According to the AdWords Glossary, optimization is the process of modifying your ad campaigns to improve the quality and performance of your AdWords ads. This often involves changing the contents and settings of your campaigns and ad groups and editing your keyword lists and landing pages.
Optimization can be as simple as adding new keywords relevant to your campaign, or can be as involved as adjusting your CPC bids and rewriting your ad text. By optimizing your campaigns to improve your keyword Quality Scores, you can help lower your ad's costs without losing your position on a search results page.
If you'd like to learn more about optimization, here's a guide from our AdWords Help Center.
