The failure of the Luftwaffe in the Defense of the Reich campaign was because of many factors. The Luftwaffe lacked an effective air defense mechanism early in the war. Hitler's foreign policy and rapid expansion of his Army, had pushed Germany into war before these defenses could be fully functional. The Luftwaffe was forced to improvise and construct its defense DURING the war. The daylight actions over German controlled territory were sparse in 1939–1940. The responsibility of the defense of German air space fell to the Luftgaukommandos (air district commands, for example all of Germany was split up into certain districts that a consulate was responsible for protecting, because of this there was an inconsistency among these Luftgaukommandos). Hitler in particular wanted the defense to rest on anti-aircraft artillery as it gave the civilian population a "psychological crutch" no matter how ineffective the weapons, since Hitler didn't have planes to defend the air, favoring Anti Air cannons that were very ineffective.

Sources:

http://books.google.com/books?id=hMFA8FJ1KXMC&pg=PA174&dq=defense+of+reich&sig=ACfU3U1NMZ-3endfpH3FDBU6mJJMQ7CKHg#PPA177,M1

http://books.google.com/books?id=_HkHU5RJJekC&pg=PA281&dq=Oberkommando+Der+Luftwaffe&hl=en&ei=8RJ3TMrKJ4menQfs8qmXCw&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGEQ6AEwCQ#v=onepage&q=OKL&f=true