It's a bit tougher when a paper hasn't been peer reviewed, although not too different from a good paper published in a low quality or unknown conference. I think you should cite any idea you pick from a paper when the said paper has some the following qualities:

- novelty

- technical correctness

- clarity

- good experimental evaluation

Novelty is the most important: if without the citation your paper looks like the original idea, this is plagiarism.

If the paper has big shortcomings that your paper adresses, it is fair to give yourself the credit you deserve of course, but it doesn't harm to cite the other paper, in fact it gives a way to give some sort of peer review: In [1], Foo and al. attempted to explore <subject> but the experiments were inconclusive/the technique sucked compare to state of the art/they didn't explain how they did it... In this paper we did this and that and it gives us awesome results (Said in a nicer way)