If you look at team talent composite, we have been very even with Michigan for several years now. They are not on a different talent level than PSU, and that relative evenness had been mirrored in the head-to-head records up until the past two seasons.
The recent difference, I believe, is that Michigan and Harbaugh have been able to find their identity on offense and really cultivate it. They have been able to recruit talented players who also fit that identity well. They have also been able to coach up those players to the point where they execute very effectively.
Under Franklin, Penn State certainly has an identity it wants on offense (one that differs from Michigan’s substantially), but I don’t know if PSU been able to quite find its way to truly cultivating it at the same level. Perhaps it’s due to a recruiting hole at a position or two, or it’s been a guy or two not developing as quickly as hoped for, but I don’t see us executing on offense quite to the same level of consistency as Michigan does.
But, in the end, we have enough to beat Michigan. The question comes down to how well can our offense execute blocking on the first and second levels, running routes, being on the same page and throwing accurately, etc. (which is a no-duh, but these are areas of growth that need to happen). But, Michigan is not some sort of giant we cannot compete with (as some in the media tend to make them out to be), but they play within themselves and are really, really good at it.