Striking has come along ass way since Penn's heydey. He is fighting bigger guys that are extremely well rounded, and his once exceptional hands are no match for today's fighters. Edgar was already an example of this evolution: very good boxing and movement, and obviously Diaz and Yair are very good strikers in their own right. With the size deficit, and the lack of strength for wrestling, he cannot force the fight into the ground, where he is strongest.
The game has just passed him by, big time.