A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and reshape existing ones. Typically, existing companies develop their products or services by incremental enhancements and cannot make their own organisations think in new ways that would damage the existing value chains. The companies that bring disruptive innovations can take leaps the incumbents are not capable of.
The term was defined by Clayton Christensen in his book The Innovators Dilemma and is is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in a new market and later by lowering prices in the existing market.
The video below was published by Harvard Business Review earlier this week and it explains the concept in under two minutes.