Sure, you can use MP4, use any kind of format that VLC can handle. In the beginning you can cut a longer video into smaller pieces without converting into another format. After you get the hang of it you can teach yourself the handling of FFMpeg, or use the convert function provided by the editor. For video cutting I use Avidemux, but I'm sure there are more programs like it.
Personally I prefer shorter clips for each position, around 1 to 1.5 minutes. If the original video is between 30 and 40 minutes you will get around 20 to 25 clips.
You will need a portrait of the star to represent the girl in the game. Recommended max size is 400x400 px, but any size will be zoomed by the game. Larger images will increase the file size of the pack, but most of the size comes from the videos anyway. In the editor there is a web button next to the girl's portrait. Use this to get pictures and text information of the girl from Internet databases.
Although you can put your edited scene anywhere in the game you should use the one which closely matches the location used in the clips.