some error in location estimation.