Prior to their Champions League match last week, Guardiola claimed Dortmund "pay a lot of money to agents" to land the game's talented youngsters ahead of their rivals across Europe.
"In the last five years they have spent nearly 1bn euros on new players," Watzke said to the BBC.
"In five years. Who has the possibility to make this? He has not to criticise other clubs."
City have forked out more than £850m in transfer fees since the start of the 2016/17 season, recouping around just £285m of that in sales.
"It [the business model] is working fantastic but it is difficult to develop a team with it because after two or three years, these young players, if they perform very, very well, like Erling Haaland or Jadon Sancho, then the biggest clubs in Europe want to buy them," Watzke added.
"But this is the only way for Borussia Dortmund."