In some contexts, the term SEM is used exclusively to mean pay per click advertising, particularly in the commercial advertising and marketing communities which have a vested interest in this narrow definition. Such usage excludes the wider search marketing community that is engaged in other forms of SEM such as search engine optimization and search retargeting.
So if you think about it, SEO is really just a process of proving to search engines that you are the best site, the most authoritative, the most trusted, the most unique and interesting site that they can offer to their customer - the searcher. Get people to talk about you, produce good quality content, get people to link to you, and Google will be more confident that you are the best result that they can offer to their searchers, and that’s when you will start ranking on the first page of Google.
Today, however, SEM is used to refer exclusively to paid search. According to Search Engine Land, Search Engine Marketing is “the process of gaining website traffic by purchasing ads on search engines.” Search Engine Optimization, on the other hand, is defined as “the process of getting traffic from free, organic, editorial or natural search results.”
Additionally, there are many situations where PPC (a component of SEM) makes more sense than SEO. For example, if you are first launching a site and you want immediate visibility, it is a good idea to create a PPC campaign because it takes less time than SEO, but it would be unwise to strictly work with PPC and not even touch search engine optimization.