A coach will be able to bring out the best potential from a club if the club has players and a style of play that suits the coach. That doesn't mean that if you are very great as a coach at a club, it doesn't necessarily mean that you will be even greater if you coach a club with higher quality players. There are many factors such as the coach's approach to the players or how the coach manages the existing squad to be able to play with the expected tactics. I agree that Xabi is a great young coach at the moment but if he were to coach Real Madrid then it would be a different challenge.
I agree with you, most persons thinks that coaching Madrid where there are some good quality players would be even better but then they fail to understand that there are factors that may surround his career in Madrid which were not there at Leverkusen so it isn't a form of certainty that he will do better at Madrid.
The players at Madrid may not give off same cooperation as the players he did worked with at Leverkusen, the tactics he used at Leverkusen may not work on the Madrid squad, the list is just endless but then his ability to cope and bring up a better strategy which helps the team is what will truly define him, it's very possible he might just be good with smaller team, helping them grow nd becoming formidable but may turn out bad managing teams who are bigger already, he can definitely explore greater heights in his career using the small teams but then it's good he is yet to make known any decisions about his next move.