Abstract this study centres around the way in which firms can enhance alliance performance through the development of alliance capabilities. Whereas most research has focused on inter-firm antecedents of alliance performance, research on intra-firm antecedents pointing to prior experience and internal mechanisms to foster knowledge transfer has only recently emerged. As little is known about how firms develop alliance capabilities, this study aims to uncover how differences in sources of alliance capabilities explain performance heterogeneity. The data are derived from a detailed survey held among alliance managers and vice-presidents of 151 firms. The survey covers over 2600 alliances for the period 1997–2001. This study not only finds that alliance capabilities partially mediate between alliance experience and alliance performance, but also yields novel insights into the micro-level building blocks underlying the process of alliance capability development.