The best thing would be for NATO and the individual nations of NATO to be strong and united so that Russia never has any reason to take the chance or assume a weak NATO would allow them to take the Baltic States without repercussions. Failing that, I agree with you that the best thing would be a non-nuclear conventional war to take back the Baltic States and expel Russian troops by force of arms and then probably embargo and trade sanctions, perhaps hinged on Russia having to pay reparations for what they would have done in invading 3 NATO nations.
I agree that the primary value of NATO is that it serves as a deterrent. And a strange part of being a deterrent is that NATO needs to assume it will fail as a deterrent. Only by having a credible plan for fighting a war can NATO prevent that war from occurring. And not planning on fighting a war makes that war more likely to occur.