I hadn't heard the term dogfooding used much before I started here, but it has already been explained so take a look here. The basic idea is that if you're not happy using your product (i.e. eating your own dogfood) then why should you expect your customers to be? Working at Microsoft gives you incredible scope to dogfood a wide variety of products.
As a Microsoft employee, I should be using Internet Explorer, Vista, Office, etc etc and I am. This doesn't necessarily mean I shouldn't run alternative products as well or when a Microsoft product doesn't provide the functionality I need.
As a Microsoft developer, I should be using Team Foundation Server for bug tracking and source control. I should be developing Visual Studio using Visual Studio. I should be profiling my code using VSTS profiling tools. Fortunately, I am, although not exclusively and probably not in some other parts of the company.
The main reason I think this is a good idea is because we get to feel any of the pain that customers do. We have extra incentive to fix any problems instead of ignoring them. We often catch problems early on before customers even see them.
I'll admit it, the process can be painful. The pain typically increases as you get closer to the bleeding edge of technology. For example, my Visual Studio dogfooding experience involves running the latest build of VSTS while developing. There are issues which delay my development, but facing these issues every day helps me drive improvements to the product. Imagine if your source control system went down - you'd want it fixed pretty quickly and that's just what we want from our TFS dogfood server.
Here's a few of things that I think need to happen for successful dogfooding:
If you're an application developer, are you using your own alpha/beta software before it is released to the public?
Tech-Ed 2007 is starting tomorrow and the Profiler Team is sending a few people to sunny Orlando for the event. This is great news for me because my boss, Steve Carroll, is away for the week (just kidding Steve), but it is really great news for folks at Tech Ed because he'll be there presenting with Marc Popkin-Paine:
DEV313 - Improving Code Performance with Microsoft Visual Studio Team System [N210 E]
I believe they'll be demoing a few new Orcas features and giving a pretty good introduction to profiling. If you didn't know Visual Studio Team System has a profiler, or you don't think performance is important, you should definitely check this out.
If you're not lucky enough to be able to make it to Orlando this year, be sure to take a look at Virtual Tech Ed, which will include webcasts and other content from some of the sessions. One that jumps out at me is MSDN Webcast: A Lap around Microsoft Visual Studio Code Name "Orcas" (Level 200).
UPDATE: Steve is already helping people at Tech Ed. If you're there and you're interested in performance go and have a chat with him in the Technical Learning Center.