Dramatization is the process of making a play, or movie etc., about a story which already exists. It could be based on a novel, or other work of fiction; or it could be based on something that happened in real life, perhaps historically or perhaps in the present time.
Improvisation is the process of making something up, or changing it, while you are actually doing it. For example, a person who is due to make a speech normally plans out what to say and may practice it beforehand. If, on the other hand, he simply waits until the time for the speech and then makes it up as he goes along then he is improvising.
If you and your friend decide to create a play, or movie, about a story you have read then you are making a dramatization of the story. You first decide how you are going to do it, for example, who will say what and in which order. This becomes your first draft of the script.
You then start practicing but part way through you think of something better to say, and so you say it instead of the script. You have made an improvisation. Your friend may then respond by making one of his own. By a process of improvisations you eventually come up with an amended script for the dramatization.
Alternatively, you could start off by improvising the whole thing, just deciding who would play which character and then each of you using his initiative to develop the plot as you go along.
Even while you are actually performing the play for an audience it is still possible to improvise by making sudden changes, but perhaps not advisable.