The formation of convex and concave regions on the surface of a strained thin epitaxial film on a thick substrate is analyzed by minimization of energy associated with the configuration. The strain energy change resulting from the formation of undulations is modelled with the strain in the film represented by a continuous distribution of dislocations along the perturbed surface and the interface. A discrete dislocation model is also used when periodic undulations are formed. Results of energy minimization for germanium or germanium-silicon alloy films on silicon substrate illustrate that convex regions tend to grow. On the other hand, convex regions formed to conserve mass in shape changes associated with concave regions become stable with minimum energy under quasi-equilibrium when the mobility of adatoms is low. We have determined the size and radius of curvature of the undulations at minimum energy and conclude that it is favorable to form atomic steps on the surfaces from which dislocation generation and strain relaxation takes place.