I think what [MENTION=22779]Hussar[/MENTION] is saying (and I know he'll correct me if I'm wrong

) is that there's more to creating the game in an RPG than simply designing the rules; and that your-as-GM decision that Lt Li is part of a conspiracy comes under game creation rather than game play.
In more clear-cut situations, the game creation and set-up phase is pretty much finished before game play begins: you don't start making chess moves before all the pieces are on the board where they should be, and a traditional DM doesn't start running an adventure before she's got it all mapped out and stocked. But in the way you play RPGs I'd say the creation and set-up phase never really ends and very much overlaps with the actual play of the game - you kind of mush the two together and probably don't even realize (or maybe even care) when you and-or your players jump from one to the other and back.
Inventing the persona of Lt Li is part of set-up, as is deciding she's part of a conspiracy. Whether these things are done by you ahead of time or on the fly in mid-session is irrelevant: they're still a part of the set-up phase. Contrast this with your actual role-playing of this character, informed and molded by the background you've given her, and the players/PCs' subsequent reactions and interactions with her: these are part of the game play phase.
My educated guess is that most RPGing these days kinda does look like this, in that most current RPGing still involves a DM or GM running a prepublished module or AP where the module/AP author has already done the mapping and stocking work. I say this because by far the most-played RPG today is D&D 5e, with PF1 next; and while some few might play these systems in make-it-up-on-the-fly format I'd think that would be an extreme minority.
Lanefan