If it's an image I think you mean KMZ rather than KML. I find the simplest way of adding an image overlay to GE is to georeference it and then look at the metadata to find the central lat/lon. Then fly to this coordinate in GE and add the image as an overlay. The image will centre on GE correctly and then all you need to do is to resize it (by holding down the shift key and dragging a corner) and rotate it slightly, if necessary.
I'm not quite sure where shapefiles come in here, but it is easy enough to convert these to KML.
Caversham, Reading, England.