the way it should work is that if you have for example, replaced the TEC scout with.... I don't know.... a Super Star Destroyer... you would have to actually replace it in the update. So I believe it would be asking for techfrigatescout.entity, and you would then go to your mod folder and find the dastardlyempiresuperstardestroyerscout.entity. Do not mix capitals with frigates.... I was just being humorous in this example.
I does not matter that the files are .entity and not .txt, as long as can be read as if they were .txts. As far as which files you want, you want to start with the directory that you dumped the bin->txt converted files in. Then, look for the specific ship in the diplomacy folder first (if you downloaded the folder, you obviously want the latest version. If its not there, check the entrenchment folder. If its not there, check the vanilla game info folder. If you have a mod ship.... well, look above
So, you hit the big button, and it should ask you for each file 1 by 1. Don't forget that excel defaults to looking for .xls and such. since you are looking for .entity, you need to set it to 'all files'. If you've only changed 1 ship out of everything, I'd recommend skipping every ship other than the one you changed, as it's much easier to skip and nothing else has changed.
So far, I'm the only one I know who has changed the files and tried importing the files. So, let me know if this isnt working still. You might have macros disabled, make sure they can run. If you're in anyway fluent in excel, I can explain how it works if you want to know how to play with the formulas and such. I'd recommend saving an extra copy so that you have something to go back to if you mess it up somehow.