The "øy" is written without a space between the letters, which seems to mean that these letters occur together in words (more obvious example: "eau" leads into French).
The problem is that we can put words together to form new words. So say I produced a yogurt at a lake(sø) , I could call it søyougurt. It's not a word that would be in a dictionary though, but lots of that kind of words aren't.
I mean, I'm not looking to defend this diagram, I have no idea if it's correct. And frankly I would be surprised if it is anything more than an approximation, since language is always messy.