The Higher Education Quality Council of Ontario has told all higher education institutions in the province to identify which specialities they excel in and restrict their bids for government funding to those areas.
It has also advised institutions to establish individual goals rather than benchmarking themselves against other universities.
The report was commissioned by Deborah Newman, deputy minister of training, colleges and universities, who asked the council to explore "whether a more strongly differentiated set of universities would improve the overall performance and sustainability of the system, and help Ontario compete internationally".
The resulting publication, The Benefits of Greater Differentiation of Ontario's University Sector, released last week, says that such a move would benefit students by providing "clearer choices from a larger number of higher quality programmes, (clarifying) the institutions that best serve their career and personal aspirations".
Harvey Weingarten, president of the quality council, told the Toronto Star newspaper: "The funding formula just can't sustain having every institution have every programme - there are complaints already that classes are too large and that students don't know their professors."
But the Ontario Confederation of University Faculty Associations said it was "deeply concerned" by the report's recommendations.
"In many ways, this paper is an answer to a question nobody asked," said Mark Langer, associate professor of film studies at Carleton University and president of the association.
He added that the quality council was "taking the 'let's do more with less' approach to our universities. But when we're talking about education, you only get less with less.
"Given the importance of our institutions to Ontario's economic and social success, we can ill afford to choose stunt policies over sustainable and robust public funding."