You don’t do both. I mean you don’t do meditation and you don’t observe something while being in meditation. Observing, paying attention, focusing, noticing are all mental activities. Meditation is a state of non-doing being, when you simply be without doing any mental activity.
Our mind is always engaged with mental activity and these include the monologues in our mind with ourselves, the dialogues we carry out mentally with an imaginary person, the voices of others in our mind telling us what not to do, memories of past events, worries about the future, fantasising, imagining, dreaming, planning, working, calculating, computing, watching something (videos) listening to something (such as podcasts), reading, studying, focusing, concentrating, paying attention, etc. We are habituated to this and so it seems to be happening effortlessly and automatically, although we are doing it. We don’t know how to stop it.
Observing the breath may be used as a step for slowing the mind from a very restless state to a relatively quiet state. When our mind settles down and rests quietly and we shift into our Aware mind, all that is happening in the moment will be in our awareness simultaneously. This includes everything happening in our body (all body sensations including breathing), all our emotional feelings, all the thoughts arising in the mind and all the physical sense perceptions (visual, smell, taste, touch and sound) of the world around us. Awareness is that which remains when our thinking-mind rests quietly.
Doing the breathing, taking conscious breaths, observing the breathing and just allowing the breath to remain in our awareness are all different from each other. The difference is very subtle and can be understood only with experience. The following articles may help with this.