“World-building” is the term used for crafting the details of a fantasy world, whatever that might be. It’s the expression of the project’s internal mythology as reflected by the “reality” of the characters inhabiting this world.
The most obvious example of world-building is something based on, for example, thoroughly detailed fantasy IP: LORD OF THE RINGS, HARRY POTTER, GAME OF THRONES, and so on. That is: What our mythical countries are, where they reside in the larger fantasy world, who are the main players in this space, if magic exists and how it works, the backstory of how this world and its inhabitants came to be, and so on.
But world-building isn’t limited to just IP-driven fantasy. For example, sci-fi like THE EXPANSE, STAR WARS, THE MATRIX, etc. are all driven by deep world-building. They might sometimes coincide with the real world as we know it (for example, in THE EXPANSE some characters live on Earth, as we do) but use the normal in order to further the world-building (by, using this example, showing us the future version of Earth as it exists in the “world” of THE EXPANSE).
World-building is important because it’s one of the key elements to crafting a strong mythology. “Mythology” is the industry’s term for a given project’s internal world-building and concepts. A strong mythology is also one of the key elements that service a franchise and/or IP. For example, say the words MAD MAX and we are instantly taken to that very recognizable “world.” Say the words STAR WARS and we instantly understand how that mythology can fuel any number of stories among its characters, factions, and planets.
The key to good world-building is internal logic, even if that logic is in and of itself based on fantasy elements.
For example, let’s say we have a spec script that’s set in a near future in which everyone can fly. Okay, cool, that’s interesting. But then we have to ask: How does everyone fly? Are there rules or limitations? Does it come from a sci-fi device, or magic, or… what?
But then to really build the world we have to extrapolate how that concept will affect… well, everything. To paraphrase Isaac Asimov, anybody could have predicted the car, but it takes a writer to predict the traffic jam.
So for example we have a story set in world in which everyone can fly. If we have a scene in that script in which the characters are sitting on a plane, suddenly we’re bumping the audience with – Huh? Wait, why are they in a plane? Are there stairs in this world? If so, why? If there are no stairs, how do people get in and out of upper floors? Are there still cars? Why? Why? How do people keep bugs from getting in their eyes while they’re flying around? Does it get cold…?
The best way to craft a world is from the inside out. Put yourself in that world, and start asking questions.