I don't play MMO's. I should start out with that, but I still play a lot of games with lots of grinding in them.
To me, grinding is when a single mechanic comes in the way of advancing, wether it's crafting, or combat, or whatever. A game should allow you the freedom to keep going with the story, or the interesting bits, or whatever, without forcing an arbitrary barrier on you to extend playing time or whatever. I'll use Bioware games (since they're all pretty much identical, in structure) and the old goldie freelancer as examples here.
In Freelancer (and almost sequel Darkstar One), you can have lots of fun just flying around, doing missions, killing people, getting money, buying new stuff. Or just explore new systems, or trade. It might be grinding, but it's still fun, because it's voluntary. On the other hand, between story missions you're FORCED into doing it. You must reach a certain wealth for the story to advance. That's where it turns into grinding for real, because it's not your choice anymore, and you can't skip it (without cheating, I guess).
Some games allows skipping dialogue, and story parts. Neverwinter nights, for example, allows you to choose which chapter you want to start in. Many games allow you to skip cutscenes, or already played levels. I don't think I've ever seen a game that allows you to skip combat you're already done with. Many story-based games, like all of Bioware's games have too much combat. It might be a matter of opinion, in some cases, but the combat will almost always turn stale in the first playthrough, whatever tactics there are get dull, there are too many battles to keep the concentration up all the way through, and you just can't be bothered going through with it all, every time. On a second playthrough it's even worse.
The interesting parts, the parts that change, are how you deal with conversations, how you choose to conduct yourself, and how you choose to build your characters. The changes are intersting in a few fights, but after the 250:th encounter you've seen it all, and even if one of those were really special, like a fight against a big dragon, or boss might have been cooler, it doesn't stick out, it just blends with the rest.
The grinding part there is also involuntary, and present inside the story quests.
What I'd like to see is a button to skip the annoying, endless, identical fights instead of the conversation that I can influence the end outcome of.
Or, if I'm daydreaming, see an rpg (which are most guilty of the grinding stuff) turn every combat situation into something interesting. Spread them out more, work more on atmosphere, and make every battle count, every battle be an experience to remember. Make them unique, with the environment mattering a lot more, give each battle it's own distinct feel. Here a lesson can really be learned from movies. After watching a movie (well, most movies, that are at least decent), something can be said about every action scene, every battle. They have their own individual flair. They weren't all the same, over and over.
Cut out as much of the filler as possible from the quests, and make it voluntary outside of them. There are often some battles that attempt to be that way, boss fights, first encounter with a new enemy type, a scripted ambush, whatever, but in all the mud from the ton of other battles, they drown.
Grinding is when something becomes a chore, becomes work, instead of being fun.
