I know a lot of people will be confused with my first step, but it makes sense to me. Your main characters drive your story. I start building based on them, Who are they? What made them that way? What is their family like? What made their family like that?
I ask myself, what kind of place makes someone as they are? A small town makes different people from a big city. Isolated populations are different from high contact ones like trading hubs. Then, go a bit further out.
What kind of people are around? What geographical features would promote their existance? Someone who has always had the ocean right outside adapts to it, learning to swim and fish, preparing for high tide and sea storms. Someone from the mountains would go hunting and foraging differently from someone living right by the ocean. They would value different things.
If you have non-human protagonists and antagonists, what kind of habitat would they need or come from? A giant would probably have a massive homeland where everything is huge from a human perspective.
Keep in mind, what kind of people and places would build your characters into who they are when the story begins?
Beth Bayless's Writing 