Polukranos and Vigor both try to apply a replacement effect if Polukranos would be dealt damage (as prevention is a class of replacement effects). As the controller of the affected object, you choose the order to apply the replacement effects. Apply Vigor's first, and Polukranos's replacement has nothing to replace any more (since no damage is being dealt). The hydra gets bigger instead of smaller.
As far as a Polukranos deck goes, I would definitely want to give him some form(s) of evasion. A 12/12 commander after escaping is a 2-hit KO.