The tradition comes from ancient times, when the crib was used as an element of evangelization, to explain all the magic of Christmas with simplicity.
The crib is a miniature reconstruction of the birth of Jesus, so even the smallest crib should have all the elements that make up this time, as recounted in the Gospels. So you should place the Holy Family in the reconstruction of a cave, or a small poor building, with an ox and a donkey nearby. Over the building place the Star and outside theThree Kings with their gifts.
The setting is bucolic and pastoral, so nearby you should place figures of shepherds and small animals, or if you want other elements that make up life in the country, such as windmill, a fountain, haystacks, and whatever your imagination might suggest. To simulate the grass use moss, or just green fabric, and to simulate the sky try a background of blue paper with little stars.