This paper presents a System Dynamics perspective to establish a causal model to demonstrate how organizations can achieve an increased market standing by leveraging Knowledge Management (KM) as a tool for Innovation. The study is grounded in the various models that are discussed in the literature and the model is developed from research surrounding this theory. It can be concluded that, the key to achieve an increased market standing in a dynamic environment arises from consistent innovation by companies that come out with newer and better products and services. New product development stems from a robust Knowledge Management system. This paper very strongly recommends KM initiative in innovating new products and services using a causal approach and designs a framework to use KM as a strategic tool. It also emphasizes on the interaction between KM and its influence on Innovation through a feedback loop system using System Dynamics.