1. Pick a character.
2. Have that character take an action.
3. Calculate and apply the results of that action.
4. Pick the next character, and repeat.
However, I now think that this might not be the most satisfying form of combat for an interactive fiction. What seems more interesting, both from a gameplay perspective and from the perspective of generating prose, is this:
1. Pick the character with "initiative".
2. Have that character declare an action.
3. Have the other character(s) declare an action.
4. Calculate and apply the results of all these actions.
The basic scenario I am thinking of is one where you are attacked by the enemy, and then must make one of the following choices:
- Dodge the attack, minimising the risk of being damaged but also minimising your chance of taking initiative.
- Parry the attack, moderately decreasing the chance of being hit but also increasing the chance of winning initiative.
- Counterattack, taking a big risk but also opening the possibility of both damaging the attacker and winning initiative.
In such a system, "initiative" would be something that you want to have but can't easily get. Getting initiative is always a bit of a risk; alternately, some particularly good actions will have the negative side effect of giving initiative to your enemy. There are actions that can only be taken when you have initiative (attack, throw fragmentation grenade, cast summon imps) and actions that can only be taken when you do not have initiative (dodge, parry, counterattack).
The only thing that would be really complicated is fights with more than two combatants. But it will be worth it; think of how cool it would be to throw yourself between your team mate and her attacker so she can concentrate on casting that healing spell she badly needs.