When you are not able to perform at the required level, you can't cut the mustard. Example: "Did you hear that Williams got fired?" Reply: "Yes. He couldn't cut the mustard."

It is as if cutting "the mustard" were some test that you had to pass in order to belong. If you can't cut the mustard, you are not allowed to participate. Example: "Bob dropped out of medical school." Reply: "Why?" Answer: "He just couldn't cut the mustard."

If you don't work hard enough, or if you just aren't good enough, you can't cut the mustard. Example: "So, do you think you will be able to cut the mustard?"