Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.
Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.
Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. A disruptive technology can come to dominate an existing market by either filling a role in a new market that the older technology could not fill (as cheaper, lower capacity but smaller-sized flash memory is doing for personal data storage in the 2000s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has largely replaced film photography).
I was recently talking to Trip Hawkins, CEO of Digital Chocolate, and he made the claim that simplicity and ease of use aimed at non-consumption is always a disruptive innovation that threatens incumbents. I think he is right. Some examples include the Flip, which disrupted consumer video cameras, and blogging which disrupted content management systems. Trip was talking about the rise of social and iphone gaming as the equivalent disruptive innovation that was causing non gamers to play games. Definitely something that incumbents need to watch.