We are splitting hairs. I've said I don't think their squad is better than their competition for the top 4, and questionably whether it's good enough for the top 6 when you compare it with Leicester or others.
It's pretty clear to think their squad isn't as good as Liverpool, City, and Chelsea (all quite obviously), and then Spurs, United and probably Leicester are all better(I think Arsenal would bite your hand off for Leicester's midfield and defense). Then, it's certainly closer than you would like with both Everton and Southampton. Is their squad better than both? Probably, but I don't think it's that far off. Heck, healthy Wolves have some parts that would Arsenal would be lucky to have. Heck, I think Brighton's back four is better than Arsenal's.
That's a vast difference between saying they're the 12th or 15th best squad. Even if you're suggesting they're a top 6 side talent wise, they're much closer to 8-10 than they are 1-2. Once again, the manager sucks... and that's clear, but they're also not really blessed with some top 6 side where they can overcome crappy management or major dips in form (which you're seeing from Auba and others). You can say they're a top 6 side, and that's maybe fractionally true, but they're not that much better than teams around them, when you have poor management, form issues, and a questionable midfield/backline.
As for Pepe discussion, I think he would certainly be a different player under a different side. But how much of that is down to management, how much of that would be down to who he would be lining up next to, and how much of it is down to the player himself and not being ready for his situation is a fluid thing. Would he look much better playing for City than Arsenal now? Sure... But he also wouldn't be this giant signing who has to hit the ground running. Pep could work him off the bench, and when he did play, he wouldn't be being asked to carry it from 1/3rd of the way out and create something. He wouldn't have minimal support in the midfield. He could make a mistake or three and there wouldn't be fans wanting to bin him to Siberia. But to act like it's all on the manager or whatever is a bit unfair as well. He picked that situation. He went there. He doesn't give full effort at times just standing around. He looks disinterested. He missed chances he should convert with his talent. He head butted a dude. There are flashes, but dribbling past a dude, or showing a burst is great... but not 80 million great.