Discussion about Heroes I.

The second time, we simply defeat him with 30 peasants.

That's correct: if the enemy hero doesn't gain a level, then the "level-up-and-beat" strategy fails. A necessary condition for the "level-up-and-beat" strategy: in the previous battle, the companion hero gains at least one level.

So, in the given scenario: if you flee in the first round, when the dragons haven't killed the peasants yet, the "level-up-and-beat" strategy fails. If you flee in the second and subsequent rounds, everything is fine.