UK: FOCUS IS FOR WIMPS.

The current focus fad, so beloved of the City, does much to end value destruction but nothing to create new value and little to promote profitable growth.

Focus. It seems a no-brainer. In a viciously competitive world, it's self-evident that companies can only survive by concentrating on what they do best. From 'stick to the knitting' (Peters and Waterman) to 'low cost, differentiation and customer focus' (Porter) to 'core competencies' (Hamel and Prahalad), refocusing - divesting or outsourcing non-core activities and zooming in on your strategic assets through a close-up lens - seems to be the only respectable management game in town.

So here is Thorn-EMI dividing the parts put together by Jules Thorn in the 1960s. Here too is, or are, Hanson, the businesses that Lords Hanson and White spent three decades assembling, now split into four. Courtaulds, ICI, BAT Industries and Racal are others that have already trooped down the demerger path. British Gas is going the same way. In the US, General Motors has spun off EDS; AT&T and ITT are following the trail blazed by IBM and Quaker Oats. In Europe: Daimler-Benz, Philips and Lufthansa. On both sides of the Atlantic, the number of firms selling off so-called non-core businesses and going back to basics is too large to count. In money terms, the amounts involved in such break-ups is increasing by leaps and bounds.

Focus appears to come with the stock market's seal of approval. Indeed, many managers believe that that's what drives it. You can see why: according to Constantinos Markides, associate professor at London Business School, on the positive side, refocusing firms can expect to see their share price rise on average 2% the day they announce their move. The spin-offs can anticipate further healthy gains over the next two years. The converse is the well-known conglomerate discount, that is, the de-rating applied by the market to firms it believes to be over-diversified (see graph, p46), and the attempts of such confident past diversifiers as BTR, Williams Holdings and Tomkins to escape less-than-sum-of parts valuation either by changing their strategy or by persuading sceptical analysts that they were really focused companies all long. The Monitor Company's Rob Bier sums it up: 'Conglomerate is the politically incorrect word of the 1990s.'

It could hardly, then, seem clearer. Focused company: tick. Diversified company: the equivalent of a BSE carcass. But wait a minute. Probe a bit, and things aren't quite that simple. For example, what would you call a firm comprising paint, chemicals, fertilisers, explosives, oil and gas?

A conglomerate, or what? That's demerged ICI. Or healthcare, seeds, agrochemicals and pharmaceuticals? Zeneca. As soon as you start delving, for every truly focused company - a Reuters, Rentokil or British Airways - a successful multibusiness firm emerges to balance the picture. Take ABB or Virgin.

Take GE, that icon of modern management. Or 3M, another venerated monument, with its array of 100,000 different products. Consider Procter & Gamble in the US, Unilever, Grand-Met in the UK. Even Marks & Spencer has branched quietly out into financial services. So long as the dreaded word isn't mentioned, diversification, it seems, is alive and kicking. So what's going on around here?

At the simplest level, say consultants and academics, what's going on is a correction of past excesses. Underneath that, however, is a fascinating story of the dialectics of management innovation, and a subterranean debate about the nature of the company itself.

To understand today's refocusing discussion, it is necessary to go back to the beginning. And in that beginning was focus - the carpenter, the mason, the baker. As economic activity became more complex, so too did the co-ordinating arrangements. First came the individual financier or rentier, then the focused company. In modern times the key event was the invention by General Motors and DuPont in the 1920s of the divisional structure. Divisionalisation addressed the complexity of businesses which required scale and the integration of diverse activities, and for the first time enabled companies to do things for themselves which complemented their main purpose. Unilever, for example, decided to set up market research, advertising and transport operations alongside its tea plantations. Thus was born vertical integration for support operations.

After the war - in the next innovation - companies discovered that they could co-opt the same organisational form as a mechanism to support diversification for its own sake. Suddenly companies were diversifying for the sake of being diverse. The logic seemed compelling: diversification spread risk, provided wider opportunity and was supported by the general management logic of the time, namely, 'we're good at managing things'. In the 1960s ITTand BTR came to embody this kind of diversification.

Warning signs, though, started to glow in the recession at the end of the 1970s. The lesson - that managing a portfolio of different businesses was becoming more difficult as times got harder - wasn't heeded at once, believes Andrew Campbell, director of the Ashridge Strategic Management Centre and co-author of a forthcoming book on corporate break-ups, for a variety of reasons. One was the new hope for managing diversity offered by the Boston Consulting Group's invention of the growth/ share portfolio matrix; in effect an internal capital market, this was a technology for classifying companies in a portfolio (stars, cash cows, dogs) and allocating resources between them. Also important was the 'incredibly influential' example of the oil companies, diversifying (disastrously, as it turned out) into minerals after the oil shock.

It took the second recession plus a variety of intellectual and practical stimuli - In Search of Excellence ('stick to the knitting'), core competencies, the oil companies' U-turn from their minerals foray, Courtaulds's pioneering demerger - to bring the pendulum swinging back. 'Too many companies diversified too much,' says Markides. Some made the mistake of defining their business or their competences too broadly, like the utilities; others neglected the changing external environment. 'New technology, globalisation and shorter life cycles suddenly made the margin of error much smaller,' Markides explains. 'You made a mistake, and more focused competitors would cut your throat.'

These lessons have now been taken firmly to heart, says Campbell, who claims that, 'the whole (western) management psychology has changed. Conglomerates aren't a comfortable place for managers to sit any more. It's not an enjoyable job.' The shareholder value movement, imported from the US, has also had a profound influence by concentrating attention on the share price. 'Managers are realising they don't need size any more. They can get extremely rich from smaller scale and focus.' Given the intensifying competition, the helpful arrival of outsourcing and the development of new attractive games for management to play, such as globalisation, it is clear, he says, that the issue of focus is not going to go away. Indeed, despite the lip service, most companies have no idea how unfocused they really are, and the rising tide of focus will make today's waves look like ripples tomorrow. Says Campbell: 'Even companies which champion the idea of focus are much more diversified than in the 1950s.'

That's it, then? Again, it's not that tidy. For while the world may well see more refocusings, that doesn't simply mean all diversification is wrong. 'There are benefits of diversification, but limits to how much and what type,' says Markides. Nor is all focusing right. As the momentum grows, many companies will refocus badly or for the wrong or no reason.

In some cases, focus is subsidiary to quite other motivations, a mislabelling almost. Take AT&T. The idea that the struggling phone company's decision to divest its equipment manufacturing and computer divisions is to do with focus is 'bullshit!' declares Eileen Shapiro, a US consultant whose speciality is boardroom fashions. The reason for getting out of computers is that buying NCR was one of the world's dumbest moves in the first place, she says, while hiving off equipment is necessary because AT&T's telecoms competitors, the Baby Bells, are refusing to buy from their greatest enemy.

'AT&T's actions are to do with power and stupidity,' says Shapiro curtly, 'not focus at all'.

As a guide for action, focus only takes you so far. Crucially, concedes Campbell, 'focus is not a value-creation thought - it's a value-destruction-avoidance thought.' Typically, Campbell believes, through bureaucratic overhead, second-guessing operating managers and generally getting in the way, corporate HQs destroy far more value than they create. Stock markets seem to agree. If the simple act of breaking a company into separate pieces makes it worth more than as a unitary whole, it follows that it must have been doing something wrong - destroying value - in the past. For many companies, adding back the value that leaked away through corporate headquarters will be a huge gain, no question. But the move doesn't create new value in the sense that innovations in products and processes create value. It's like giving up beating your wife: managers worth their salt shouldn't have been destroying value in the first place.

As with downsizing, focus is simply another reorganisation which does nothing in itself to improve a product or please a customer. In itself it does little to enhance growth or strategic position. It may even harm it.

More fundamentally, where does focus stop? If Zeneca is a conglomerate, why shouldn't we break that up, too? Part of the answer, as Markides suggests, depends on the external commercial environment and its complexity (and note here that while focus may be an advantage in particular western markets, it is much less so in, say, the riotously expanding markets of the Pacific Rim). But only part. For behind that elementary-sounding question lurks one of the most troublesome issues in management. Why does the company exist?

The answer is of much more than academic interest. Put crudely, current orthodoxy is that in an ideal world, markets would co-ordinate all economic activity through individuals contracting with each other in the marketplace, as in pre-modern organisation. In this view, companies are simply regrettable necessities to perform some complex activities that markets unfortunately cannot. The implication is clear: where possible, sweep away everything - such as corporate centres - which second-guesses the market. That's what focus does. Ergo, the tighter the focus the better. Perhaps Zeneca should be broken up.

But this, insists Professor Sumantra Ghoshal of London Business School, is not only a wrong conclusion but dangerous, driving practice up a blind alley with a reductive and simplistic version of what economic growth and progress really are. What purely economic accounts of the firm leave out is the quality of management, which includes the faith and confidence to combine resources to challenge the market with new ideas for creating value. On the economic scale, management is always a residual, points out Ghoshal. Yet statistical analyses explain only a fraction of the variance in firms' performance. 'Institutional and managerial issues are what's lacking,' he says. 'We need to take account of the fact that we live in an organisational, not market, economy.'

Ghoshal reverses the academic orthodoxy: markets exist where organisations fail. In dry, cost terms, organisations will inevitably look inefficient compared with the market. But that is not their first priority. 'Organisations provide a refuge for people to battle with markets and move progress on,' he says.

Without the dynamic efficiency or innovation that only companies are able to provide, markets can only create a fraction of the value that is potentially available.

A management-grounded view of the world has radical consequences for strategy. 'If you have poor management, focus makes absolute sense,' Ghoshal concedes. Michael Black, vice-president of consultancy CSC Index, agrees.

'Focus is often a code word for lack of commercial imagination,' he says.

'Simplifying corporate life does allow us to exploit a business opportunity more reliably - the problem is that there are fewer opportunities as life gets simpler. Great managers know how to create possibility from diversity; this takes more than skill, it takes courage.'

Focused companies are undoubtedly easier to manage. But in the long term, focus raises as many questions as it answers. For example, while analysis shows that the largest US companies have benefited in terms of profitability and shareholder value from the 1980s waves of downsizing, delayering and refocusing - in effect, bringing shareholder pressure inside the company - these improvements have coincided with massive loss of world market share. According to one recent account measuring the US percentage of the market share of the world's biggest companies, in a 10-year period to 1990, US firms dropped 16% in computers (down from 86% to 70%), a relatively modest 4% in automobiles (42% to 38%), a whopping 33% in electricals (44% to 11%), and suffered complete wipeout in banking and steel - in these areas no US firm now figures in the world top 12. 'What kind of a victory is that?' asks Ghoshal.

The depressing reality, he says, is that behind the visions and grand strategies, western management has grown remarkably timid. Focus is partly to blame. Paradoxically, it has made lack of courage macho through the rhetoric of downsizing and delayering. Even in the case of revered GE, it could be argued that much of its supposedly superior performance is the result of getting rid of more than 100,000 jobs.

As for the claim that managers are being driven in this direction by stockholders, the facts can support a quite different interpretation.

'If I'm an investment fund, I don't see courage and faith in a large number of companies,' says Ghoshal. 'So give me profits which I can invest in companies that I can trust to manage growth.' After all, until it hit its present problems, 'Digital had grown for 30 years without paying a dividend'.

For the next 50 years, sighs Ghoshal, 'you won't see good management ideas from the sophisticated Anglo-Saxon markets - you'll need to look at places like India, China and Korea', where companies view year-on-year growth rates of 20% as just so-so. He points to groups like Korea's LG, formerly Lucky Goldstar, which is investing all over the world in its aim to turn itself into a $400 billion company by 2005 - 10 times its current size. Or to Hyundai which is planning to invest £2 billion in Scotland's Silicon Glen. When Samsung's founder judged semiconductors to be a crucial component of its future competitiveness, it built the expertise from scratch at a time when its competitors were far along the learning curve.

From the point of view of focus: utter madness. But that, says Ghoshal, 'is exactly my point: before you accept something as generalisable truth, look around'.

Of course, managing diversity is more than a simple matter of courage and blind faith. It is difficult. The paradox of focus is that the most diversified companies juggle with it constantly: how much complexity can we manage and how do we allocate the precious ability to do so? Virgin's mind-stretching combination of airlines, condoms, cola, records and financial services seemingly defies focus, but it's there in branding and image-exploiting skills. Even Branson wouldn't touch steel or pharmaceuticals.

Monitor's Bier points out that leveraged buy-out funds such as KKR appear to add value to highly diversified portfolios with something much resembling traditional conglomerate management: rigorous business planning, effective incentivisation of management, cheap capital - and not much else. The latter may be key: as Campbell would agree, it's essential not to impose false synergies which are a drag on effort and cross-pollute individual cultures. 'Managers too often think they have to do more rather than less,' says Bier.

Management doesn't - can't - stand still. The structure of external markets changes, and technological and management innovations are constantly shifting the balance of make-or-buy decisions. On such unstable terrain, catch-all concepts like focus should be used with care. Despite the easy assumptions of analysts and (sometimes) chief executives, there's nothing inherently good about focus. It's a western notion which is irrelevant or misleading in much of the globe. It's certainly simpler, but even in the West, there are still benefits to diversification - if you have the skill to go after them.

Focus is a means, not an end, and a second-order one at that. It does nothing to create new value and precious little to promote profitable growth. Figures from Mercer Consulting show that fewer than one in 10 of the 1,000 largest US public companies grew profitably in the two five-year periods 1984-1989 and 1989-1994, a decade in which refocusing has been at its height. So what's it all for? Many companies will continue to focus, says Ghoshal, and some should. Given the freedom with which they have destroyed value in the past, that is an important gain. And it will undoubtedly make many people very rich. But that's a limited aspiration compared with the inventive animal spirits of a Microsoft, a Virgin or the Korean chaebols. 'Focus is a good cop-out for chief executives,' says Ghoshal. 'But don't celebrate it. Recognise it for the weakness it is.'

Simon Caulkin edits the Management page of the Observer.