The topic of this paper is the influence of knowledge management on competitive advantage of companies. The emphasis is put on effective knowledge management in a company, which leads to utilizing the full potential of knowledge that all the employees of a company possess. The intent of the paper was to determine if and how knowledge management contributes to the competitive advantage of a company. In addition, by empirical research, it was to determine if there are any differences in approach to knowledge management between public and private sector managers. Two research studies were conducted for the purpose of the elaboration of the topic. The first research study included gathering and analyzing various scientific literature. The second research study was empirical research based on interviews with 12 sampled respondents, i.e. managers, in six companies. The first group consisted of the respondents from the private sector, and the second group from the public sector. The respondents were interviewed in person and anonymously for the purpose of gaining credible results. The results of the study have confirmed that there is an influence of knowledge management on competitive advantage of a company. It has been proven that the companies which have implemented knowledge management system (hereinafter KM system) gain the competitive advantage over the companies which do not implement them. However, the research study has shown that there are no significant differences in knowledge management in companies from different industries and sectors. Furthermore, the influence of politics was present in all decision making situations, including those concerning knowledge management, in the companies which have not implemented the KM system or in which it has partially been implemented. Since the study has proven that the influence of politics is the key obstacle, it is necessary to change such a practice, and employ managers who recognize knowledge as a key resource. Such responsible management, mindful of importance of knowledge, is priceless to any company. Implementation of the KM system is to be perceived as a necessity without which it is impossible not only to survive on the market, but also to gain a competitive advantage. In that sense, the implementation of the KM system presents an imperative for every serious company.