This study explores how integrating design processes into the native timber industry of southern Chile, specifically in the Araucanía and Los Ríos regions, can improve the value chain and promote sustainability. Chile’s native wood sector is constrained by fragmented value chains, underutilised small-diameter logs and limited market confidence. These challenges jeopardise forest sustainability and rural livelihoods, underscoring the imperative to find innovative solutions to reinvigorate the sector. A market gap analysis revealed critical limitations in the current industry, including low supply, limited demand, and weak technological development, especially in producing value-added wood products. The research identified over 417,000 hectares of second-growth roble (Nothofagus obliqua)-raulí (Nothofagus alpina)-coigüe (Nothofagus dombeyi) forests suitable for sustainable management. Interviews with woodworking SMEs showed that 66% already use native timber, yet 46% of the projected volume remains underutilised due to the prevalence of short and thin logs. In response to these challenges, the study developed innovative prototypes such as interior claddings and lattices made from smaller, underutilised logs. These designs were evaluated and validated for use in residential and public buildings, demonstrating their potential to meet new market demands while promoting resource efficiency. The results show that, whilst there is a clear need for better infrastructure, workforce training, and commercial planning to support product adoption, design-driven innovation offers a promising path forward enhancing the industry’s competitiveness. Demonstrating how design-led integration can transform under-used native timber into high-value products, simultaneously driving sustainable forest stewardship and local economic growth.