By The University of Queensland Professor Tim Kastelle,  Director of the Andrew N. Liveris Academy for Innovation and Leadership

In today’s dynamic business environment, innovation is widely recognised as a key driver of growth and resilience. Yet for many small to medium enterprises (SMEs), the concept can feel abstract, or something reserved for tech giants or startups in Silicon Valley. In reality, innovation is not only within reach for SMEs, it is often already happening informally and organically. The opportunity lies in recognising it, testing it, and leveraging it to create value.

What exactly is innovation in the context of SMEs?

Ask 30 experts what innovation means, and you’re likely to receive 30 different definitions. For me, a practical definition of innovation for SMEs is:

Innovation is the execution of new ideas to create value.

This broad framing works across industries and organisational sizes- from global corporations to local businesses and community organisations. Crucially, it places emphasis not on the novelty of the idea, but on the act of delivering tangible value.

Innovation is not about being the first to think of something. It is about being the first to do something, then connecting that action meaningfully with your stakeholders, whether they be customers, funders or suppliers.

Innovation in practice: Insights from Queensland SMEs

During a series of workshops I conducted with Business Chamber Queensland, we met with SMEs right across Queensland.

At these workshops, we asked attendees to reflect on innovation in their own operations.

We asked them to describe situations where they had to change their operations or ideas to respond to a crisis, and when they had to change to respond to an opportunity.

Many of these businesses shared examples of adaptions they made during the COVID-19 pandemic, or changes they made in response to market volatility like exchange rate changes or supply chain disruption.

When asked how they innovated to respond to an opportunity, we heard of businesses launching new products, adopting AI tools, or reimagining service delivery models to better serve their clients.

For me, these discussions revealed two key insights:

• Most SMEs are already innovating, often without labelling it as such.
• Innovation is not limited to new product development. It includes rethinking processes, service models, communication methods, business models, and customer engagement strategies.

What enables innovation in SMEs?

In my experience and certainly as we saw reflected in the workshops, there are three conditions that are crucial for fostering innovation in SMEs:

1. 1. A sense of agency
      SMEs have a structural advantage: fewer layers of hierarchy and more autonomy to act. Unlike employees in large corporations who may be several tiers removed from decision-making, SME leaders can move quickly and decisively.
   2. Resource access and mobilisation
      Innovation requires more than ideas; it needs access to the skills, tools, and financial resources required to turn concepts into reality.
   3. Clarity on customer and stakeholder needs
      Understanding the needs of customers, partners, and suppliers is essential. Innovation is only valuable if it addresses a clearly defined demand or improves outcomes for the people who matter most.

The cost of not innovating

Globally, data shows that approximately 40–60 per cent of organisations engage in some form of innovation. This leaves a significant proportion of businesses, potentially up to 60 per cent operating without active innovation strategies.

The risk of not innovating is clear. Every SME operates within a broader business ecosystem. Whether you’re a local service provider or a component supplier in a global supply chain, your operating context is subject to continuous change. Without innovation, businesses risk becoming misaligned with evolving market needs.

Innovation enables continuous adaptation. Without it, the sustainability of current business models becomes increasingly uncertain, which is a risky position in any industry.

Building your innovation strategy

Innovation, at its core is a series of well-designed experiments. An effective SME innovation strategy does not need to be complex. My advice is to focus on testing and experimenting with changes to your service delivery, customer experience, internal processes, pricing or even how you communicate or engage with stakeholders.

Successful innovation strategies begin with awareness of your own business and knowing where innovation is needed most. From there, test and learn and adapt as you go.

Identify a challenge you are facing, or an opportunity you would like to make the most of. Design a small experiment, measure the results and see what happens.

For example, if improving customer service is a priority, a business might test a new communication channel or service standard. You might commit to responding to all enquiries within 3 hours.

Give it a try and then evaluate its impact on customer satisfaction.

Navigating global trends: the role of digital tools and AI

Digital transformation is a prominent trend, and AI offers exciting possibilities for SMEs. However, it is critical to proceed with a clear strategy.

Digitising a process that is already ineffective will not solve underlying issues. In fact, automation can compound inefficiencies if applied to broken systems.

Before adopting digital tools, SMEs should ensure they have a clear business strategy and defined value proposition and their core processes are functioning as they should be.

Only then will digital tools, whether CRM platforms, AI-powered chatbots, or data analytics, enhance rather than hinder performance.

How important is AI right now?

While AI is a powerful tool, it has limitations. It can generate insights and automate tasks, but it lacks human intuition, empathy, and the ability to form genuine connections. These are attributes that SMEs can and should continue to leverage.

AI should be seen as a support tool and not a replacement for strategic thinking or relationship-building.

My top tips for SME Innovation

1. 1. Clarify who your key stakeholders are.
      Understand who matters most (customers, suppliers, regulators) and what they are trying to achieve.

1. 1. Define the value you deliver.
      Innovation should enhance the value you provide. Without clarity on what stakeholders value, it’s impossible to innovate meaningfully.

1. 1. Build your experimentation capability.
      Encourage a culture of low-risk experimentation. Test assumptions, measure outcomes, and adapt based on evidence.

Innovation doesn’t require radical disruption. Rather, it is best understood as an ongoing process of learning and refinement. In this way, SMEs can reduce risk, respond effectively to change, and unlock new opportunities for sustainable growth.