Hi,
Yes, the processor on the keyboard scans the rows & columns looking for key-down and key-up. When it finds it it sends looks up the row and column in a table and sends the matching keyboard scancode to the computer via USB (or whatever).
If you've got a $15 Dell keyboard that's all you get on the keyboard side. Nothing is programmable.
If you've got a programable keyboard, however, you have more options.
Let's say your Esc key came at Row-0, Column=0.
Further let's say CapsLock is at Row=3, Column=0.
If you want to swap "Esc" and "Capslock" you can change the code emitted by each key by changing the look-up table. So Row=0, Col=0 will output the code for CapsLock instead of Esc.
(There are more complex options as well.)
Then, you never need The Microsoft Keyboard Layout Creator, or similar, or a different program for every OS you use.
Every computer you bring your keyboard to will behave as you like.
Especially useful for Ergodox where the layout is "so odd" everyone will want something at least a little different.