The part I didn't like: the players quite dramatically outplayed me.
And that's because you let them. You need to realize that any time they do things like this, you're allowed to improvise to respond with an appropriate challenge. They don't know what goes on behind your DM screen, and you don't have to let them know.
It is true that I tend not to improvise during the course of a session of play. I do plenty of improvisation beforehand, but I tend not to fudge rolls, and I tend not to say, 'those three orcs I had planned are now mind flayers in disguise!' It's worthwhile to look at the reasons, to leave this not an unexamined assumption:
- One reason is that I tend not to think of it as an option. I forget even the in-game options that characters have, and I forget the out-of-game options too.
- Another reason is partially the fault of D&D. D&D has a very strong groove; there are some pretty strong guidelines for monster development, for example. And having such a strong groove makes me much more inclined to stay in that groove; I think I'd be more likely (though perhaps not much more likely) to change things on the fly if I was GMing Adventure! or Nobilis.
- The biggest reason, though, is a hard-to-articulate sense of fairness. I have a strong gamist streak--I would get very upset as a player if the rules were to change out from under me, and so I don't want to do that as a GM. Even when I don't know what the rules are, exactly, it's important to me to believe that there are rules, and what's happening at the detail level is not wholly arbitrary. And it's important to me as a player that the game be winnable in theory, even if it requires rolling five 20s in a row.
Now that I write this down, it doesn't seem to make sense--it's not required that an RPG be that way. But it is part of my gut, and it does shape the way I play.