A central theme in developmental and cancer biology is to understand the mechanisms by which cells and their local microenvironment interact during morphogenesis, cell fate decisions, and cancer development. Although it is widely recognized that embryonic mesenchyme is essential for organ specification and differentiation during development, how the postnatal stroma maintains cell fate and differentiation during organ homeostasis and function, and how it may deteriorate during aging and other pathologies such as cancers have remained largely unknown. Using genetic mouse models, 3D in vitro cultures, and patient-derived xenografts, we focus on the cellular and molecular mechanisms of epithelial morphogenesis, stem cell biology, and the role of the stromal microenvironment during mammary gland development and breast cancer.