Business Capability Maps for Private Equity Success

1. Building Strategic Capability Maps for Private Equity Success www.capstera.com 1

2. Transform Portfolio Companies with Precision Engineering. Business capability mapping has emerged as a foundational ▪ discipline for transformation excellence in the competitive private equity landscape, where value creation must be systematic and accelerated. This strategic tool provides PE firms with a structured framework to identify value creation opportunities, prioritize investments, and track transformation progress across portfolio companies. Capability maps serve as the architectural blueprint that ▪ connects investment theses to concrete operational improvements, enabling PE firms to speak a common language across diverse portfolio companies while maintaining laser focus on the capabilities that truly drive enterprise value and competitive differentiation. www.capstera.com 2 2

3. The Strategic Value of Capability Mapping for PE 1 Capability mapping provides PE firms with a powerful lens to evaluate portfolio companies and drive systematic value creation across the investment lifecycle. This architectural approach shifts focus from organizational structures to the business functions that directly create value. ▪ Investment Thesis Validation: Business capability maps offer a structured framework to validate investment theses by connecting high-level value creation strategies to specific operational capabilities requiring enhancement. ▪ Due Diligence Enhancement: Capability assessment during due diligence enables more accurate evaluation of operational strengths, weaknesses, and transformation complexity before capital deployment. ▪ Transformation Prioritization: Capability maps highlight the critical capabilities that disproportionately drive competitive advantage, ensuring transformation efforts concentrate on areas of highest return. ▪ Technical Debt Identification: Capability-based assessment reveals hidden technical debt and system redundancies that erode operational efficiency and limit scalability. ▪ Exit Value Maximization: Well-documented capability improvements demonstrate sustainable operational excellence to potential buyers, supporting premium valuation multiples at exit. www.capstera.com 3

4. Capability Mapping Fundamentals 2 Business capability maps create a comprehensive inventory of "what" a company does, independent of "how" it performs these functions. This abstraction enables objective evaluation and strategic prioritization. ▪ Capability Definition: A business capability represents a discrete business function that delivers specific value, operates independently of organizational structure, and can be evaluated for performance and strategic importance. ▪ Hierarchical Structure: Capability maps are hierarchically organized (Level 1-3) to provide both executive-level strategic views and detailed operational perspectives needed for implementation planning. ▪ Cross-Functional Perspective: Capability mapping transcends departmental silos, revealing integration challenges and interdependencies that impact transformation success. ▪ Strategic Neutrality: Capability maps describe "what" the business does rather than "how" it operates, creating an objective foundation for strategic assessment and improvement planning. ▪ Stable Architecture: Unlike processes or organizational structures that frequently change, capabilities remain relatively stable over time, providing a consistent framework for multi-year transformation journeys. www.capstera.com 4

5. The PE Capability Mapping Process 3 Developing an effective capability map for PE portfolio companies requires a structured approach that balances comprehensiveness with strategic focus. The process follows a clear sequence from initial scoping to final validation. ▪ Scope Definition: Establish clear boundaries for the capability mapping exercise, determining whether to map the entire enterprise or focus on specific value streams or business areas aligned with the investment thesis. ▪ Level 1 Framework: Develop the top-level capability categories that provide the foundation for the map, typically including core, supporting, and strategic capability groups. ▪ Decomposition Process: Systematically break down Level 1 capabilities into increasingly detailed Level 2 and 3 capabilities while maintaining consistent granularity within each level. ▪ Cross-Functional Validation: Engage cross-functional stakeholders to validate the capability inventory, ensuring completeness and accurate representation of the business. ▪ Attribute Development: Enhance the capability map with critical attributes such as strategic importance, current performance, competitive position, and transformation complexity. www.capstera.com 5

6. Accelerating Time-to-Value with Pre- Built Capability Maps 4 Leveraging pre-built and customizable business capability maps dramatically accelerates the mapping process while reducing costs and ensuring comprehensive coverage of industry-specific capabilities. ▪ Time Compression: Pre-built capability maps reduce development time from months to weeks, enabling PE firms to move quickly from capability assessment to transformation planning within the compressed timelines of PE ownership. ▪ Industry Benchmarking: Industry-specific capability maps incorporate best practices and competitive benchmarks, providing immediate context for assessing portfolio company capability maturity. ▪ Completeness Assurance: Pre-built maps ensure comprehensive capability coverage, eliminating the risk of overlooking critical capabilities during the assessment process. ▪ Common Language: Standardized capability frameworks establish a consistent language across the PE portfolio, facilitating cross-company comparisons and best practice sharing. ▪ Cost Efficiency: Purchasing and customizing pre-built maps requires significantly less investment than developing maps from scratch, typically reducing mapping costs by 60-70% while improving quality. www.capstera.com 6

7. Did You Know According to research by Bain & Company, PE firms ▪ utilizing capability mapping during due diligence identify 40% more value creation opportunities than traditional operational due diligence approaches, achieving 2.5x higher success rates in transformation initiative implementation. www.capstera.com 7

8. Capability Assessment for Portfolio Companies 5 Capability assessment translates the map into actionable insights by evaluating current performance, strategic importance, and transformation potential across the capability landscape. ▪ Maturity Evaluation: Systematically assess the maturity of each capability using a standardized scale (typically 1-5) that considers process quality, technology enablement, talent, and governance dimensions. ▪ Strategic Importance Rating: Evaluate each capability's contribution to competitive advantage and investment thesis realization to identify capabilities with disproportionate strategic impact. ▪ Competitive Benchmarking: Compare capability performance against industry peers and best practices to identify performance gaps and improvement opportunities with highest value potential. ▪ Heat Map Visualization: Develop heat map visualizations that highlight capability gaps between current maturity and strategic importance, creating a compelling view of transformation priorities. ▪ Quick Win Identification: Identify capabilities where maturity can be rapidly improved with relatively low investment to create early transformation momentum and stakeholder buy- in. www.capstera.com 8

9. Capability Roadmapping for Value Creation 6 Capability roadmapping translates assessment insights into a structured transformation plan that sequences capability improvements based on value, dependencies, and implementation complexity. ▪ Investment Thesis Alignment: Ensure capability improvement priorities directly support the core value creation levers identified in the investment thesis, creating clear strategic alignment. ▪ Dependency Mapping: Identify and document capability dependencies to create logical sequencing that addresses foundational capabilities before dependent capabilities. ▪ Resource Optimization: Develop capability enhancement waves that optimize resource utilization and balance transformation capacity across multiple concurrent initiatives. ▪ Time-Horizon Planning: Structure capability improvements across distinct time horizons, from quick wins (0-6 months) to medium-term enhancements (6-18 months) and long-term transformations (18+ months). ▪ Exit Timing Considerations: Align capability roadmaps with anticipated exit timelines, prioritizing improvements that will significantly impact exit valuation and be fully realized before the sale process. www.capstera.com 9

10. Technology Enablement of Capabilities 7 Effective capability mapping connects business capabilities to their enabling technology systems, creating visibility into technology gaps and investment priorities. ▪ Application Portfolio Mapping: Create a systematic mapping between business capabilities and supporting applications to identify capability gaps, redundancies, and misalignments in the technology portfolio. ▪ Technical Debt Identification: Evaluate technology enablement maturity for strategic capabilities to highlight technical debt that threatens value creation or creates operational risk. ▪ Investment Prioritization: Use capability-to-technology mapping to prioritize technology investments based on the strategic importance of the capabilities they enable. ▪ Architecture Simplification: Identify opportunities to rationalize the application landscape by eliminating redundant systems supporting the same capabilities across the organization. ▪ Build vs. Buy Decisions: Leverage capability mapping to make strategic decisions about whether to build custom solutions or purchase commercial off-the-shelf products based on capability differentiation value. www.capstera.com 10

11. Organizational Alignment to Capabilities 8 Capability mapping provides a framework to optimize organizational design and ensure clear capability ownership across the portfolio company. ▪ Capability Ownership Clarity: Establish clear executive ownership for each Level 1 capability to ensure accountability for performance improvement and transformation success. ▪ Operating Model Optimization: Use capability mapping to inform operating model decisions, determining which capabilities should be centralized, federated, or decentralized based on strategic importance. ▪ Skill Gap Analysis: Identify critical skill gaps that must be addressed through hiring, training, or strategic partnerships to improve capability maturity and performance. ▪ Shared Service Opportunities: Leverage capability mapping across portfolio companies to identify capabilities that could benefit from shared service models and economies of scale. ▪ Organizational Streamlining: Identify organizational overlaps and redundancies where multiple departments support the same capabilities, creating opportunities for structural simplification and cost reduction. www.capstera.com 11

12. Did You Know Research by McKinsey reveals that PE portfolio companies ▪ using capability-based technology prioritization achieve 30% higher ROI on technology investments and 40% faster time-to-value compared to companies making technology decisions without capability mapping frameworks. www.capstera.com 12

13. Process Excellence through Capability Mapping 9 Capability mapping creates the foundation for process optimization by connecting capabilities to their supporting processes and identifying improvement opportunities. ▪ Process-to-Capability Alignment: Map key business processes to their supporting capabilities to ensure process improvement initiatives target strategically important capabilities. ▪ Value Stream Optimization: Use capability mapping to identify cross-capability value streams that deliver customer value, highlighting integration points requiring improvement. ▪ End-to-End Process Ownership: Establish clear ownership for end-to-end processes that span multiple capabilities to prevent siloed optimization and ensure cohesive transformation. ▪ Process Standardization Opportunities: Identify core capabilities where process standardization would create significant efficiency and quality improvements across the organization. ▪ Automation Candidate Identification: Use capability mapping to prioritize process automation initiatives based on the strategic importance and improvement potential of the 13 underlying capabilities. www.capstera.com 13

14. Performance Measurement through Capability Lenses 10 Capability mapping enables PE firms to establish performance metrics that directly connect operational improvements to enterprise value creation. ▪ KPI Alignment: Develop capability-specific key performance indicators that directly measure how capability improvements contribute to value creation levers in the investment thesis. ▪ Performance Dashboards: Create capability-based performance dashboards that provide visibility into transformation progress and operational improvements across the portfolio company. ▪ Benchmark Integration: Incorporate industry benchmarks into capability performance metrics to provide context for improvement targets and highlight competitive positioning. ▪ Leading Indicators: Develop leading performance indicators for critical capabilities that provide early warning of potential issues before they impact financial results. ▪ Investment-to-Outcome Tracking: Establish measurement systems that track the direct impact of capability investments on operational and financial outcomes to validate ROI. www.capstera.com 14

15. Capability-Based Portfolio Management 11 For PE firms with multiple portfolio companies, capability mapping provides a framework for portfolio-wide value creation and best practice sharing. ▪ Cross-Portfolio Assessment: Conduct standardized capability assessments across portfolio companies to identify common capability gaps and improvement opportunities. ▪ Best Practice Transfer: Identify portfolio companies with exceptional capability performance and create mechanisms to transfer best practices to companies with capability gaps. ▪ Center of Excellence Development: Establish centers of excellence for strategically critical capabilities that can provide expertise and standardized approaches across the portfolio. ▪ Capability Synergy Capture: Identify opportunities for capability sharing or consolidation across portfolio companies to capture economies of scale and expertise concentration. ▪ Portfolio-wide Technology Rationalization: Use capability mapping to identify opportunities for standardized technology platforms that can be leveraged across multiple portfolio companies. www.capstera.com 15

16. Capability Mapping for Buy-and- Build Strategies 12 Capability mapping provides critical support for buy-and-build strategies by streamlining the integration of add-on acquisitions and maximizing synergy capture. ▪ Acquisition Targeting: Use capability mapping to identify acquisition targets with complementary capability strengths or strategic capabilities missing from the platform company. ▪ Due Diligence Enhancement: Apply capability assessment methodologies during due diligence to evaluate the maturity and fit of target company capabilities with the platform strategy. ▪ Integration Planning: Leverage capability mapping to create detailed integration plans that prioritize capability consolidation based on value creation potential and implementation complexity. ▪ Synergy Identification: Use capability comparison between platform and add-on companies to identify specific synergy opportunities and quantify potential value creation. ▪ Cultural Integration: Leverage capability frameworks to create a common language and shared understanding across merged organizations, accelerating cultural integration. www.capstera.com 16

17. Did You Know A 2023 study by Ernst & Young found that PE portfolio ▪ companies with formalized capability governance frameworks achieved 35% higher success rates in transformation initiatives and realized value creation goals 40% faster than companies without structured capability governance. www.capstera.com 17

18. Capability Innovation for Market Disruption 13 Beyond operational improvement, capability mapping enables PE firms to identify opportunities for capability innovation that can disrupt markets and create premium valuation multiples. ▪ Capability Gap Analysis: Identify industry-wide capability gaps that could be filled through innovative approaches to create competitive differentiation and market disruption. ▪ Digital Capability Building: Use capability mapping to identify traditional capabilities that could be digitally transformed to create new customer value propositions and market opportunities. ▪ Ecosystem Capability Integration: Identify opportunities to integrate external partner capabilities into the portfolio company's capability map through API-enabled business models and strategic partnerships. ▪ Adjacent Market Expansion: Evaluate how existing strong capabilities could be leveraged to enter adjacent markets with minimal additional capability investment. ▪ Emerging Technology Mapping: Systematically evaluate how emerging technologies like AI, blockchain, and IoT could enhance strategic capabilities to create competitive advantage. www.capstera.com 18

19. Capability Governance for Sustainable Transformation 14 Establishing effective capability governance ensures transformation initiatives remain aligned with strategic priorities throughout the PE ownership period. ▪ Governance Structure: Establish a capability governance framework that includes executive sponsorship, clear decision rights, and regular review processes for capability transformation initiatives. ▪ Investment Approval Processes: Implement capability-based investment approval processes that ensure all significant investments directly support priority capability improvements aligned with the investment thesis. ▪ Transformation Monitoring: Create systematic processes to track capability improvement progress, identify execution risks, and implement course corrections when needed. ▪ Benefit Realization Management: Implement formal processes to track and validate the benefits realized from capability improvements, ensuring accountability for transformation outcomes. ▪ Knowledge Management: Establish systems to capture capability improvement methodologies and lessons learned, creating institutional knowledge that enhances future transformation efforts. www.capstera.com 19

20. Exit Preparation Through Capability Lens 15 Capability mapping provides a powerful framework for maximizing exit valuation by demonstrating sustainable operational excellence to potential buyers. ▪ Capability Maturity Documentation: Create comprehensive documentation of capability improvements achieved during the holding period, with clear evidence of maturity progression and performance impact. ▪ Strategic Buyer Alignment: Identify and highlight capabilities that would be particularly valuable to potential strategic buyers, positioning these as key elements of the exit value proposition. ▪ Future Capability Roadmapping: Develop forward-looking capability roadmaps that demonstrate additional value creation potential available to the next owner. ▪ Operational Stability Evidence: Use capability maturity assessments to demonstrate operational stability and reduced execution risk to potential buyers, supporting premium valuation multiples. ▪ Transformation Sustainability: Provide evidence of how capability improvements have been institutionalized through structural changes, ensuring sustainability beyond the exit transaction. www.capstera.com 20

21. Takeaway Business capability mapping gives PE firms a powerful architectural framework to drive value creation across portfolio companies systematically. By creating visibility into the capabilities that truly matter for competitive advantage and enterprise value, capability mapping enables more focused transformation efforts, clearer prioritization, and more effective resource allocation. PE firms that adopt capability- based approaches to portfolio transformation achieve faster value creation, more sustainable operational improvements, and ultimately higher exit valuations through demonstrated operational excellence. 21 www.capstera.com 21

22. Next Steps 1. Assess Your Current State: Evaluate your current approach to portfolio company transformation against capability-based best practices, identifying opportunity areas for more structured architectural approaches. 2. Start with a Pilot: Select a portfolio company where capability mapping could immediately enhance an existing transformation program, creating a practical demonstration of the methodology's value. 3. Leverage Pre-Built Maps: Research industry-specific capability map frameworks that can accelerate your mapping process while ensuring comprehensive coverage and best practice alignment. 4. Develop Assessment Methodology: Create a standardized capability assessment approach that combines maturity evaluation, strategic importance rating, and competitive benchmarking to drive prioritization. 5. Establish Governance: Implement lightweight capability governance that ensures transformation initiatives remain focused on the capabilities most critical to your investment thesis and value creation plan. 22 www.capstera.com 22

23. Capstera is a treasure trove for Business and Enterprise Architects. ▪ Capability Maps for Various Functions and Sectors. ▪ Value Streams ▪ Business Data Models ▪ Insights ▪ Tools, Templates, and Tutorials Stay in touch with Capstera. www.Capstera.com https://www.linkedin.com/company/capstera https://www.X.com/Capstera https://www.facebook.com/capstera Note: Capstera’s products and their contents may differ from the general information offered in these guides.) 23 www.capstera.com 23

24. Thank you Like | Share |Comment |Repost www.Capstera.com www.capstera.com 24