Does the difficulty of conquering Dorne make sense? With such a small population and limited water, couldn’t a conqueror with an attitude like Tywin Lannister simply work to hold the major water sources and put the rest of the population to the sword? Or is his bloody nature unusual for medieval warfare?

Yes it does. 

1. The locals are more adapted to the water situation than would-be conquerors. They know where the wells are and which ones are and aren’t marked on maps, they’re more used to going without water, and they have the opportunity to poison the wells first to deny them to the enemy.
2. The small population actually works better with the water situation. The larger your army, the more resources it requires, and vice versa. And if and when the supply of resources if cut, the larger army feels the effects faster and more intensely. 

At the end of the day, brutality is not a magic wand against guerrilla warfare, as Lord Lyonel Tyrell found out when he tried to hold Dorne against the Dornish.