The monsters walk around on the screen, and when you get close enough, a free(ish) battle initiates. You can control your character, and move them to strategic locations. The difference between KH and FF, is that FF still has a time bar for each character, so you have to wait for it to fill up before you can attack again, whereas KH is much more active and involved.
I think the KH system would work better, then you could incorporate evasive maneuvers, and have it feel more realistic. I mean, if you were in a fight, would you say to your opponent: "Listen, I'll hit you once, then you hit me once, and we'll just repeat that"?