Google changes its algorithm every now and then, but this update has created a buzz amongst many within the SEO/ SEM community. Ranking results have changed a lot over the weeks and developers are modifying their keywords so that the new algorithm increases their ranks.
This update helps in developing quality content on the net, rather than articles which are written purely to increase ranking by adding hyperlinks to major websites. Google has always had a moto of helping websites which have good content to make these sites more popular and increase their ranking.
The prior update Panda, changed rankings of several websites as well and some more severely. Whenever Google releases an update many websites lose their ranking. The penguin update basically aimed at improving the quality of search results and an attempt to eradicate black hat SEO techniques. The Penguin update helps in reducing the spam both in terms of content and in hyperlinks. There are several websites with content that is similar or sometimes the same, this update basically decreases the ranking of these websites
Previously any form of linking back was fine, but after this update Google wanted related websites to link back rather than websites which are of a completely different genre and not just spitting all over the blogosphere for back links. On the plus side spam is reduced and quality websites are emphasized, on the down side smaller websites which do not understand SEO have lost their rankings, a site such as ASOS would be more popular than a small cottage industry making similar products.
Basically the update reduces Black hat SEO tricks, used by optimisers. Tricks such as keyword stuffing, paid links, and spinning articles.