It basically does the same thing you would do to put a mod into your game. It replaces the files in the game with the modded files. It automates the process of backing up the original files, checking for conflicts and keeping track of which mods are installed and which aren't. In general, it makes modding life a lot simpler!
One thing you need to make sure to do is check the folder structure on the mods when you decompress (unzip, unrar, un7z) them. Always make sure that the folder you put in the MODS folder is the one that (generally) contains the Data folder. Most mods change a file that is contained somewhere in the Data folder (or a folder contained in it), so you can tell that you have reached the mod itself when you get to the Data folder.
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