Though I think it's really helpful to think of clothing in terms of "lifestyle categories" and how an item fits into one or more of them, I tend to think of capsules in a more old-school way.
To me, a capsule is a smaller group of items that works together in terms of color, fabric, and proportion. Wear top A with bottom B or C; wear bottom C with tops D and E. Use accessory F as a scarf for this and a belt for that. Etc, etc. [Garanimals!]
It's the type of thing you often see in articles on packing for travel, and I actually think it can help a LOT when starting over with a wardrobe or trying to update one's closet.
Judging from all the mixing and matching I see on the forum, I actually think a lot of YLFers do the capsule thing!
Unfortunately, I don't have any great suggestions about how to MANAGE capsules, ha (where are those articles?!).
But I stumbled into HAVING an accidental (mini)capsule last year when I was buying a very limited number of items for fall/winter. [I knew each item would work with lots of other stuff in my closet, I just didn't realize it would work together.]
Since I only tend to buy 5-10 pieces of clothing each season, I'm now trying to always have a good chunk of those pieces work as a capsule. The potential downside is that a season may become your "Color X" season....
In the end it's more important to me that most of my new stuff work wells with the older stuff.
But honestly I found a capsule does make it simpler to pack, to feel like I have multiple newer outfits that work with my style [and/or current trends, if I wanted to go there], and to just know *what* will work with what.
Hope that is somewhat helpful.