Since no one has responded to my original question, I thought I would provide a partial answer based on some research into the topic (special thanks to Edward Bierstone for some guidance on this matter).

My initial question was to better understand how normalization can be better incorporated into the resolution process. First I wanted to know whether there were articles/books mentioning this topic. Here are a few:

1) Zariski, Oscar (1939), "The reduction of the singularities of an algebraic surface", Ann. Of Math. (2) 40 (3): 639–689

Here Zariski actually resolves singularities by normalizing and then blowing-up and repeating, which is exactly what I wanted. I think the very basic idea is that by first normalizing, we remove all codimension 1 singularities, and in fact leave only finitely many codimension 2 singularities (it is a fact that normal surfaces only have finitely many singular points). By blowing-up one of these points, we leave the remaining ones unaltered (since the blowing-up is an isomorphism away from the centre), and possibly introduce new codimension 1 singularities as a fibre over the centre, while "improving" the strict transform of the codimension 2 singularity. We then normalize the transform to remove these newly introduced codimension 1 singularities, and continue the process until resolved (this process does actually resolve singularities).

2) Lipman, Joseph (1978), "Desingularization of two-dimensional schemes", Ann. Math. (2) 107 (1): 151–207

This result is slightly different than what I was looking for, but is in the same spirit of the problem. Let $X$ be a 2-dimensional reduced Noetherian scheme. Here Lipman shows that if the normalization of $X$ is finite over $X$, analytically normal, and has finitely many singular points, then $X$ can be desingularized. In fact this is an iff statement.

3) Kollár, János (2007), Lectures on Resolution of Singularities, Princeton: Princeton University Press

Among many techniques discussed in this book, normalization of curves as a resolution algorithm is explained (normalization removes codimension 1 singularities, so 1-dimensional varieties are resolved by normalization).

4) Toric varieties are often taken to be normal by definition, so a resolution of singularities here already (implicitly) incorporates the above ideas.

I do not think there are any known results in higher dimensions (please feel free to comment on this if you know otherwise). This leads to my second question on whether we have examples where normalization makes matters worse.

Current algorithms in characteristic 0 utilize the exceptional divisor in the resolution process. Keeping track of the exceptional divisor allows us to have a control on the resolution invariant. In particular, the definition of this invariant counts exceptional divisors at various stages of the algorithm, and it's use allows us to measure improvements in the singularity (that is, the invariant decreases). In the end, having such a controlled incorporation of the exceptional divisor gives us a sort of global coordinate system for the total transform. Normalization after each blowing-up could (but I am not certain) cause us to lose control of the exceptional divisors in a way that would render the invariant ineffective (perhaps we could not guarantee that it decreases anymore).

If I find specific examples to support (or oppose) an extension of Zariski's ideas to higher dimensions, I will update this post later.