You need two or more entities (lines/arcs) which fits exactly on their endpoints. If there is a little gap between the entities, maybe only visible in a very high zoom level, the tool doesn't work.
Use snap endpoints when drawing the entities or use trim both to connect them. Then click on one of the entities when the tool is activated and all connected entities are combined in a single polyline entity.
When you select the entity after deactivating the tool, all former entities should be selected as part of the polyline.
With the Modify->Explode tool you can revert this and split the polyline into its former single entities.
"Creating..." is for polyline only, the result is a new polyline, therefor it is in the Draw->Polyline menu
"Explode" is for blocks too, you can explode existing polylines and blocks into multiple entities, so it is in the Modify menu.
I think this is similar in other CAD software.
Polyline is the name for the single entity, which is a succession of lines and arcs.
In detail, the polyline is a collection of vertices, which are connected straight (lines) or with a bulge (arcs).
A polyline with two vertices, connected straight, is equal in appearance to a line entity. But internally and in DXF representation they are different entities. The same is true for a polyline from two vertices connected with a buge and an arc.
For constructing I usually use lines and arcs, as there are more and better drawing options. But for machining it is better to have polylines as they are continuous contours without gaps by definition.
So after drawing and trimming the lines and arcs I create a polyline of them which could be easily processed by a CAM processor.