INVESTMENT STRATEGY: MARKET-ORIENTED PRIORITISATION OF INVESTMENTS IN RAILWAY STATIONS
Problem & client overview
Investment prioritisation is important when the costs of all potential investment options exceed the available budget. Compared to other prioritisation problems, investment decisions are of special relevance due to their long-term, strategic impact. Therefore, it is vital to base such decisions on a comprehensive and sound analysis.
Together with a MARA1 team, the DB Station&Service AG - a subsidiary of the German railway company Deutsche Bahn AG - developed a multi-criteria decision analysis (MCDA) approach for prioritising infrastructure investments. As an integral part of the formerly state-run Deutsche Bahn AG, the daily business of the DB Station&Service AG involves a large number of stakeholders. As a result, the company faces numerous constraints when allocating its investment budget:
- Historic complexity: Legacy of regulatory obligations
- Decision Autonomy:
- Internal: High degree of interdependency of (holding) investments
- External: Public authorities as an important source of funding
Additionally, at the moment, investment decisions seem to be made on a case-to-case basis. As such, investments are not necessarily considered in the context of the whole station portfolio managed by DB Station&Service AG. Decisions also seem to lack a detailed comparison of the efficiency of all possible measures within one station.
Objectives of the project
The restrictions and shortcomings described above result in a sub-optimal investment portfolio. The integrated approach applied in this project aims to provide strategic insights for the adjustment of medium to long-term planning. It facilitates the allocation of resources across different categories of stations and investment fields based on a value-for-money relationship. The examination of resource allocation is carried out as a pilot project in one administrative region, allowing for precise and high-quality outputs in the short time frame available for the project execution.
Modelling approach
An MCDA model that integrates both hard financial data and relative expert judgements was constructed. It includes a comprehensive set of investment options, providing a broad picture of the investment activities of the company. Experts judge the impact of each of these options on a set of criteria that reflect the objectives of all stakeholders of the company, e.g. the travellers, the shop tenants and DB Bahn AG.
Results & impact
The result is an unrestricted, though efficient, prioritisation of investments. The optimal investment portfolio of DB Station&Service AG would allow for an efficiency gain of 72%, compared to the Status Quo of the current portfolio. However, due to external constraints, this efficiency gain cannot be completely realised.
In figure 1, the value-for-money of an investment option is represented by the size of the bubble. As an indicator of efficiency, it shows that money invested in a larger station (indicated by a lower category number on the left) tends to realise a greater impact than money invested in smaller stations. Also, costly investments in activities involving construction turn out less beneficial than cheaper ones in fields of action like customer information (when neglecting all internal and external investment obligations or funding issues).
- Efficiencies of investments per category and field of action
The analysis quantifies the efficiency losses incurred by the above-mentioned restrictions. Although DB Station&Service AG does not dispose freely of the whole investment budget, the present study can now internally and externally supplement its argumentation for any future strategic (re-)orientation. Particularly in investment negotiation with co-investors, the transparent MCDA approach as applied in this case may prove helpful.
Conclusion
The investment prioritisation problem at DB Station&Service AG perfectly illustrates that financial resource allocation problems are multi-criteria decision problems, given their complex, uncertain, multiple objective, and subjective nature. Prescriptive recommendations, e.g. a priority list of current investments, can be derived. Furthermore, descriptive insights, e.g. into an optimal investment portfolio can be gained.
The project also demonstrated that even in decision contexts that are as heavily constrained as in the case of DB Station&Service AG, an MCDA approach proves highly valuable. Constraints can be quantified and incorporated in future planning processes.
Most relevant literature
- Grundy, Tony and Johnson, Gerry (1993): Manager's Perspectives on Making Major Investment Decisions: The Problem of Linking Strategic and Financial Appraisal, British Journal of Management, Vol. 4, pp. 253-267.
- Mintzberg, Henry; Ahlstrand, Bruce and Lampel, Joseph (1998). Strategy Safari: The Complete Guide Through The Winds of Strategic Management.
- Phillips, Lawrence D. (1984): A Theory of Requisite Decision Models. Acta Psychologica, Vol. 56, pp. 29-48.
- Phillips, Lawrence D. and Bana e Costa, Carlos A. (2005): Transparent Prioritization, Budgeting and Resource Allocation with Multicriteria Decision Analysis and Decision Conferencing, Working Paper LSE, London School of Economics and Political Science.
- Phillips, Lawrence D. (2006): Decision Conferencing. In W. Edwards & J. Ralph F. Miles & D. von Winterfeldt's Advances in Decision Analysis: From Foundations to Applications, Cambridge University Press.
