I don't think I can explain why you get the error. make itself has told you why you got the error ("can't find generic.mak") and I can't think of any way to explain "can't find generic.mak" without actually saying "can't find generic.mak".
So either generic.mak isn't on your computer, or make is looking in the wrong place.
%1 is the first parameter. So for the command "dir *.txt /s", dir would see *.txt as %1 and /s as %2.
If generic.mak is in \yyyy then probably you need to set DVD_MAKE=\yyyy.