After Fa Mulan runs away from home to serve in her elderly father Fa Zhou's place in a war against the deadly Hun army, the spirits of the ancestors choose to send the Great Stone Dragon to simply bring her back home safely. For the task of awakening him, they send Mushu, who is offended when he is not asked to find her himself (in the past, his actions in protecting the Fa family led to disaster). After several unsuccessful attempts at waking the Dragon, he ends up accidentally destroying the dragon statue after breaking its ear off. To cover for his mistake, Mushu imitates the being. The ruse works, and the head ancestor tells the "dragon" to go and fetch Mulan.
It's implied the great stone dragon didn't want to be a guardian and replaced himself with a statue replica of himself since he never woke up and his spirit didn't rise up when Mushu accidentally smashed his statue.