We've always had a tension between enterprise design practices and a "small pieces, loosely joined" way of making software, to use David Weinberger's felicitous phrase. The advantages to the latter are in part described in Worse is Better and The Cathedral and the Bazaar. Situated software is in the small pieces category, with the following additional characteristic -- it is designed for use by a specific social group, rather than for a generic set of "users". This will carry some obvious downsides, including tying the developers of such applications to community support roles, and shortening the useful lifespan of the software made in this way.
Situated software isn't a technological strategy so much as an attitude about closeness of fit between software and its group of users, and a refusal to embrace scale, generality or completeness as unqualified virtues. Seen in this light, the obsession with personalization of Web School software is an apology for the obvious truth -- most web applications are impersonal by design, as they are built for a generic user. Now, though, I think we're starting to see a new software niche, where communities get form-fit tools for very particular needs, tools that fail most previous test of design quality or success, but which nevertheless function well, because they are so well situated in the community that uses them.