That phrase always makes me laugh, but I think it's accurate. If you're not familiar, it means that a company that produces a product should use the product themselves.
In the online community world, I've been suspicious of companies that purport to understand all things "community" but don't have a community that supports their customers using their platform. It's one of the things I do like about Web Crossing, they have WebXHarbor.
I haven't seen a more productive example of eating their dogfood than how the Robot Co-op is using with their new site at ideas.43things.com.
The site is using the 43 Things format to collect ideas from users about what they should develop next. From talking to the guys, it's working -- the users have come up with ideas that had never occurred to them.