Running a business is all about innovation. Whether it's a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to success. Without innovation, companies run the risk of getting complacent, being outflanked by competitors, or, even worse, folding up shop altogether, the way Circuit City did a couple of years ago.

No company gets a free pass when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Pacific Ethanol (Nasdaq: PEIXD) to determine whether the company can adapt to rapidly changing consumer demands or whether it will be pushed into the background.

What’s wrong with Pacific Ethanol?
Pacific Ethanol shares could be on their last legs, after the company succumbed to the dreaded reverse split three weeks ago to get its share price back above the minimum listing price of $1.

Behind the company's precipitous fall from its all-time split-adjusted high of $296 in May 2006 to its disappointing close of $1.32 as of yesterday is a steady stream of annual losses and ethanol's non-acceptance as a primary fuel. Pacific Ethanol always seems to be close to turning the corner, but ethanol prices, consumer habits, or infrastructure costs always seem to be there to derail the company from appeasing shareholders with a profit.

The company recently amended its revolving credit line, allowing it access to an additional $10 million in financing, but I have to wonder: Is this too little, too late? Corn prices are rising, and the Senate may vote to end ethanol subsidies in the very near future. Pacific Ethanol is left looking at a potential doomsday scenario for the second time in two years.

Getting Pacific Ethanol back on track
I'm not the CEO of Pacific Ethanol, but for a moment let's pretend I am. As I see it, there are three things the company needs to do to get itself back on track.

  • Focus on its margins: It doesn't matter that Pacific Ethanol was able to increase revenue by 143% over the year-ago period if it can't turn a profit. The company has been using and abusing investors' money since 2005 -- it needs to trim the fat, and it could start by looking to the top. Top executives' salaries, though not extravagant, have doubled or even tripled since 2006 while the stock price has nosedived 99%. The cuts need to come from somewhere, and this is a good place to start.
  • Hedge, hedge, hedge: Being primarily in the business of marketing third-party ethanol doesn't save the company from feeling the effects of rising corn prices. Corn, the primary component of ethanol, is currently tipping the scales just a few percentage points from a multidecade high. The company moving forward will need to act on any pullback to lock in lower prices.
  • Promote its product: Whether by joint ventures or selling out to a larger competitor such as Archer Daniels Midland (NYSE: ADM), Valero Energy (NYSE: VLO), or Chesapeake Energy (NYSE: CHK), Pacific Ethanol needs to take bigger strides toward making ethanol a more mainstream fuel. Until investors think of it as such, its profitability will remain on hold.

What's the verdict?
I didn't anticipate that Pacific Ethanol would re-emerge from bankruptcy with any value left for shareholders, but it did. I also didn't anticipate that it would grow its revenue as rapidly as it has of late. But one consistent fact has remained throughout, and that's the unreliability of the company's earnings. It's no surprise Pacific Ethanol hasn't turned a full-year profit, with ethanol producers always fighting an uphill battle against rising corn prices and subsidy-related threats from Congress. With its debt once again rising and earnings being nonexistent, another bankruptcy filing is not out of the question, and I doubt there would be any value for shareholders this time around.

Do you think Pacific Ethanol has what it takes to thrive, or will it just struggle to survive? Share your thoughts in the comments section below, and consider adding Pacific Ethanol to your watchlist to keep up on the latest news in the ethanol sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's fueled by transparency.