Dortmund have a four-point advantage over Bayern so will stay ahead of the champions regardless of Saturday's result at Signal Iduna Park.
Bayern president Uli Hoeness has described his side as the underdogs, with the Bavarians showing inconsistent form under new head coach Niko Kovac.
"We know that we are playing against a very big team," said Favre. "Bayern remains Bayern. We have to play very clever against Bayern.
"We do not know yet how we will play. Bayern are good in every position, not just in attack. We have to play very well, front and back, and not just focus on the strikers.
"We know that we are playing against a very good team with a lot of experience in all positions and we want to do a great job – we want that in every match.
"We have made progress in the past three or four months, but we still have a lot to learn tactically, especially the young players."
Dortmund are unbeaten in the Bundesliga under Favre, who took charge for the 2018-19 season after leaving his role at Nice.
BVB sporting director Michael Zorc praised the team's progress under the Swiss but called for a reaction to their tame Champions League defeat.
"Overall, many small factors have helped us to stand where we stand," said Zorc. "From day one Lucien had a clear vision of how this team should play and the team trusts him. That's the key.
"We all look forward to the game, which always has a special charm. Of course, our goal is to win the game like every game. I know that the Bayern will play against us differently than they did in their other recent games.
"I expect a very hot game, we have to be ready for that. I missed the aggression against Atletico, that's what I want to see on Saturday."